Funding Follows the Child and the National Standard for Early Learning and Childcare Providers: interim guidance - update

Annex A: Payment of sustainable rates for the delivery of funded early learning and childcare from August 2022

Overview

1. The payment of sustainable rates to funded providers is vital to supporting financial sustainability, and is a key aspect of Funding Follows the Child.

2. In April 2019, guidance was published to support local authorities to set sustainable rates for funded providers in the private and third sectors, including childminders, from August 2020. This was produced based on feedback gathered from across the sector, and sets out the principles that should underpin any approach to setting sustainable rates; and options for taking forward the process.

3. The guidance highlights that the rate paid to funded providers should be sustainable and should meet the following:

• the rate will support delivery of a high quality ELC experience for all children
• it will be a rate that reflects the cost of delivery, including the delivery of national policy objectives
• the rate will allow for investment in the setting – staff, resources and physical environment
• it will enable payment of the real Living Wage for those childcare workers delivering the funded entitlement

4. The guidance also highlights that from a local authority perspective the rate must be sustainable for authorities in terms of the budgets available, and that the following points are also important to consider when setting a sustainable rate:

• the rate does not have a detrimental effect on the local authority's ability to continue to pay for the service in the long-term
• the wider package of 'in-kind benefits', which are separate to the sustainable rate, available to the funded provider as part of their contract with the local authority
• the rate does not need to be cross-subsidised by parents and carers through charges for non-funded hours

5. When setting sustainable rates to meet the requirements of paragraphs 3 and 4 local authorities are expected to continue to use Funding follows the child and the national standard for early learning and childcare providers: guidance for setting sustainable rates from August 2020 as the main source of guidance for this, and the process for setting sustainable rates should be underpinned by the principles set out in Section 2 of the Guidance.

6. This update acts as a complement to the Sustainable Rates Guidance published in April 2019 to focus on the key considerations for setting rates for August 2022 in light of the programme of actions, set out in the Financial Sustainability Health Check, to strengthen the process for setting sustainable rates and the current economy wide cost pressures.

7. The principles in the guidance highlight the importance of the rate setting process being underpinned by an evidence-based approach; transparency; and partnership working between local authorities and funded providers in the private, third and childminding sectors.

Strengthening the Process for Setting Sustainable Rates

8. In August 2021 the Scottish Government published the Financial Sustainability Health Check, and Early learning and childcare providers - local authority funding and support: overview, which set out updated information on the sustainable rates that services in the private, third and childminding sectors currently receive from their local authorities to deliver funded ELC. In light of the evidence from these reports, and given the importance of sustainable rates to the financial sustainability of these providers, the Health Check set out a series of actions to provide further support to strengthen the process for setting sustainable rates for August 2022.

9. This has included making additional support and advice available to local authorities, where required, to support the sustainable rates setting process; to ensure that rates reflect the costs of delivery, provide scope for reinvestment and enable delivery of the real Living Wage commitment. As part of this the Improvement Service have been working with local authorities to understand what assistance would be beneficial to setting sustainable rates in their area, and providing a forum for authorities to engage on these issues and to share good practice.

10. This includes a programme of workshops on sustainable rates, organised by the Improvement Service, and local authorities are encouraged to continue to engage in these sessions.

11. A key area where local authorities identified a need for more support is in gathering robust evidence on costs of delivery, which could then be used as the starting point for developing local sustainable rates. To support this COSLA and local authorities, through the Improvement Service, commissioned Ipsos Mori to undertake an independent cost collection exercise. Ipsos Mori collected, through a detailed survey in March 2022, information from funded services in the private, and third sector. This will be followed by a separate cost collection exercise of funded childminding services.

12. Where the response rate is high enough, outputs from the cost collection exercise have been made available at local authority level. Where there is not a sufficiently high response rate for a reliable output at a local authority level, outputs are provided across a group of authorities. This will be at Regional Improvement Collaborative level in the first instance or an alternative agreed with relevant local authorities directly. Local authorities received their outputs from this exercise in May 2022. Alongside this Ipsos Mori have produced a detailed technical guidance note for authorities to draw on when using the data, and which clearly sets out what factors are, and are not, reflected in the cost data (for example, the cost data does not include a measure of return on investment, which is an aspect of the sustainable rate). Further information is set out in section 3 of Estimating the costs of Early Learning and Childcare provision in partner provider settings - Technical note, which local authorities should have received with their cost data outputs.

13. With regards to how the outputs of the cost collection exercise are shared and used, the COSLA Children and Young People's Board have agreed the following:

• In line with the guidance for setting sustainable rates, local authorities will be as transparent as possible on outputs from the survey, provided outputs have the appropriate level of statistical confidence, and such that any guarantee of confidentiality for respondents is not jeopardised.
• Where there is not a sufficiently high response rate for a reliable output at a local authority level, outputs should be provided across a group of authorities. This will be at Regional Improvement Collaborative level in the first instance or an alternative agreed with relevant local authorities directly.
• As there is no national rate for ELC funding, there should be no publication of national level data.
• The findings of the national cost collection exercise are only a part of the rate setting process. Local authorities will also be considering any outputs alongside local ELC market conditions and ongoing consultation with their local ELC providers.

Key Considerations in setting Sustainable Rates for August 2022

14. The guidance sets out that the sustainable rate should capture the criteria set out in paragraph 3, including reflecting the costs of delivering ELC. However, ensuring a sustainable rate in the current economic climate is challenging. This reflects the ongoing cost of living pressures and continuing high levels of inflation across the economy, as well as the impacts of the COVID-19 pandemic.

15. The impacts of these pressures on delivery costs may not be uniform across different types of settings and may, for example, reflect differences in the size of settings, whether they are located in a remote or rural area, the sector they are located in, rent or mortgage agreements in place, and access to outdoor space. There may also be varying cost pressures across different parts of the service, for example, between staff and non-staff costs. Local authorities may wish to consider how best to reflect these differences.

16. The findings from the cost collection exercise provide local authorities with a robust evidence base on which to start their local rate setting process. However, as highlighted in paragraph 13, the outputs of the national cost collection exercise are only a part of the rate setting process, and authorities need to consider the outputs alongside local market conditions and ongoing consultation with their local ELC providers.

17. It is expected that local authorities work with providers on the basis of the available evidence, and within the funding envelope available for 1140 expansion, to uplift rates for 2022-23 to ensure that they reflect the costs of delivery (including inflationary increases), provide scope for reinvestment (reflecting a measure of profit in a private sector setting or surplus in a third sector organisation) and enable delivery of the real Living Wage commitment within the scope of the ELC quantum.

18. The level of change in rates in 2022-23 will reflect gathered local evidence and local circumstances, and will be determined through robust and transparent processes and local engagement. Rates must be affordable for local authorities in terms of the budgets available.

19. To inform this it is also important, particularly given the current economic climate, that local authorities give consideration to the following in setting sustainable rates:

• What engagement has there been with providers to create and maintain dialogue throughout the rates setting process, including providing the opportunity to raise any concerns or queries about the process?
• In-line with paragraph 105 in the Sustainable Rates Guidance published in April 2019, sustainable rates should, where possible, reflect actual, up to date costs. As highlighted in the Technical Report provided by Ipsos Mori the information collected, for the majority of services, is for either Q1 2022 or for the 2021-22 financial year. What information is available on the cost pressures – both staff and non-staff costs – that services have faced since early 2022?
• Will the rate set for August 2022 remain sustainable for the full year? Will there be any assessment of the rate undertaken during the year?
• Related to the above point, what will be the impact on the sustainability of the rate following the announcement of the next uplift to the real Living Wage (which is usually announced in November each year)? For example, if the real Living Wage increased in-line with current forecast levels of inflation (the Bank of England's Monetary Policy Report for May 2022 forecasts that Consumer Prices Index (CPI) inflation could peak at just over 10% in the year to Q4 2022) what would the impact be on the sustainability of the rate?
• How does the rate allow for investment in the setting – staff, resources and physical environment? The cost collection data does not include this measure, and local authorities will have to make an evidence-based judgement as to an appropriate return on investment rate to apply locally.

Payments for delivery of the free meal commitment

20. As highlighted in section 2 of this interim guidance document, local authorities and providers are now expected to be delivering the commitment that every child receiving a funded ELC session will receive a free meal.

21. Funding to deliver the free meal commitment will be additional to the sustainable rate for funded providers.

22. Local authorities must continue to ensure that they are transparent as to the funding being provided to private and third sector providers for the delivery of the free meal commitment.

23. To ease the administrative burden on providers, a local authority may decide to include these elements in the same payment as the sustainable rate or a local authority may account for it separately. The local authority must make sure, particularly where all elements are reflected in one payment, that there is transparency for providers regarding the separate elements of funding being received.

Next Steps on Setting Sustainable Rates

24. The Improvement Service will continue to facilitate workshops and forums to enable local authorities to share good practice and learning regarding the approach to setting sustainable rates. Local authorities are encouraged to continue to engage in this support.

25. As set out in the Financial Sustainability Health Check the Scottish Government is committed to updating the sustainable rates data collection exercise annually with the updated information published by the end of August each year. To inform this we will request information from local authorities on the rates that they have set for August 2022.

26. This will also help to inform our wider work on monitoring the sustainability of the childcare sector, and we are considering approaches to updating aspects of the Financial Sustainability Health Check later this year.

27. We will also continue to review the sustainable rates guidance document, published in April 2019, as part of the wider update of supporting guidance and documentation, ahead of the full implementation of Funding Follows the Child in August 2023. This will be informed by engagement with local authorities and the sector, and will consider the approaches adopted by authorities to setting sustainable rates for August 2022.