Free, but not easy
BRITAIN: 30 HOURS FREE CHILDCARE
Free, but not easy The 30 hours free childcare scheme seems sound and fair in principle but the realities of delivering it will be anything but, particularly for some providers. Ledetta Asfa-Wossen explores the current market sentiment
U
K childcare costs are among the most expensive in the world. The Institute of Economic Affairs estimates that most families spend a third of their net income on childcare, putting it on par with mortgage or rent payments. Families spend an average of £11,000 a year on a single full-time nursery space, according to the Family and Childcare Trust. The number is even higher in London. The September rollout of 30 hours free childcare for three and four year olds will allow eligible working parents to claim an additional 570 hours a year of free early education. Providing parents live and work in England, that could be an entitlement of up to 1,140 hours a year. So far, so good – however flaws in the foundation of the scheme mean it won’t be a win-win for parents and nursery providers alike. There are multiple reasons for this, the first being funding.
Poor sums
years to come,” explains Leitch. The PLA, along with other lobby groups such as the National Day Nurseries Association (NDNA), has been warning both industry and the government of funding shortages for some time. “Although the 30 hours of funded childcare initiative will be a big boost to parents, our members are extremely concerned about whether they can offer this and remain sustainable as businesses. In its current form, many settings will struggle to offer this, limit the number of places or just opt out altogether,” says Purnima Tanuku, chief executive, NDNA. While the scheme is being fully rolled out this month, Tanuku argues that lessons still need to be learnt from the pilots before being implemented and urges providers to urgently revisit their business models.
Sadly, we’ve already
The costs are high
Each local authority allocates hourly A recent PLA survey conducted with started to see childcare payment rates and these hourly 1,332 providers found that 44% of rates awarded for funded places providers would not offer the 30 providers, many of whom vary significantly between local hours free childcare and a quarter of have been running for authorities. In some parts of England, providers now fear closure. “Sadly, decades, shutting their the awarded hourly rates nowhere we’ve already started to see childcare doors due to lack of near cover the costs incurred by the providers, many of whom have adequate funding provider and parents are frequently been running for decades, shutting forced to cross subsidise through their doors due to lack of adequate private fee payments. funding,” says Leitch. In pockets across the country, concerns are being voiced “It’s time for the government to face up to the facts, we that providers will struggle to make ends meet. “The childcare either need to see substantially greater investment into the sector in England has been grossly underfunded for years. sector, or an acceptance that the so-called free childcare offer Nurseries, pre-schools and childminders have struggled to is not – and has never been – free at all,” he adds. remain commercially viable, with many forced to rely on While the term 30 hours free childcare is still broadly used, volunteers, fundraising and staff working unpaid overtime many companies within the sector such as Christie & Co have to stay afloat. The introduction of 30 hours, will make the decided to stop using the word ‘free’. situation even more difficult,” says Neil Leitch, chief executive “Each provider will handle the implementation of 30 hours of the Pre-school Learning Alliance (PLA). childcare differently. If providers intend to offer it, the terms “Many providers will no longer be able to cross-subsidise to of the contract they enter regarding terms of delivery with cover the shortfall between government funding rates and the their local authority will be key,” says Courteney Donaldson, cost of delivering funded places. Worse still, current funding childcare and education managing director at Christie & Co. levels, which were based on provider cost data (such as wages, “During the first six months of 2017, we have seen an rents and insurance costs) from 2012, are now fixed until the increase in nurseries closing – but it’s not all doom and gloom. end of parliament. This means that even those providers who While 30 hours’ is viewed as a threat by some, other providers are able to make it work this year are likely to struggle in see it as an opportunity,” she adds.
24
£11,000 the average amount families spend a year on a single full-time nursery space
1,140 number of free early education hours per year working parents could be entitled to
EducationInvestor Global • September 2017
BRITAIN: 30 HOURS FREE CHILDCARE
Smaller providers – those offering 20-50 places, are likely to face the most pressure. The cost of providing even 12 funded places could severely affect their bottom line and the number of parents paying the private fee will not be enough to subsidise the gap in funding. For those at the coalface, the timing for the scheme couldn’t be worse. Many providers are currently battling with the cost of workplace pensions, business rates re-valuations, increases in the National Minimum Wage and pressure to employ a higher qualified or graduate workforce. Sharon Rea, founder of New View Nursery, says: “West Sussex have told us the hourly funded rate for free entitlement will be £4.42. This hourly rate will not cover our delivery costs and I refuse to make cuts to staff ratios and the quality of provision. Neither the press nor the government is giving the full picture. Meanwhile, the nursery sector is left having to find creative ways to remain in business.” Term time nursery schools that operate on a sessional basis are also likely to face significant sustainability challenges. “Larger nurseries may be able to cover those losses but across the board we may see prices for private places increase,” adds Donaldson.
Size matters But it doesn’t mean profit falls for all. Far from it, particularly for the larger nursery groups. “Mitigating strategies are likely to be well in place for nursery groups,” says Arun Kanwar, partner at Cairneagle Associates. “There will inevitably be some casualties, but we expect this to be mostly sub-scale and less well-run single site operations – this certainly isn’t a blanket negative outcome in all cases.” Furthermore, Kanwar says there could be a growth curve for some providers. “Our analysis suggests a less unfavourable impact and in some cases a net favourable impact in the north of England. Parents with earnings in excess of £100,000 who are not eligible for the 30 hours funding will also provide some protection against any negative impact in more affluent nursery locations.” He also warns against providers rushing to shun the scheme in a bid to protect their business as while opting
EducationInvestor Global • September 2017
out of 30 hours is an option for a nursery, it may put them at a competitive disadvantage if local competitors offer the funding. While many would argue that the policy has not been terribly well thought through, Kanwar adds that “nurseries should take comfort from the fact that the government can’t afford for private providers in the market to fail and therefore need to show flexibility,” particularly when private firms account for over 80% of all spaces. In terms of the potential impact on investor appetite, private equity firms have remained interested in the early years and childcare sector. This is partly “due to the barriers to entry in what is a highly regulated sector, as well as the opportunities to acquire platform assets from which to grow through further acquisition and benefit from scale economies,” says Lewis Gray of Livingstone Partners. The cost benefits that come with being a larger group that can share overheads have meant that achieving scale through acquisition has become more of a focus for the UK’s significant nursery groups. “Acquisition activity has held up in 2017 despite the uncertainties, with interest being sustained by PE-backed consolidators such as Ontario Teachers Pension Plan-backed Busy Bees Nurseries and international acquirers Bright Horizons and Les Petits Chaperons Rouges all demonstrating continuing appetite to invest for growth in the UK childcare sector over the course of the last nine months,” adds Gray. This view is further held up by Kanwar: “Fundamentally, the question is not whether the sector remains investible. In fact, given the penetration of private providers and the level of fragmentation, there is perhaps more opportunity for consolidation than in any other education vertical. Rather, it is a question of whether a price adjustment is required for 30 hours for any business being invested in.” While investment opportunities in the UK’s nursery sector and the outlook for larger providers remains positive, it is universally agreed that there are likely to be winners and losers. As Donaldson succinctly puts, “unfortunately the most important stakeholders that will lose out in the short-term are children, due to some nurseries closing”. n
25
Free, but not easy The 30 hours free childcare scheme seems sound and fair in principle but the realities of delivering it will be anything but, particularly for some providers. Ledetta Asfa-Wossen explores the current market sentiment
U
K childcare costs are among the most expensive in the world. The Institute of Economic Affairs estimates that most families spend a third of their net income on childcare, putting it on par with mortgage or rent payments. Families spend an average of £11,000 a year on a single full-time nursery space, according to the Family and Childcare Trust. The number is even higher in London. The September rollout of 30 hours free childcare for three and four year olds will allow eligible working parents to claim an additional 570 hours a year of free early education. Providing parents live and work in England, that could be an entitlement of up to 1,140 hours a year. So far, so good – however flaws in the foundation of the scheme mean it won’t be a win-win for parents and nursery providers alike. There are multiple reasons for this, the first being funding.
Poor sums
years to come,” explains Leitch. The PLA, along with other lobby groups such as the National Day Nurseries Association (NDNA), has been warning both industry and the government of funding shortages for some time. “Although the 30 hours of funded childcare initiative will be a big boost to parents, our members are extremely concerned about whether they can offer this and remain sustainable as businesses. In its current form, many settings will struggle to offer this, limit the number of places or just opt out altogether,” says Purnima Tanuku, chief executive, NDNA. While the scheme is being fully rolled out this month, Tanuku argues that lessons still need to be learnt from the pilots before being implemented and urges providers to urgently revisit their business models.
Sadly, we’ve already
The costs are high
Each local authority allocates hourly A recent PLA survey conducted with started to see childcare payment rates and these hourly 1,332 providers found that 44% of rates awarded for funded places providers would not offer the 30 providers, many of whom vary significantly between local hours free childcare and a quarter of have been running for authorities. In some parts of England, providers now fear closure. “Sadly, decades, shutting their the awarded hourly rates nowhere we’ve already started to see childcare doors due to lack of near cover the costs incurred by the providers, many of whom have adequate funding provider and parents are frequently been running for decades, shutting forced to cross subsidise through their doors due to lack of adequate private fee payments. funding,” says Leitch. In pockets across the country, concerns are being voiced “It’s time for the government to face up to the facts, we that providers will struggle to make ends meet. “The childcare either need to see substantially greater investment into the sector in England has been grossly underfunded for years. sector, or an acceptance that the so-called free childcare offer Nurseries, pre-schools and childminders have struggled to is not – and has never been – free at all,” he adds. remain commercially viable, with many forced to rely on While the term 30 hours free childcare is still broadly used, volunteers, fundraising and staff working unpaid overtime many companies within the sector such as Christie & Co have to stay afloat. The introduction of 30 hours, will make the decided to stop using the word ‘free’. situation even more difficult,” says Neil Leitch, chief executive “Each provider will handle the implementation of 30 hours of the Pre-school Learning Alliance (PLA). childcare differently. If providers intend to offer it, the terms “Many providers will no longer be able to cross-subsidise to of the contract they enter regarding terms of delivery with cover the shortfall between government funding rates and the their local authority will be key,” says Courteney Donaldson, cost of delivering funded places. Worse still, current funding childcare and education managing director at Christie & Co. levels, which were based on provider cost data (such as wages, “During the first six months of 2017, we have seen an rents and insurance costs) from 2012, are now fixed until the increase in nurseries closing – but it’s not all doom and gloom. end of parliament. This means that even those providers who While 30 hours’ is viewed as a threat by some, other providers are able to make it work this year are likely to struggle in see it as an opportunity,” she adds.
24
£11,000 the average amount families spend a year on a single full-time nursery space
1,140 number of free early education hours per year working parents could be entitled to
EducationInvestor Global • September 2017
BRITAIN: 30 HOURS FREE CHILDCARE
Smaller providers – those offering 20-50 places, are likely to face the most pressure. The cost of providing even 12 funded places could severely affect their bottom line and the number of parents paying the private fee will not be enough to subsidise the gap in funding. For those at the coalface, the timing for the scheme couldn’t be worse. Many providers are currently battling with the cost of workplace pensions, business rates re-valuations, increases in the National Minimum Wage and pressure to employ a higher qualified or graduate workforce. Sharon Rea, founder of New View Nursery, says: “West Sussex have told us the hourly funded rate for free entitlement will be £4.42. This hourly rate will not cover our delivery costs and I refuse to make cuts to staff ratios and the quality of provision. Neither the press nor the government is giving the full picture. Meanwhile, the nursery sector is left having to find creative ways to remain in business.” Term time nursery schools that operate on a sessional basis are also likely to face significant sustainability challenges. “Larger nurseries may be able to cover those losses but across the board we may see prices for private places increase,” adds Donaldson.
Size matters But it doesn’t mean profit falls for all. Far from it, particularly for the larger nursery groups. “Mitigating strategies are likely to be well in place for nursery groups,” says Arun Kanwar, partner at Cairneagle Associates. “There will inevitably be some casualties, but we expect this to be mostly sub-scale and less well-run single site operations – this certainly isn’t a blanket negative outcome in all cases.” Furthermore, Kanwar says there could be a growth curve for some providers. “Our analysis suggests a less unfavourable impact and in some cases a net favourable impact in the north of England. Parents with earnings in excess of £100,000 who are not eligible for the 30 hours funding will also provide some protection against any negative impact in more affluent nursery locations.” He also warns against providers rushing to shun the scheme in a bid to protect their business as while opting
EducationInvestor Global • September 2017
out of 30 hours is an option for a nursery, it may put them at a competitive disadvantage if local competitors offer the funding. While many would argue that the policy has not been terribly well thought through, Kanwar adds that “nurseries should take comfort from the fact that the government can’t afford for private providers in the market to fail and therefore need to show flexibility,” particularly when private firms account for over 80% of all spaces. In terms of the potential impact on investor appetite, private equity firms have remained interested in the early years and childcare sector. This is partly “due to the barriers to entry in what is a highly regulated sector, as well as the opportunities to acquire platform assets from which to grow through further acquisition and benefit from scale economies,” says Lewis Gray of Livingstone Partners. The cost benefits that come with being a larger group that can share overheads have meant that achieving scale through acquisition has become more of a focus for the UK’s significant nursery groups. “Acquisition activity has held up in 2017 despite the uncertainties, with interest being sustained by PE-backed consolidators such as Ontario Teachers Pension Plan-backed Busy Bees Nurseries and international acquirers Bright Horizons and Les Petits Chaperons Rouges all demonstrating continuing appetite to invest for growth in the UK childcare sector over the course of the last nine months,” adds Gray. This view is further held up by Kanwar: “Fundamentally, the question is not whether the sector remains investible. In fact, given the penetration of private providers and the level of fragmentation, there is perhaps more opportunity for consolidation than in any other education vertical. Rather, it is a question of whether a price adjustment is required for 30 hours for any business being invested in.” While investment opportunities in the UK’s nursery sector and the outlook for larger providers remains positive, it is universally agreed that there are likely to be winners and losers. As Donaldson succinctly puts, “unfortunately the most important stakeholders that will lose out in the short-term are children, due to some nurseries closing”. n
25
