Early learning and childcare: sustainable rates review

Findings and Discussion of Evidence

28. This section discusses the key findings from the evidence and is broken into six sections. The first section looks at quantitative data on the sustainable rates set by local authorities since the start of the expansion to 1140 hours in 2017-18, with more detailed analysis of the sustainable rates set in 2022-23. The remaining sections look at the qualitative data available from the other evidence sources, including the surveys and engagement meetings, and are separated thematically into: Sustainability, Rates & Rates Setting; Funding, Equity & Workforce; Communications & Engagement; Cost Data Collection; and Other Findings. The evidence is available in more detail within the appendices to this report.

Recent Trends in Sustainable Rates

29. Table 1 provides a summary of the changes in the rates paid by local authorities for the delivery of funded ELC to 3-5 year olds. From this data, we can see changes to sustainable rates during the period over which FFTC and the Sustainable Rates guidance have been introduced. This data is presented by academic year, however it should be noted that the current rates guidance does not explicitly stipulate annual increases in rates, but does require that inflationary and real Living Wage increases should be reviewed on a regular basis, to understand any changes to these and their impact on costs. The timing of increases will also vary by local authority. Between the 2017-18 and 2022-23 rates (reported here at Appendix C):

• The average rate paid has increased by 57.6% for the delivery of funded ELC to 3-5 year olds, from £3.68 per hour to £5.80 per hour;
• The gap narrowed between the highest and lowest sustainable rate paid for the delivery of funded hours to 3-5 year olds, from 40.5% in 2017-18 to 21.5% in 2022-23 (a decline from £1.32 to £1.17). The gap was initially higher in 2018-19 and 2019-20 reflecting variations in local phasing plans (with a higher rate generally being introduced as the funded offer was increased beyond the then statutory level of 600 hours).

30. Since the introduction of the legislative duty to deliver 1140 in August 2021:

• The rates reported in August 2021 represented only a small increase (1.7%) in the average reported rate for 3-5 year olds when compared with those reported for the previous year, and rates had remained unchanged in 19 local authorities.
• The average rate being paid by local authorities during the current academic year (2022-23), for 3-5 year olds, is 6.6% higher than when rates were reported in August 2021, following a programme of actions to strengthen the process for setting sustainable rates.
• While rates have increased, this is against a background of headline CPI inflation peaking at 11.1% in the year to October 2022, whilst the Real Living Wage was set to increase by 10.1% from April 2023.
• In the financial year 2022-23, the ring-fenced component of the ELC budget was reduced by £15 million to give a total settlement of £1.006 billion, largely reflecting the fact that there were 7.5% (or 8,500) fewer 3 and 4 year olds eligible for the universal offer than was anticipated when the multi-year funding agreement was reached in 2018. However, Local Government have indicated that reductions in population do not directly translate into reduced costs for local authorities. This represented a 1.5% reduction against the 2021-22 total ELC allocation. Local authorities also reported wider long-term pressures on local authority core budgets and services, and some noted concern over the impact of inflation on available budgets.

Overview of Sustainable rates paid by local authorities in 2022-23

31. The most recent survey of rates set by local authorities was published in December 2022. At the time of publication 30 out of 32 local authorities had confirmed their sustainable rates for 2022-23. Since publication, the two remaining Councils (North Ayrshire and Moray) have now confirmed their final rates for 2022-23. This new information has now been included to give a complete data set for 2022-23 and Appendix C sets out the final rates for each local authority.

32. 29 local authorities have increased their hourly rates for 3-5 year olds since the last report in August 2021. Three have kept the same rates as in 2021-22. As highlighted in Table 1, the average rate for 3-5 year olds across all local authorities is now £5.80 per hour, which is an increase of 6.6% since the time of the previous report in 2021-22 (an increase in the average confirmed rate from £5.44 per hour). For those local authorities who increased their sustainable rate in 2022-23, the increases ranged from 1.8% to 16.9%. The average rate does not include any rates payable only to childminders.

33. 25 local authorities have increased their hourly rates for eligible 2 year olds since the last report in August 2021. Five local authorities have kept the same rates as in 2021-22, 1 local authority has decreased their rate, and the remaining local authority introduced a new rate. The average rate for eligible 2 year olds across all local authorities is now £6.43 per hour, which is an increase of 5.8% since the time of the previous report in 2021-22 (an increase in the average confirmed rate from £6.08 per hour). For those local authorities who increased their sustainable rate in 2022-23, the increases ranged from 1.6% to 42.2%. The average rate does not include any rates payable only to childminders.

34. The data relating to rates payable to childminders has not changed since the December 2022 report. For the 8 local authorities paying a separate rate for childminders in 2022-23, these rates vary from £4.76 to £6.03 per hour for both eligible 2 year olds and 3-5 year olds. The average rate for 3-5 year old childminding provision is £5.31 per hour, and the average rate for eligible 2 year old childminding provision is £5.53 per hour.

35. As set out in Table 1 for 2022-23, the highest rate payable to deliver an hour of funded provision for 3-5 year olds (£6.62 per hour) is 21.5% higher (£1.17 per hour) than the lowest rate (£5.45 per hour). This variation in the rates paid by local authorities was often highlighted by providers during the review. While variation is to be expected to reflect differences in local circumstances and costs, we do not have robust enough evidence on varying costs of delivery across each local authority area to indicate what level of variation should be expected. The level of variation has narrowed since 2017-18 where the highest rate was around 40.5% higher than the lowest rate (a gap of £1.32 per hour).

36. There is a much higher variation in the rates payable for 2 year old children eligible for funded hours - in 2022-23 this ranged from £5.50 per hour to £8.50 per hour – a gap of 54.5%. There are also differing approaches across authorities as to how 2 year old places are funded. 24 local authorities now pay a higher rate for 2 year olds in 2022-23. In the last year, 6 local authorities have introduced a separate 2 year old rate, whilst one local authority removed their separate 2 year old rate during 2022-23.

37. The data on meal payments collected during 2022 also highlight some variations in the level of payment made to settings for delivery of free meals. Where a payment is made per meal/day this varies from £1.99 to £3.11 per meal. Where local authorities choose to provide an additional top-up to the sustainable rate for delivery of the meal commitment this 'top-up' to the sustainable rate varies from £0.30 to £0.50 per hour.

38. By comparison, the range of meal payments reported in the August 2021 rates data collection exercise was broadly similar, with rates varying from £1.80 to £3.11 per meal, or £0.30 and £0.50 per hour. 6 local authorities have reported an increase between the time of that report, and the latest publication in December 2022, with 22 reporting they were paying the same rate (3 of the remaining authorities changed the way they calculate payments, and 1 did not report a rate in 2021).

Sustainability and Rate Setting

39. The review team drew on a range of evidence, both quantitative and qualitative, in order to consider the potential impacts of sustainable rates on the sustainability of ELC providers.

40. The Scottish Government published an updated Financial Sustainability Health Check in July 2023. This included analysis of Care Inspectorate registration data to the period 31 March 2023. This shows that while there has been no significant increase in the annual cancellation levels and rates for private or third sector day care of children services (across the whole childcare sector), there have been significant declines in overall third sector and childminding provision across the whole sector, and a trend towards more capacity being delivered by larger providers. A key driver of this, compared to pre-pandemic trends, have been decreases in the number of new third sector and childminding services entering the sector in recent years. Whilst this provides useful context, it is not possible to differentiate the ELC and non-ELC within the Care Inspectorate data.

41. The Financial Sustainability Health Check also presents evidence from detailed surveys of childcare providers. All types of providers reported that their confidence in their financial sustainability has declined across all types of childcare services since the previous Health Check (2021). This includes a marked decrease in self-reported sustainability from funded ELC providers (with 31% reporting significant concerns regarding their sustainability – compared to 9% in Summer 2021). ELC providers reported the largest percentage point deterioration in self-reported sustainability between the two Health Checks of any provider group. Providers reported that this was driven by increased costs of delivery over the last year due to the costs crisis, particularly in relation to significantly higher energy and food prices; higher staff costs (in particular due to increases in the Real Living Wage) and concerns regarding loss of staff; and, increases in income not keeping pace with cost increases. Some funded providers responding to the Health Check surveys highlighted that they felt that the hourly rate that they received from their local authority for delivering funded ELC did not cover their current costs of delivery.

42. The Improvement Service collects data from local authorities to monitor progress in delivering funded ELC, including the share of funded ELC delivered by funded providers in the private, third and childminding sectors. The most recent Delivery Progress Report was published on 23 June 2023. This highlights that providers in the private, voluntary and childminding sectors were reported to have provided 31% of all funded provision in April 2023, and that this share has remained relatively static since August 2021. The share is higher than had been forecast earlier in the expansion, with data reported by local authorities for the June 2019 Delivery Progress Report forecast that around 24% of ELC would be delivered by funded providers in the private, third and childminding sectors.

43. The evidence assessed by the review team found that local authorities and providers had very different views about whether the rates paid in 2022-23 were sustainable.

44. On one hand, the majority of council officers we spoke to were confident that the rates they were paying were sustainable. Although not necessarily a direct measure of the overall sustainability of a provider, it was reported that they had seen very little evidence of funded services in the private, third or childminding sectors reporting to them that they had been under financial duress or of services closing due to financial sustainability pressures. A number of local authorities also reported they were taking some reassurance from the numbers of applications they had received from new providers to enter into funded provision.

45. Most funded providers who engaged with the review process had a different view – a significant proportion did not think the rate they received in 2022-23 met their current costs of delivery, including meeting the substantial increases in the real Living Wage (with an increase of 10.1% announced in September 2022) and general cost increases. They also highlighted that, in their view, the rate did not provide them with adequate resources to provide quality ELC over the longer term.

46. Some providers noted that while they had been able to maintain their business at current rates, this was not necessarily a good indication of their long-term sustainability. They reported that the rates did not enable them to adequately reinvest in their business or pay their workforce fairly (workforce concerns are described below). As highlighted below in the section on cost data, there is a gap in terms of the information available on average surplus/profit rates for providers in the sector. Many providers were worried about the impact of inflation costs over the last year (for example, the Consumer Prices Index peaked at 11.1% in the year to October 2022, and price rise pressures have been higher for some elements, in particular food) and felt that this hasn’t been reflected by recent rate increases.

47. There was concern from some local authorities over the challenges involved in the setting of a single rate within their area, given the diversity of provision. This was mirrored by evidence from providers, some of whom do not think the current rates process adequately reflects their particular business model.

48. Some providers, particularly those with a high proportion of funded places, have significant concerns over a further expansion to funded childcare provision under the current sustainable rates policy. A few providers reported that they were utilising higher pricing for private provision to support their overall business model – despite the requirement within the sustainable rates guidance for rates to be set at a level that eliminates any need to cross-subsidise funded provision. Conversely, in some areas it was reported that funded provision may be subsidising prices for non-funded hours. Two local authorities with access to local pricing data reported that the sustainable rate they were paying was higher than average local prices. In either case, the ability of business owners to influence their overall business sustainability, and profitability, would be limited with any further expansion to funded hours if a larger proportion of overall income becomes determined by public sector funding.

49. This evidence must also be viewed in the context of the variation in rates being paid by local authorities, particularly for eligible 2 year old provision, which is highlighted in the summary section above. Some providers raised concern during our engagement regarding the level of funding for eligible 2 year old provision in their area where a separate rate was not paid.

50. The evidence on rate data highlighted in the findings on rates paid shows that there is a variation in the sustainable rates paid by local authorities. A level of variation is to be expected, reflecting differences in local circumstances and costs (e.g. between local authorities with differing levels of rural and remote provision). The overall level of variation between the highest and lowest rates has narrowed since 2017-18. However, the gap remains particularly pronounced in relation to rates paid for eligible 2 year olds. It also shows that while rates have increased for most providers in 2022-23, there is a significant variation in these increases, and the changes in rates may not have kept pace with inflation and increases to the real Living Wage. Given both the variation in rates set, and the diversity of business models being supported on a single set of rates within each local authority area, there is a risk that some funded providers are not being as effectively supported as others by current sustainable rates.

51. There was a significant variation in the approach to rate-setting, and in their views on the overall process, across local authorities. A large number of local authorities would like a more standardised and straightforward approach to rate-setting. Many local authorities highlighted that they would appreciate further support with interpreting cost data, and the support from the Improvement Service during 2022-23 was seen as being beneficial. Some local authorities found rate setting timescales challenging, with a few citing the timing of budgetary decisions, and the short time available to implement the updated guidance published in in May 2022. A smaller number of authorities wanted to ensure local flexibility and ownership of the rate setting process was retained.

52. Accurate pricing data for private provision, which would provide another reference point for authorities to consider the sustainability of the rates they are setting, is not currently available to almost all local authorities and is very challenging for them to acquire locally. Many report that providers are reluctant to share information with them which they regard as commercially sensitive. Some local authorities reported that pricing details had become more difficult to locate since the expansion to 1140 hours, with some providers having since removed pricing information from their websites.

Local Government Funding

53. The guidance states that sustainable rates must be sustainable and affordable for local authorities in terms of their overall budget. Affordability was cited as a primary concern by a large majority of local authorities when setting rates. A number of councils cited longstanding pressures on local authority core funding, reductions in the ELC ringfenced grant 2022-23 and 23-24, difficulty setting a rate when their budget allocation for the next financial year was not yet known, and a lack of clarity on the future ELC budget beyond 2023-24 as key factors.

54. An important factor informing future local authority ELC budgets is demographic change. As highlighted in the section on trends above, there were fewer 3 and 4 year olds eligible in 2021-22 for the universal offer than was originally projected when the multi-year funding agreement was reached in 2018, and projections suggest that the total eligible population across Scotland is set to continue to decline. Changing demographics will vary by local authority, and we are aware that, for example, the eligible population is increasing in some areas.

55. Some local authorities highlighted that their rates are currently at the limit of affordability, and that they are concerned at the pace of annual rate increases arising from cost inflation and RLW increases. In this context, concerns were reported about their continued ability to meet these increases in line with the sustainable rates guidance without a commensurate increase in funding.

56. A small number of local authorities gave a stronger indication of concerns relating to the affordability of current rates, reporting that their spend on ELC was higher than the amount they were allocated, or that spend had necessitated the utilisation of reserves or budget which had been carried forward from previous years.

57. Other risks to affordability noted by a few local authorities included the potential long-term cost of increased numbers of children deferring entry into school, the cost of delivering on any expansion to 2 year old places, and any future increased cost of their own staff contracts. These local authorities were managing the risk to affordability by examining their own service delivery models and the efficiency of their ELC spend. A few local authorities noted that communications on rates could be more reflective of local authorities’ position (including the realities of how overall council budgets are set), and the requirement for rates to be affordable.

Equity of Funding and Workforce

58. There was concern amongst many funded providers who engaged with the review over the perceived lack of equity in how funding is distributed between local authorities and funded providers under FFTC; and the impact this has on the quality of provision in funded provider services. There is a growing call from some funded providers that the total funding available for ELC should be distributed equally across all providers, including local authority services, according to the number of hours delivered.

59. This view does not take account of the costs incurred by local authorities in discharging their duties as guarantors of quality, or in making provision available where this is not financially viable. It would also represent a significant departure from the existing policy set out in FFTC described above, where the sustainability of rates is defined without reference to costs in local authority settings.

60. Local authorities indicated that these expectations around funding may have arisen from a lack of awareness amongst some of their funded providers as to how their funding is allocated, the reality of their current budgetary allocations, the funding implications arising from their statutory duties (including their duty to assure that statutory ELC provision is accessible to every eligible child in their respective areas); as well as the monetary value of any additional benefits package offered by the authority. Local authorities will often provide services which are not commercially viable, for example, through smaller services in remote and rural areas. This is highlighted in the Financial Sustainability Health Check, which reports that, as at 31 March 2023, the majority of smaller registered childcare services are delivered by local authorities - with local authorities delivering 59% of services with a registered capacity of 25 or less (and 81% of services with a registered capacity of 1-10 places).

61. This perception of inequality was most often highlighted by these providers in relation to workforce pay disparity, and the contingent concerns around recruitment and retention of capable and fully qualified ELC practitioners. Funding Follows the Child policy and the Sustainable Rates guidance is clear that sustainable rates should be set to enable payment of the Real Living Wage to workers delivering funded ELC.

62. On the other hand, average rates of pay in local authority services, which reflect locally determined pay ranges for staff that are driven by national bargaining arrangements, are often significantly above the RLW. Local authorities noted that, as per current policy, current funding allocations do not support payment of staff within the private and third sectors beyond the RLW, and that providing any financial support to pay staff in the private and third sector beyond the RLW would require a change in policy and additional funding.

63. The aim of the policy, to enable payment of the RLW, needs to be viewed in the context upon which it was introduced. As highlighted earlier, before the ELC expansion to 1140 hours, approximately 80% of staff delivering funded ELC within partner providers were paid less than the real Living Wage. The latest update to the Financial Sustainability Health Check (FSHC) reports that 81% of funded ELC providers were paying the real Living Wage to either all staff or staff delivering funded ELC, representing significant progress when compared with the childcare sector before the expansion. The evidence is different with regards childminders. Both SCMA data, and data from the FSHC update, shows that a large majority of childminders across the whole childcare sector are not paying themselves the RLW (72% according to the latest FSHC update).

64. However the cost of maintaining wages at the RLW has risen rapidly, increasing by 10.1% during the period covered by the 2022-23 rate setting process. Providers who participated in the review highlighted that as well as the funding provided through the sustainable rates, they also had to find the funding to increase wages for all staff in their setting. Workforce challenges were a dominant theme throughout the engagement sessions with funded providers, with almost all noting that the recruitment and retention of staff remained a key ongoing concern. There was a broad consensus from providers with whom we engaged, that sustainable rates (where the wage element of the rate is based on the RLW), did not provide scope for them to pay significantly beyond the RLW, and that this presented a significant challenge to their business, particularly given the gap in wages with ELC staff working in local authority settings.

65. Some providers noted recent problems arising from losing staff (either to local authority nurseries or other sectors), and noted that it was often the most experienced staff who moved to local authorities. Recruiting to the sector and investment in training were significant additional costs. Some were worried about the potential impact of high turnover on quality within their settings, and councils also reported that the limited availability of staffing was negatively impacting the relationship between the local authority and its funded providers.

66. Recruitment and retention challenges are currently affecting the wider ELC sector (as well as other sectors such as adult social care). In June 2023, the SSSC (Scottish Social Services Council) published analysis of the movement of day care of children staff in the 2021-22 financial year. This analysis covers movement of staff across all registered day care of children services and doesn’t allow for specific analysis of movements from services delivering funded ELC (for example, as of September 2022 it is estimated that only 56.5% of all registered private and third sector day care of children services delivered funded ELC) and only provides a snapshot for the period 1 April 2021 to 31 March 2022. The report highlights that in 2021-22 staff retention levels were lowest in private sector service; and that 34.3% of staff leaving private services for another childcare service in 2021-22 moved to a local authority service (59% of staff left to another private setting, 6.7% left to a setting in the third/voluntary sector). Retention levels were highest in local authority services and the majority (92.5%) of staff in local authority services who moved, did so to another local authority service.

Communications and Engagement

67. There was a significant variation as to how positively relationships between local authorities and funded providers were viewed by both different local authorities and funded providers. Local authorities, in general, reported that relationships with a majority of providers are good. However, a few local authorities reported that they have had significant challenges with a minority of more vocal providers who they felt had not always been willing to engage constructively, creating an additional challenge to the rate-setting process. For example, concerns were reported that a few providers had sought to undermine the cost data collection exercise undertaken by Ipsos Mori by dissuading other providers from participating.

68. There was a mixed picture from providers who participated in the review. Some reported that their local authorities had communicated and engaged effectively – this was generally where there are experienced staff proactively managing relationships. The most positive comments around local authority support were generally in relation to operational aspects. Successful engagement had included regular meetings and communications, quality assurance and training support, engagement relating to the Ipsos Mori cost collection exercise, and participation in local surveys.

69. Many of these providers were more critical when discussing engagement specifically on sustainable rates. A significant proportion of the providers we engaged with reported that they felt as though they were not being effectively engaged with during the rate setting process, or did not receive effective communications on how and when rates were being set.

70. A common theme raised by these providers, is that engagement often doesn’t include the ability for providers to comment or negotiate on rates as they are being set. For these respondents there is an expectation of being involved at the point of decision making, rather than only when evidence is being gathered. Some of these expectations extend beyond the remit of current policy and guidance. For example, the guidance sets out the need for consultation with funded providers but does not provide for a bargaining or negotiating arrangement on the value of rates (which would not be possible within the current framework of local authorities’ duties and functions in relation to budget-setting and procurement, and how this currently operates). Some local authorities also noted that these differences in expectations may be contributing to feelings that engagement was not adequate, despite their efforts in this area.

71. Several providers noted that a change in local authority staff had been instrumental to either an improvement in their relationship, or that the loss of a local authority staff member had resulted in a deterioration of the relationship. The engagement sessions with providers demonstrated the crucial role that effective personal relationships between individual staff members in local authorities and their setting had been to their relationship with their local authority. These funded providers considered the availability of experienced ELC staff members within a local authority to be of particular importance.

72. The mixed evidence on the communications and engagement experience reported during the review, and the resulting diversity in relationships between local authorities and providers, highlights the importance of equally effective communication and engagement (in line with the joint guidance) taking place within all local authority areas. It also suggests a need to ensure the position of local authorities is fully understood by all funded providers, and the need for clear expectations on how engagement should be approached by both local authorities and funded providers.

Cost Data Collection

73. Regardless of the model used to distribute funding to support delivery of ELC, under a mixed economy of provision there will be a need to obtain robust data on costs across the different types of provision. For example, the UK Government, which distributes funding using national rates, also collects costs data using a national survey.

74. While overall national participation rates by providers in the Ipsos Mori cost data collection exercise were higher than the previous exercise in 2016 (a usable response rate of 34% of funded providers in 2022, compared to 22% in 2016), they remained low in some local authority areas. Many of the providers who engaged in the Review highlighted a lack of trust in this process. A few local authorities highlighted specific data gaps within the outputs, notably that it did not include data on profits/surplus and reinvestment levels, which the sustainable rates guidance requires them to consider.

75. The data available produced robust figures at Regional Improvement Collaborative (RIC) level. However, a large number of authorities did not have data specific to their area as a result of low participation and/or data sample size limits. Cooperation on data sharing and rate setting at Regional Improvement Collaboratives was seen as being beneficial where local data was not available.

76. A driving factor in low participation rates reported by providers during the review was concern around whether cost data would be uplifted to reflect current costs, and a lack of awareness as to how the information (some of which is commercially sensitive) would be used and who had access to this. Some providers indicated that that they believed that the survey was flawed because it asked for actual most recent cost figures (described as ‘historical’), and did not ask those participating to make financial projections on current and future costs. The Ipsos Mori survey asked for actual cost figures so that the starting point for calculating rates in-line with the Guidance was based upon a robust evidence source (with further cost increases calculated on a consistent basis later within the rate-setting process), which is standard practice in cost collection exercises of this type, and the information requested was readily available for providers to report.

77. Some providers also reported that they found the survey to be too difficult or time consuming to complete; while others felt that the questions were generic and did not apply well to their particular business; and/or the survey was too comprehensive or intrusive, asking questions about their wider business rather than just funded provision. A further minority of providers had not been aware of the survey. SCMA noted that both engagement strategies, and the cost data collection exercise, require significant adaption to be effective for childminders.

78. Some local authorities noted significant previous efforts to engage with providers ahead of the 2022 Ipsos Mori survey, or their own local surveys; and the continued lack of trust in these processes. Some also reported that a minority of providers had sought to directly undermine participation in the cost collection exercise. Despite the issues described, and some gaps in the methodology to capture all aspects required to set sustainable rates (in particular information on surplus/profit), the 2022 Ipsos Mori survey has provided useful evidence on costs of delivery (and other important metrics), across different regions of Scotland and for some local authorities, during a time of significant economic challenges.

Other Findings

79. The provider engagement and survey highlighted concerns that some providers had over their current meal costs. They stated that the amounts received for meals had either not increased in line with inflation or did not currently meet the costs of delivering meals, with several mentioning rapidly rising grocery costs (the Food and non-alcoholic beverages component of CPI peaked at 19.1% over the year to March 2023, and has been consistently running above the main inflation index). There was a specific challenge for an island-based provider who reported that they had limited options for buying in bulk to reduce unit costs, and that they already faced an “island premium” in relation to food costs. A few providers also highlighted difficulties arising from the different approaches to payment - when a meal payment was added as a top-up to the sustainable rate (and not given as a per meal payment), concerns were raised that the full costs of meal provision would not be fully reflected.

80. Some providers raised concern over the level of funding available to provide the required care for children with Additional Support Needs (ASN). Feedback from Early Years Scotland noted the large disparity in the levels of support offered for children with ASN across Scotland, both in terms of funding rates and other types of support (e.g., additional staffing or access to equipment). Information from local authorities shows that there is a range of approaches to supporting funded providers delivering provision for children with additional support needs, both financial and in-kind, and the diversity of requirements for these children will necessitate some flexibility in how this support is provided.

Summary of Findings

81. The Review has drawn on a wide range of evidence, both quantitative and qualitative. In summary:

• Sustainable rates have increased by an average of 57.6% since the expansion to 1140 funded hours, and in 2022-23 were at a higher average rate than anywhere else in the UK. Overall capacity across the whole sector has been sustained during delivery of a near doubling in hours.
• Nearly all local authorities increased their sustainable rates in 2022-23, with an average rise of 6.6% in the 3-5 year old rate, although the rate of increase varied significantly across authorities, as did the timing of decisions on the increases.
• However, this was against a backdrop of very high inflation in 2022-23 (with CPI peaking at 11.1% in the year to October 2022).
• Although not a measure of long-term financial sustainability, data to 31 March 2023 highlights that there has not been a rising trend in Care Inspectorate service closure or cancellation rates for private and third sector services (across the whole childcare sector) in the period from March 2018 to March 2023.
• However, evidence from the Financial Sustainability Health Check reports a marked decrease in self-reported sustainability from funded ELC providers (with 31% reporting significant concerns regarding their sustainability – compared to 9% in Summer 2021).
• There is a mixed picture in terms of local authorities’ and providers’ perceptions of how effectively rates for 2022-23 are supporting the long-term sustainability of providers. There is a risk that some providers are not being as effectively supported as others by current rates.
• There is a significant variation in the rates payable with respect eligible 2 year olds (in 2022-23 there was a gap of £3 per hour, or 54.5%, between the highest and lowest rates) – and some providers highlighted that these rates were set too low to cover the costs for them to deliver to eligible 2 year olds.
• Many local authorities would like further standardisation of the rate-setting process, so they have stronger guidance on how to apply the policy effectively.
• Affordability is as a primary concern of local authorities when setting rates, with pressures on local authority core funding and a lack of clarity on future ELC budgets cited as key factors.
• Many providers report a perceived lack of equity regarding how funding is distributed between local authorities and funded providers under the current agreed policy framework, which is most keenly felt in relation to the differing levels of pay for staff working across different parts of the sector.
• The ability to recruit and retain qualified staff, and being able to pay higher wages for staff, are central concerns for many of the funded providers who participated in the review. Many noted the gap in wages between ELC staff working in private and third sector settings, and those in local authority run settings.
• Some funded providers we engaged with are finding it challenging to meet the costs of paying the Real Living Wage given the scale of recent increases, and some highlighted that current rates restrict them from paying significantly beyond this. The current funding settlement, and rates policy, is based upon the RLW, and paying rates that support wages beyond this would require significant additional funding.
• The strength of relationships between local authorities and funded providers, and the approaches to communications and engagement on rates, varies significantly.
• ‘Survey fatigue’ and issues of trust in how the data would be used were key barriers to higher local participation rates in the cost data collection exercise conducted by Ipsos Mori in 2022. Whilst the data was sufficiently representative nationally and regionally, in many areas it could not be broken down to provide robust financial data at a local authority level and other sources had to be used (as set out in the Rates Guidance, the Ipsos-Mori data was intended to be one part of the rate setting process for local authorities to consider, alongside local ELC market conditions and ongoing consultation with their local ELC providers).
• Payments made to some funded providers for meals are not keeping pace with the inflationary increase in costs to deliver these meals.
• The financial support available to care for children with additional support needs is of concern to some providers.