5. Competition Assessment
5.1 As highlighted in section 1, the ELC sector operates as a mixed economy model with a mixture of public, private and third sector providers. For many private and third sector providers their business model is built around offering a mixture of funded hours and paid for hours (or non-funded hours) – with the latter accounting for the majority of their income (on average, around 77%)
5.2 The key potential impact on competition in the sector – with regards to where the funded hours are delivered – will be determined by how local authority plans for expanding capacity in their own settings takes account of the local market for ELC and in particular, overall capacity across all sectors.
5.3 As highlighted in section 2.15 each local authority developed an expansion plan setting out how they will deliver 1140 hours in their respective areas. These plans included an assessment of local market capacity and were accompanied by detailed Finance Templates. These templates included estimates of the contribution that funded providers in the private and third sectors, including childminders, would make to the delivery of the funded hours. This provides an estimated profile as to how market share for the delivery of funded ELC will evolve over the period to 2021-22 (the first full year of 1140 hours being available).
5.4 The share of the funded hours accounted for by providers in the private and third sectors, including childminders, is estimated to remain broadly unchanged in 2021-22 relative to the 2016-17 baseline. However, within the transition period to August 2020 it is estimated that there will be a temporary increase in the share of funded hours delivered in local authority settings. This reflects the expansion planning guidance which issued to local authorities in March 2017 and made clear that plans for phasing should reflect the Scottish Index of Multiple Deprivation to ensure that families and communities who stand to benefit most from the expansion also benefit first. Local authority settings are more likely, compared to private and third sector providers, to operate in deprived areas so it is expected that early phasing of 1140 hours would be more concentrated in these settings.
5.5 Whilst it will be important to track changes in market share local authority plans indicate that they have been built on the premise that from the full roll out of 1140 hours in August 2020 the market structure remains broadly unchanged from 2016-17 following the creation of additional capacity in the period to 2020.
5.6 Funding Follows the Child should also support competition in the sector. For example, the approach is ‘provider neutral’ and is underpinned by a National Standard that all funded providers will have to meet. As well as ensuring that the funded hours are delivered in high quality settings it will also place choice in parents’ and carers’ hands by allowing them to access their child’s entitlement from any setting that meets the National Standard, has a place available and is willing to enter a contract with the local authority.
5.7 The move towards Funding Follows the Child will be supported by clear and accessible information for families to ensure that parents and carers know what their child is entitled to and how the new approach will operate. The National Standard, for example, provides reassurance to families that any provider delivering the funded entitlement is a high quality setting.
5.8 Moreover, the Funding Follows the Child and the National Standard for Early Learning and Childcare: Operating Guidance highlights that the sustainability of funded providers is about more than just the funding rate that they receive. The competitiveness and business sustainability of funded providers may be impacted by policy and investment decisions taken by local authorities. The recruitment activity of local authorities can also impact on the sustainability of funded providers. The Operating Guidance highlights that it is important that local authorities give appropriate consideration to these potential impacts in exercising their statutory duties, undertaking recruitment activity, and in applying ELC expansion planning principles.
5.9 Access for providers to delivering the funded entitlement is also impacted by the process for becoming a funded provider. There is a commitment, as part of Funding Follows the Child, to simplifying the process for, and reducing the burden on, providers who wish to deliver the funded entitlement. This is expected to make it easier for ELC providers in the private and third sectors, including childminders, to become a supplier of funded ELC, thus potentially increasing the number of providers offering the funded entitlement (as long as they meet the criteria in the National Standard).
5.10 The approach also enables new providers to enter the market. For example, new settings will be able to deliver the funded hours on a probationary basis, pending the outcome of their first Care Inspectorate inspection, provided the local authority is assured that they have the potential to meet all other criteria in the National Standard. All new settings have to be approved through the Care Inspectorate registration process as being fit to deliver a daycare of children service.
5.11 This probationary condition has been included to improve the accessibility of funded provision. It also acknowledges that in some areas, especially in remote and rural areas, newly registered settings may not be financially viable without being able to offer the funded entitlement from the outset. This condition will also be important in encouraging new innovative provision, including outdoor nurseries and provision developed by community enterprises.