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Scottish private nurseries are not receiving enough money to meet the cost of free childcare places for three and four-year-olds, according to a survey published by the National Day Nurseries Association (NDNA).
Private and third sector nurseries currently make up a significant part of the early learning and childcare in Scotland, with 86 per cent of nurseries delivering free places for three and four-year-olds.
Launching the survey and NDNA Scotland’s Childcare Challenge to the next Government, chief executive Purnima Tanuku, said: "This enormous shortfall is a huge burden on private and third sector nurseries.
"They have no choice but to try to absorb these costs themselves or pass them onto parents by increasing fees for additional hours or for younger children."
She added: "Their main concern is that if free early learning and childcare is expanded, far fewer parents will need any additional hours, so they will struggle to make up this shortfall, especially with the National Living Wage being introduced next month.
"The vast majority of nurseries are small businesses and can’t afford these losses. They want to offer parents these free hours, but at the same time they have to be sustainable. Almost half of the nurseries who responded expected only to break even, with 11 per cent expecting a loss.
"This is why fewer feel confident in offering more funded hours to support the next Scottish Government in fulfilling free childcare pledges."
Parties across the political spectrum have plans to extend the free childcare offer to parents, including the Scottish National Party (SNP) planning to increase funded hours from 600 to 1,140 per year by 2020.
According to the survey, due to chronic underfunding and rising business costs, only half of respondent nurseries would be likely to extend their funded hours and 22 per cent were unlikely, or very unlikely, to increase the amount of funded places they offered.
Nurseries are paid an average of £3.56 per hour by local authorities for a free place for three and four-year-olds, but this falls short of their costs by £1,128 per child per year.
Many private nurseries already have waiting lists for the funded hours and some are having the number of free places they can offer capped by local authorities.
Ms Tanuku added: "We know that parents can’t always send their children to their choice of provider because local authorities are limiting funded places at private and third sector nurseries. This rationing is undermining families’ choice. Working parents need the flexibility that private and third sector nurseries can offer.
"Underfunding means that the private sector is unable to match pay and conditions in the public sector, so nurseries are losing qualified practitioners to schools and maintained nurseries. We would ask the next Government to ensure all childcare providers are able to offer funded hours on a level footing and give true choice to parents.
"The new Government must work with the sector to get the funding right and make sure all the money reaches nurseries. Nursery owners are keen to support families and make free childcare a success for everyone, but need to know their costs will be covered."