Childcare providers are increasingly running at a loss despite more money being spent on such services. Jo Stephenson investigates the causes and how providers are hoping to get themselves back on track after a difficult period for the sector.

On the surface the childcare market appears to be booming. Why then areso many providers struggling to balance their books?

Government-commissioned research shows the number of full daycare placeshas mushroomed in five years. But so too has the number that are makinga loss (Children Now, 31 May - 6 June).

Surveys by market research firm BMRB show that there has been an overallincrease in the number of childcare providers of all types making aloss.

But full daycare has been worst hit with a fifth of providers reportinga loss in their last financial year. Many more are just breakingeven.

It's an alarming trend, says the National Day Nurseries Association.

"This will ultimately lead to the closure of high-quality provision, andreduced choice for parents," believes chief executive PurnimaTanuku.

State-funded places

But what is the reason behind it? The association points to aproliferation of new state-funded childcare places in children's centresand extended schools, which are squeezing existing private and voluntarynurseries out.

It wants local authorities to make use of existing childcare. In its2005 report Why Duplicate? the association estimated that using existingsurplus places could save local authorities 1.89bn in capitalcosts. And new legislation on its way through Parliament stipulates thatcouncils must audit existing provision and seek to work with existingproviders before creating new places.

Councils will have a new role to manage local childcare markets underthe Childcare Bill and it's going to be a tricky balancing act, says theDaycare Trust. Local authorities will have to influence their localchildcare market to provide childcare that's sustainable financially andmeets the needs of children and families, adds the trust's head ofprojects Thom Crabbe.

"We must also remember that many families still find it very difficultto find suitable and affordable childcare," he says.

Organisations such as the Daycare Trust have long pushed for more directfunding to childcare providers. The Government is offering cash to fulldaycare providers to employ high-level qualified staff through theTransformation Fund. And "supply-side funding" is being tested in Londonthrough the London Development Agency's Childcare AffordabilityProgramme, where nurseries are given subsidies to provide cheaper andmore flexible places, which helps fill empty places.

Some of the early results have been "fantastic", reveals Denise Burke,senior childcare manager for the London Development Agency. It couldherald a whole new way of funding childcare, yet Burke says we'reunlikely to see a massive change in the near future. And she agrees thatthe way childcare is funded at the moment is complicated andunwieldy.

But change can't all be one way, and nurseries themselves can do more tofill places by helping parents negotiate their way through thesystem.

"Parents are immediately put off when they make an initial enquiry andare told that upfront fees are 175 a week. It's a scary figure,"says Burke.

But she points out that childcare tax credits, childcare vouchers atwork, nursery education grants and other schemes can bring this down toa more acceptable sum.

Some chains have already embraced the idea. Asquith Nurseries, thesecond largest nursery chain in the UK, says it offers parentsinformation and advice, including leaflets on benefits such as taxcredits.

The organisation is now looking at appointing a "champion" in eachnursery who will be responsible for talking to parents and flagging upsupport.

At the same time, providers must respond to demand and that meansproviding more flexible care, says Burke. "People have more flexiblelives and working patterns that don't necessarily fit into regimentedopening and closing times," she adds. "It's about moving with the timesand changing their businesses to fit in."

Meeting specific needs

Andrew Fitzmaurice, chief executive of Nord Anglia Education, which runsthe UK's largest nursery chain, agrees. "We need to make sure that we'reconstantly re-inventing ourselves to provide what parents and childrenneed," he says.

Nord Anglia has struggled with falling occupancy rates in its LeapfrogNurseries arm. It's trying to reverse that trend by moving into summerholiday clubs, altering opening hours and helping parents understand theplethora of funding streams.

It's also keeping up pressure on the Government. Fitzmaurice believesthe key issues for the childcare market are the current surfeit ofchildcare places and how an array of different government initiativesaround childcare will fit together.

But he's pleased with the Childcare Bill, although he would like to seea separate right of appeal for independent providers who don't thinkthey've been given a fair chance. "The supply and demand thing willcorrect itself as long as Government is sensible," he says. "It's not inits interest to destroy private and voluntary providers, so there shouldbe a good future for us after what's been a tough few years."

DAYCARE STATISTICS

- The number of full daycare providers increased from 9,964 in 2003 to11,811 in 2005

- In 2005 a fifth of full daycare providers surveyed by BMRB said theymade a loss in their last financial year, up from 12 per cent in2003

- Local authorities could save themselves nearly 2bn in capitalcosts if they used existing surplus nursery places, according to theNational Day Nurseries Association

- To download the BMRB research go to www.dfes.gov.uk/research.