Financial review of early learning and childcare in Scotland: the current landscape

Finances: Funding, Expenditure and Cost

This chapter sets out the available evidence on funding, expenditure and costs associated with the delivery of ELC and with a particular focus on the free entitlement and public sector funding. It draws on existing local authority financial information and on two specific data collections conducted during 2016. The first of these was a data collection from a sample of local authorities carried out by questionnaire and interview. The second data collection was conducted by Ipsos MORI on behalf of Scottish Government and involved a detailed financial survey of partner providers. The data from all of these sources has been brought together to derive estimated unit costs - the cost per hour of ELC delivered.

Scottish Government funding

Funding for ELC is provided to local authorities as part of the block grant. Local authorities allocate funding on the basis of local need, having first fulfilled statutory obligations and the jointly agreed set of national and local priorities.

Following the Children and Young People (Scotland) Act 2014, the Scottish Government has provided local authorities with additional funding to cover the costs arising from the Act. As with the rest of the block grant, the additional funding is not ring-fenced and actual expenditure is determined by each local authority on the basis of its own circumstances and priorities. Table 23 lists the ELC related funding elements of the CYP Act. The additional funding is allocated to local authorities on the basis of Grant Aided Expenditure shares and the estimated number of two-year olds in workless households.

Table 23: Funding for ELC elements of CYP Act, £millions

	3&4 yr old revenue	2 yr old revenue	Workforce Dev'ment	Total revenue	3&4 yr old capital	2 yr old capital	Total capital	Total ELC funding
2014/15	£51m	£15m	£4m	£69m	£30m	£41m	£71m	£140m
2015/16	£75m	£44m		£119m	£30m	£39m	£69m	£188m
2016/17	£82m	£58m		£141m	£30m		£30m	£171m
2017/18	£90m	£59m		£149m				£149m
2018/19	£101m	£60m		£160m				£160m
2019/20	£101m	£60m		£161m				£161m

Source: Children and Young People (Scotland) 2014 Act - Explanatory notes and financial memorandum

Revenue expenditure

Key information on local authority expenditure is provided annually through three financial reports which local authorities submit to Scottish Government. Between them these reports summarise actual, estimated and planned expenditure for the current and two preceding financial years as follows:

1. Local Financial Return ( LFR) - final audited figures of local authority net and gross expenditure; most recent LFR was published in February 2016 with data for FY 2014/15

2. Provisional Outturn ( PO) - unaudited net expenditure on recently concluded financial year; most recent PO was published in June 2016 with data for FY 2015/16. Note that due to the provisional nature of the PO it is subject to change. Hence it does not offer the same robustness as figures taken from the LFR.

3. Budget Estimates (BE) - planned net expenditure for the current financial year; the most recent BE was published in June 2016 with data for FY 2016/17. Similarly to the PO, the BE is an estimate and actual expenditure may differ.

The various financial returns are subject to some limitations (discussed below) but do provide a high level overview of patterns of local authority expenditure on 'pre-primary education' which we take as a reasonable proxy for expenditure on ELC.

While the largest part of pre-primary education comprises staff costs, around a quarter of expenditure is not detailed. This undetailed remainder mostly consists of additional cost for premises, payments to partner providers, supplies and services. The Financial Review has been conducted in part to explore this expenditure in more detail and to identify areas of additional expenditure which are not currently captured by the 'pre-primary expenditure' category.

Funding difference

In the first three years after implementation of the CYP Act, 2014/15 to 2016/17, the Scottish Government has provided local authorities with an additional £329 million to cover the additional revenue costs of the ELC elements of the CYP during those three years.

During the same period, final net expenditure figures from 2014/15, provisional outturn figures for 2015/16 and budget estimates for 2016/17 indicate that local authorities spent or plan to spend an additional £189 million on pre-primary education over the three years compared to continuing spend at 2013/14 levels.

While 2013/14 spend figures are used as a baseline for comparison in this analysis, it should be noted that it is not certain how pre-primary education expenditure would have developed in the absence of the additional funding that has been supplied. Local authorities have been subject to significant budgetary pressures and have sought to constrain expenditure on many areas of activity and it is possible that, in the absence of the CYP Act, that expenditure would have declined and that 2013/14 expenditure is higher than the true (unknown) baseline. To the extent that this is the case, the gap between additional funding and additional expenditure reported here would be an overestimate.

Figure 12: Baseline spend, funding and spending increases

Source: LFR 2013/14, LFR 2014/15, POBE 2015/16

Looking at each of the three years in turn, there is a similar picture of increases in pre-primary education expenditure relative to the 2013/14 baseline but which fail to match the steadily increasing additional CYP-related funding:

• In 2014/15 (Table 24) local authorities provided around 19 per cent more hours of ELC compared to 2013/14 (taking account of lower-than-expected two-year old uptake), received additional funding equivalent to 23 per cent of 2013/14 net expenditure and actually spent around 9 per cent more than 2013/14. In total, local authorities received additional funding of £69 million, but increased spend on pre-primary education relative to 2013/14 by £27 million.
• In 2015/16 (Table 25) local authorities provided around 35 per cent more hours of ELC compared to 2013/14, received additional funding equivalent to 39 per cent of 2013/14 net expenditure and actually spent around 22 per cent more on pre-primary education than in 2013/14, based on the provisional outturn. In total local authorities received additional funding of £119 million, but increased pre-primary education spend relative to 2013/14 by £67 million.
• In 2016/17 (Table 25) local authorities are expected to provide around 36 per cent more hours of ELC compared to 2013/14, received additional funding equivalent to 46 per cent of 2013/14 net expenditure and actually plan to spend around 31 per cent more than 2013/14, based on the budget estimate. In total local authorities received additional funding of £141 million, but plan to increase pre-primary education spend relative to 2013/14 by £96 million.
• Over all three years (figure 15 and tables 24 and 25), compared to a baseline scenario in which the 2013/14 situation continues, local authorities will provide around 30 per cent more hours of ELC, receive additional funding equivalent to 36 per cent of baseline spend and actually spend and plan to spend an additional 21 per cent on pre-primary education. In sum, compared to a rollover of 2013/14 for the three years in question, local authorities increase spending on pre-primary education by £189 million but receive £329 million in additional funding.

Table 24: ELC revenue funding and expenditure

Local Authority	Net Expenditure 2013/14 ( LFR)	Net Expenditure 2014/15 ( LFR)	Expenditure change, 13/14 to 14/15	CYP revenue funding 2014/15
Aberdeen City	£10.9m	£13.8m	£2.9m	£2.4m
Aberdeenshire	£16.2m	£17.2m	£1.0m	£3.2m
Angus	£4.0m	£4.6m	£0.6m	£1.4m
Argyll & Bute	£5.6m	£6.5m	£0.9m	£1.0m
Clackmannanshire	£3.2m	£3.7m	£0.4m	£0.9m
Dumfries & Galloway	£9.9m	£9.3m	£0.6m	£2.0m
Dundee City	£7.7m	£8.8m	£1.0m	£2.1m
East Ayrshire	£8.9m	£9.0m	£0.1m	£1.6m
East Dunbartonshire	£4.8m	£5.3m	£0.6m	£1.1m
East Lothian	£5.6m	£6.0m	£0.4m	£1.3m
East Renfrewshire	£7.2m	£7.3m	£0.1m	£1.0m
Edinburgh, City of	£21.4m	£23.7m	£2.3m	£5.6m
Eilean Siar	£2.2m	£2.1m	£0.1m	£0.3m
Falkirk	£7.5m	£9.0m	£1.5m	£2.1m
Fife	£21.3m	£22.0m	£0.7m	£5.0m
Glasgow City	£44.9m	£47.2m	£2.3m	£8.6m
Highland	£9.6m	£11.9m	£2.2m	£3.1m
Inverclyde	£6.2m	£6.8m	£0.7m	£1.0m
Midlothian	£5.2m	£5.6m	£0.4m	£1.1m
Moray	£3.4m	£3.7m	£0.3m	£1.1m
North Ayrshire	£8.6m	£10.5m	£1.9m	£1.9m
North Lanarkshire	£23.6m	£24.0m	£0.3m	£4.8m
Orkney Islands	£0.9m	£1.0m	£0.1m	£0.2m
Perth & Kinross	£7.2m	£8.1m	£0.9m	£1.8m
Renfrewshire	£10.2m	£11.6m	£1.4m	£2.3m
Scottish Borders	£5.2m	£6.5m	£1.3m	£1.5m
Shetland Islands	£2.3m	£2.2m	£0.1m	£0.3m
South Ayrshire	£6.0m	£6.4m	£0.3m	£1.3m
South Lanarkshire	£15.4m	£16.6m	£1.2m	£4.0m
Stirling	£6.3m	£7.0m	£0.7m	£1.0m
West Dunbartonshire	£7.4m	£8.0m	£0.6m	£1.4m
West Lothian	£7.8m	£8.1m	£0.3m	£2.5m
Scotland	£306.6m	£333.5m	£26.9m	£69.3m

Source: LFR 2013/14, LFR 2014/15, POBE 2015/16

Table 25: ELC revenue funding and expenditure continued

Local Authority	Net Expenditure 2015/16 ( PO)	Expenditure change, 13/14 to 15/16	CYP revenue funding 2015/16	Net Expenditure 2016/17 (BE)	Expenditure change, 13/14 to 16/17	CYP revenue funding 2016/17
Aberdeen City	£15.2m	£4.3m	£4.0m	£16.6m	£5.8m	£4.6m
Aberdeenshire	£18.0m	£1.8m	£5.4m	£19.7m	£3.5m	£6.1m
Angus	£6.4m	£2.4m	£2.4m	£7.0m	£3.0m	£2.6m
Argyll & Bute	£7.5m	£1.8m	£1.7m	£7.5m	£1.9m	£2.1m
Clackm'nshire	£4.3m	£1.1m	£1.5m	£4.5m	£1.2m	£1.6m
Dumfries & G'way	£10.8m	£0.9m	£3.3m	£9.2m	£0.6m	£3.9m
Dundee City	£10.2m	£2.5m	£3.6m	£11.0m	£3.2m	£4.4m
East Ayrshire	£11.7m	£2.8m	£3.0m	£13.0m	£4.1m	£3.5m
E. D'bartonshire	£6.8m	£2.0m	£1.9m	£7.1m	£2.4m	£2.1m
East Lothian	£6.0m	£0.4m	£2.2m	£6.4m	£0.8m	£2.6m
E. Renfrewshire	£8.7m	£1.6m	£1.6m	£8.9m	£1.7m	£1.9m
Edinburgh, City of	£24.4m	£3.0m	£9.4m	£27.3m	£5.9m	£11.1m
Eilean Siar	£2.6m	£0.4m	£0.6m	£2.9m	£0.6m	£0.6m
Falkirk	£8.9m	£1.4m	£3.7m	£9.4m	£1.9m	£4.4m
Fife	£26.0m	£4.7m	£8.8m	£30.7m	£9.4m	£10.6m
Glasgow City	£50.9m	£6.0m	£15.0m	£52.6m	£7.7m	£18.2m
Highland	£13.0m	£3.4m	£5.3m	£12.5m	£2.9m	£5.9m
Inverclyde	£7.5m	£1.3m	£1.9m	£7.7m	£1.5m	£2.2m
Midlothian	£6.2m	£1.0m	£2.1m	£7.4m	£2.2m	£2.6m
Moray	£4.0m	£0.7m	£2.0m	£4.3m	£1.0m	£2.3m
North Ayrshire	£12.2m	£3.6m	£3.5m	£13.3m	£4.7m	£4.1m
North Lanarkshire	£26.4m	£2.7m	£8.5m	£29.1m	£5.5m	£10.0m
Orkney Islands	£1.3m	£0.4m	£0.4m	£1.5m	£0.5m	£0.5m
Perth & Kinross	£9.4m	£2.2m	£2.9m	£10.6m	£3.4m	£3.3m
Renfrewshire	£12.3m	£2.1m	£3.9m	£13.8m	£3.6m	£4.6m
Scottish Borders	£6.9m	£1.7m	£2.3m	£7.4m	£2.2m	£2.8m
Shetland Islands	£2.4m	£0.1m	£0.5m	£2.3m	£0.0m	£0.6m
South Ayrshire	£8.0m	£1.9m	£2.3m	£8.3m	£2.3m	£2.8m
S. Lanarkshire	£19.3m	£3.9m	£7.0m	£20.4m	£5.0m	£8.5m
Stirling	£7.9m	£1.6m	£1.7m	£8.2m	£2.0m	£2.1m
W.D'bartonshire	£10.7m	£3.3m	£2.5m	£13.8m	£6.4m	£3.0m
West Lothian	£7.6m	£0.2m	£4.5m	£7.8m	£0.0m	£5.1m
Scotland	£373.4m	£66.8m	£119.2m	£402.1m	£95.5m	£140.7m

Source: LFR 2013/14, LFR 2014/15, POBE 2015/16

Explaining the gap between funding and expenditure

Local authority expenditure figures referred to above are based on local authority-reported final, provisional and expected expenditure on 'pre-primary education'. Pre-primary education expenditure is a proxy for ELC expenditure. The majority of this expenditure is used by local authorities to provide the statutory entitlement to 600 hours, but some local authorities provide additional ELC at their own discretion which will also be included in these expenditure figures.

Because of variations in local authority accounting, there may also be ELC expenditure which is not captured in the pre-primary education figures. For example, where a nursery is co-located with a primary school, some of the nursery costs ( e.g. utilities, rents) may be attributed to primary school expenditure. In summary, the local authority expenditure figures provide a guide to expenditure on funded ELC, but actual expenditure may be somewhat higher or lower.

Discussions with a number of local authorities have identified a variety of explanations for the relatively restrained increases in expenditure which are outlined below.

Accounting and reporting

Part of the explanation may simply be in how ELC expenditure is accounted for and reported in the Local Financial Return, Provisional Outturn and Budget Estimates. While the accounting classifications are well defined and it is clearly set out which elements should be included in each of the subservices, shared items may be accounted for in different ways. For example, where staff work in more than one service area, the corresponding costs that fall into each of these areas have to be estimated. There is wide variation among local authorities in how this is estimated and how shared costs are attributed ( e.g. where nurseries are within primary schools). Some authorities may assign all costs to the service area that gets the majority of their attention, others may pro-rata costs based on client numbers or some other data. Some other specific factors raised by local authorities and identified during the fieldwork around how expenditure is reported are summarised below. Overall, it appears that the available financial reports ( LFR, POBE) provide an indicative view of ELC expenditure by local authorities but are likely to involve a certain amount of imprecision as a result of the inconsistency of the estimation procedures for shared items.

Children and families daycare spend

Some ELC-related expenditure by some local authorities is reported within local government financial returns as social work expenditure. This is particularly the case for expenditure on ELC for vulnerable children. Between financial years 2013/14 and 2014/15, revenue expenditure on daycare for children reported within the social work return has increased by over £3 million which may in part be due to ELC-related increases. At least one local authority has reported the opposite case, where expenditure on other children's services has been recorded against pre-school expenditure in the various financial returns.

Special education spend

Similar to the above, ELC-related expenditure on children with additional support needs ( ASN) may in some cases by reported within the ASN section of the education expenditure return rather than the 'pre-primary' section. Around 3.3 per cent of all children with ASN are estimated to be in ELC. Between financial years 2013/14 and 2014/15 overall spend on ASN increased which, if pro-rated, translates to around an increase of £0.5 million in the ELC element.

Operational changes

Local authorities have also offered explanations in terms of their delivery of ELC before and after the expansion to 600 hours. For example, some local authorities were able to accommodate the expansion to 600 hours by extending contracts from 35 to 37 hours and where local authorities were already providing ELC to 2 year olds, the additional statutory obligations have been achieved at minimal additional cost. More detail on the operational factors put forward by local authorities is provided below:

Declining baseline expenditure

As noted above, the analysis of the gap between additional funding and increased expenditure is based on an assumed baseline of expenditure continuing at 2013/14 levels ie an assumption that, in the absence of the CYP Act, that expenditure on pre-primary education as reported in the LFR and other financial reports would have continued at the same level as reported in 2013/14. During this period, local authorities have been subject to significant financial pressures and have sought to constrain expenditure across a range of activities and it is possible, in the absence of the CYP Act, that expenditure would have declined and that 2013/14 expenditure is higher than the true (unknown) baseline. Table 26 illustrates the overall budgets allocated to local authorities which shows that total revene increased slightly between 2013-15 and then decreased in 2016 for the current financial year.

Table 26: Total revenue paid to local authorities as part of the finance settlement 2013-17

Source (Finance Circular)	Year	Amount
2/2013	2013/14	£9.728 bn
2/2014	2014/15	£9.848 bn
2/2015	2015/16	£9.994 bn
1/2016	2016/17	£9.693 bn

Source: Local government finance settlement

Vulnerable 2 year olds

The uptake of the ELC offer among vulnerable 2 year olds has turned out to be only around a third of what was anticipated. This could imply, if spend is proportionate to uptake, that as little as £6 million of the additional £15 million allocated may have been required in 2014/15.

ELC provision pre- CYP Act

A number of councils already offered, at their own discretion, additional hours of ELC over and above the statutory 475 hours. In those cases, expenditure needed to increase relatively less than in authorities which were only providing the statutory minimum.

More efficient delivery of ELC

A number of local authorities have described how the expansion of ELC to 600 hours was delivered by using existing resources differently or more efficiently. This has involved, for example, change of shift and session patterns, reductions in non-contact time ( e.g. preparation time) and extended hours. One local authority described how they have made savings by making greater use of partner providers while another explained that they have reduced costs by using partner providers less.

Workforce and capital

Some local authorities have reported that recruitment of new workforce has been more challenging than expected and hence staff costs have risen more slowly than expected. Similarly, it has been suggested that completion of infrastructure-related projects is likely to be lower during the initial years following implementation of the CYP Act (see below on Capital expenditure) and that related revenue spend will be delayed as a result.

Capital expenditure

Over the financial years 2014/15 - 2016/17 Scottish Government have committed £170 million in capital expenditure to support delivery of all provisions in the Children and Young People Act (2014). This includes £90 million for investments to support local authorities in adapting to the new statutory requirements for more flexible provision of ELC. In addition, £41 million was provided to local authorities in 2014/15 and a further £39 million in 2015/16 to cover the costs of accommodating the cohort of two year olds newly eligible for funded ELC since 2014.

The total capital expenditure on pre-primary education pre- CYP Act has ranged from £3.9 million to £9.8 million with additional annual revenue contributions of around £1 million. In 2014/15, there was a significant increase to £17 million as local authorities have responded to the expansion to 600 hours. This is expected to ramp up significantly in the coming years as local authorities invest the additional £170 million provided by the Scottish Government to meet the infrastructure needs of the CYP Act.

Table 27: Capital expenditure on pre-primary education

Financial year	Nominal capital expenditure	% change	Capital expenditure in 2014/15 prices
2007/08	£ 9,788,000		£ 11,374,121
2008/09	£ 5,778,000	-41%	£ 6,524,906
2009/10	£ 4,970,000	-14%	£ 5,503,510
2010/11	£ 4,280,000	-14%	£ 4,593,704
2011/12	£ 5,707,000	33%	£ 5,997,772
2012/13	£ 4,926,000	-14%	£ 5,092,473
2013/14	£ 3,873,000	-21%	£ 3,933,457
2014/15	£ 16,927,000	337%	£ 16,927,000

Source: Local government capital returns

Cost per hour Scotland

For the purpose of the expansion to 600 hours of funded childcare, the additional funding to local governments was based on an average expected marginal unit cost ( i.e. the cost of providing an additional hour of ELC) of £4.66 per delivered childcare hour to three and four year olds (£7.34 for two year olds) in 2014/15 which was estimated to increase to £6.91 by 2018/19 to accommodate the flexibility increase (with no increase for two year olds) ^[41] .

As part of the Financial Review of ELC, the Scottish Government has collected data from 10 local authorities on their ELC related expenditure. This has involved local authorities completing a detailed questionnaire with a follow-up interview. The local authorities were chosen to provide representation across combinations of higher or lower population density and higher or lower levels of deprivation as measured by the Scottish Index of Multiple Deprivation ( SIMD).

The purpose of this exercise was to build on our current understanding of the financial implications of the existing free ELC provision and from that to develop a better understanding of how much it will cost to meet the commitment to 1140 hours of funded ELC.

The information gathered from local authorities covered activity (hours of ELC delivered), expenditure, workforce, their experience of the expansion to 600 hours and expectations for the expansion to 1,140 hours. The data gathered has enabled us to derive estimates of unit costs incurred by local authorities for ELC provision delivered either directly in local authority settings or procured from partner providers.

Unit cost in local authority settings

To derive unit costs for provision of ELC in local authority settings, all expenditure positions specifically relevant to the delivery of ELC in local authority settings ( i.e. excluding partner provider payments, free school lunches etc.) have been aggregated and related to the estimated number of hours delivered in those settings.

The cost aggregate is largely made up of staff-related expenditure (wage and non-wage expenditure i.e. pensions), which were taken from local authorities' answers to questions around staffing and staffing expenditure for managers, teachers, practitioners, support, ancillary and auxiliary workers and central and administrative staff and any other staff. Staff expenditure in support of partner providers has been deducted so that only local authority staff expenditure was reflected.

The remainder of the cost aggregate consists of costs for premises, supplies and services, transport, third party and transfer payments and non-staff elements from social work and special education relevant to ELC. The corresponding cost figures were obtained by asking the participating local authorities about costs that were not detailed in the Education LFR or were accounted for elsewhere. Across the 10 local authorities interviewed, the elements that were not attributed to pre-primary education amounted to around £17 million. Extrapolated to all 32 local authorities, this amounts to around £40 million, i.e. actual gross spend on ELC including all provisions made at local authorities' discretion is estimated to be around 10 per cent higher in reality than is reported under 'pre-primary expenditure' in the LFR.

To arrive at a unit cost, the total cost in each local authority is put in relation to the hours that were delivered during the period to which the above costs refer.

The number of hours delivered in local authority settings was estimated by multiplying the average hours per child per year, taking account of staggered start dates according to the child's birthday, with the implied or stated (staffed) capacity in local authority settings in financial year 2014/15.

Following this approach yields a unit cost estimate for provision of ELC in local authority settings of £5.45 per hour for three and four year olds and £7.74 for two year olds. In both cases, the non-staff element of these costs is estimated at around 17 per cent, although variation across local authorities is large, mainly due to differences in accounting costs for premises where settings are located in primary schools.

Figure 13: Cost components of unit cost in local authority settings

Source: Local authority data collection

The second largest component of the hourly cost of ELC is premises although many settings do not incur any substantial costs as they are located within primary schools or the building the service is delivered in is owned by the local authority.

The remainder of the cost is made up of supplies, services, third party and transfer payments and additional operational costs mainly related to service delivery for children with additional support needs. The relative weight of each of these components varies by local authority.

There is a large variation in unit costs between local authorities but without any obvious correlation with rurality/population density or with levels of deprivation. This result may be driven by the particular choice of local authorities in our sample and needs further exploration.

The unit costs above, combined with the number of children registered and the average hours of the entitlement within financial year 2014/15 gives an estimate for expenditure on funded ELC provided by local authority settings of around £249 million. In other words, of the total expenditure on ELC and related activities, £249 million or around three quarters is spent on local authority provision of the funded entitlement.

Cost to local authorities of procuring from partner providers

Where the entitlement is not provided by a public setting, local authorities can procure ELC from partner providers at a rate which the local authority either sets independently or agrees upon jointly with partner providers. Based on the data collected for the Financial Review, the average rate at which partner providers are compensated is estimated at £4.78 for two year olds and at £3.59 for three and four year olds. Local authorities also provide additional support for partner providers, for example for training and staff support. This additional support costs local authorities an estimated £0.94 per hour of ELC procured from partner providers for two year olds and £0.99 per hour for three and four year olds.

Given the number of places procured from partner providers and the average hours of the entitlement by age group, the amount spent by local authorities on procured ELC is estimated at around £79 million in financial year 2014/15.

Total local authority expenditure on the funded entitlement to 600 hours

Based on unit costs of provision in LA settings and the unit costs of LA procured PP provision, the overall expenditure on funded ELC in financial year 2014/15 is estimated at £327 million or around 98 per cent of the net expenditure on pre-primary education figure detailed in the LFR.

Table 28: Estimated total expenditure on funded ELC

	2 year olds	3 & 4 year olds
Unit cost local authority	£ 7.74	£ 5.45
Total cost local authority	£ 14,300,000	£ 234,300,000
Partner provider rate	£ 4.78	£ 3.59
Additional spend in support of PPs	£ 0.94	£ 0.99
Overall unit cost for procuring from PPs	£ 5.72	£ 4.58
Total spend on partner providers	£ 1,200,000	£ 77,300,000

Source: Scottish Government

Partner provider rates and costs

Ipsos MORI Scotland was commissioned by the Scottish Government to survey private and not-for-profit childcare providers of the funded entitlement across Scotland about their hourly unit costs for delivering ELC. ^[42] An online survey of 965 partner providers collected detailed information about costs, income, capacity and occupancy. Responses were obtained for 222 settings (22 per cent of all partner providers).

Table 29: Partner provider average unit costs for 0-5 year olds by various breakdowns

Category	Type	Average cost
Provider type	Not-for-profit provider	£3.73
	Private provider	£3.69
	Total	£3.70
Provider size	Small	£3.68
	Medium	£3.73
	Large	£3.73
	Varies (chain)	£3.50
	Total	£3.70
Area of Scotland	Eastern Scotland	£3.80
	Highlands and Islands	£3.79
	North Eastern Scotland	£3.63
	South Western Scotland	£3.59
	Varies (chain)	£3.03
	Total	£3.70
Urban rural indicator	Large urban	£3.65
	Other urban	£3.69
	Accessible small town	£3.86
	Remote small town	£3.67
	Accessible rural	£3.60
	Remote rural	£3.95
	Varies (chain)	£3.52
	Total	£3.70

Source: Ipsos MORI: Costs of Early Learning and Childcare Provision

The average cost for one hour of ELC for 0-5 year olds at partner providers is estimated at £3.70 (£3.69 in private settings, £3.72 in voluntary settings, table 29). There is only small variation across areas, urban-rural indicators and size of the setting, with only nursery chains exhibiting notably lower average costs.

Given different staff ratios by age, we estimate that costs for three and four year olds could be up to 15 per cent lower than this and costs for 2 year olds up to 20 per cent higher although this will depend on the extent to which providers are able to and chose to segregate children by age.

There is a reasonably broad variation in unit costs around the average as shown in figure 17 below; at the median, half of providers have a unit cost greater than £3.59 per hour and half have a lower unit cost. Ten per cent of providers have a unit cost at or greater than £5.31 and 10 per cent have a unit cost at or below £2.36.. Again, this does not account for any profit margin and may be missing some elements of owners' remuneration where this is taken from profits.

Figure 14: Cumulative distribution of partner provider unit costs, 0-5 year olds

Source: Ipsos MORI: Costs of Early Learning and Childcare Provision

A detailed breakdown of the average partner provider unit cost is shown in figure 15.

Figure 15: Cost breakdown for partner provider settings for one hour of ELC

Source: Ipsos MORI: Costs of Early Learning and Childcare Provision

The larger relative share in overheads reflects that private settings have higher cost for premises, maintenance and taxes which public settings either do not face at all or to a limited extent. Third sector settings, on the other hand, are eligible for tax relief and/or subsidised or free usage of public premises.

Table 30 provides a breakdown of the average amount of each cost component. Most notably, staff costs per hour are only around half as high per hour as in public settings (see page 57).

Table 30 : Results of partner provider cost survey; unit costs 0-5 year olds

Total unit cost [43]	£ 3.70
Staff	£ 2.61
Rent/mortgage	£ 0.25
Utilities	£ 0.14
Consumables	£ 0.13
Catering	£ 0.01
Play & Learning equipment	£ 0.10
Services	£ 0.03
Training	£ 0.03
Equipment	£ 0.04
Transport	£ 0.03
Maintenance	£ 0.07
Building service	£ 0.03
Business rates	£ 0.04
Other taxes	£ 0.06
Other costs	£ 0.15

Source: Ipsos MORI: Costs of Early Learning and Childcare Provision

The large difference between costs in partner provider and local authority settings can be explained by the gap in staff costs. On average, for an early years practitioner, the public sector spends two thirds more than the voluntary and 80 per cent more than the private sector on staff-related costs (wages, pensions etc). If partner providers were to pay public sector wages, their costs would be at a similar level to those found in local authority settings.

Figure 16: Cost difference PP and LA provision

Source: Ipsos MORI: Costs of Early Learning and Childcare Provision and local authority data collection

Contribution of funded entitlement to provider income

The majority of partner provider income comes from fees paid directly by parents, with payments from local authorities making up 23 per cent of total income on average. The share of local authority payments in total income tends to be greater in smaller providers and in providers operating in more remote and rural areas (see table 31).

Table 31: Partner provider average annual income by source

	Average annual income from local authorities	Average annual income from parents	Local authority share of total income
large urban	£68,276	£223,712	23%
other urban	£60,498	£251,852	19%
accessible small town	£67,240	£164,285	29%
remote small town	£71,829	£95,617	43%
accessible rural	£47,459	£129,088	27%
remote rural	£35,985	£18,150	66%

Source: Ipsos MORI

On an hourly basis, the fees parents pay for unfunded hours are lower in the not for profit sector than in the private sector and fees for 3&4 year olds are less than for 2 year olds (table 32). However, the variation by age is greater in the not for profit sector (£3.22 for 4 year olds and £3.64 for 2 year olds) than in private sector where similar fees tend to be paid (£4.25 to £4.34). The research also reveals that, on average, for two year olds, providers receive a higher partner provider rate from local authorities than they do from fees. For three and four year olds, private providers receive on average £0.66 more per hour in fees for unfunded hours than they do from local authorities for the funded entitlement. Conversely, not-for-profit providers receive slightly more per hour from local authorities than they charge to parents.

Table 32: Partner provider hourly fees and charges

	Average hourly fees from parents		Average hourly rate paid by LAs
	Not for profit	Private
2 year olds	£3.64	£4.34	£4.78
3 year olds	£3.36	£4.25	£3.59
4 year olds	£3.22	£4.25	£3.59

Source: Ipsos MORI