Nurseries fear they will not receive the necessary funding to cope with a flagship Government plan to extend free childcare to two-year-olds.

The majority of nurseries and pre-schools in England believe they will face a shortfall when the policy begins across the country next year.

Deputy Prime Minister Nick Clegg yesterday announced 10 areas where the scheme will be trialled in September, claiming the Government was "revolutionising" childcare.

It is intended that 150,000 of the most disadvantaged two-year-olds will receive up to 15 hours a week of free pre-school education from September 2013, rising to 260,000 in 2014.

But the Pre-School Learning Alliance said just one in eight institutions believed they would get the necessary cash.

The survey of more than 1,000 day nurseries and pre-schools across England was carried out earlier this month by the alliance and found that only 13% believe their costs will be covered under the free early years entitlement scheme.

Some 59% believe their costs will not be covered by the scheme and 28% were not certain they would be fully compensated.

The survey found 96% of nurseries and pre-schools believe that catering for the additional needs of some of the disadvantaged children either will or may cost more than they anticipate receiving from their local authority.

Almost two-thirds, 62%, said that at present they were not receiving enough money to cover costs under the existing free entitlement for three- and four-year-olds.

Neil Leitch, chief executive of the Pre-school Learning Alliance, said: "We are not exactly surprised by these findings. The childcare and early years sector is committed to giving young children the best start possible.

"But it is getting increasingly difficult for many day nurseries and pre-schools to be able to afford to provide the 15 hours a week of free provision as they are losing so much money on the scheme.

"One respondent to our survey said that Government funding leaves it with a £3 deficit per hour for every funded child, while another said its hourly rate for parents is £5 per child but it receives only £2.98 per hour from its local authority to cover the free entitlement costs.

"A pre-school told us the free entitlement 'barely' covers its costs and it only survives because it undertakes extensive fundraising and its staff do 'a lot of unpaid overtime'."

He said a National Audit Office report, published in February, said the free entitlement scheme for three- and four-year olds, introduced under the Labour government, had "never been properly costed or funded" and one in 10 local authorities stated the money covered the cost of only "a few or none of their (childcare) providers".

He added: "This is a concerning state of affairs as we enter a new phase of delivering even more places to disadvantaged two-year-olds.

"Though 83% of settings said that they would get involved in the extension of the free entitlement scheme when it is introduced next year, only one-in-five is prepared to invest to increase capacity for more children.

"The data reinforces earlier anecdotal evidence that providers would fill existing places but would not invest in creating new ones."

He said that if all the funding for the two-year-olds was passed to providers and there was a 95% take-up rate for the places the average hourly rate of the free entitlement will be about £5.40.

But he warned: "The sector is concerned that - as these children will be coming from disadvantaged backgrounds and will require specialist help from well-trained early years staff - funding will fall short and as one provider put it this will be 'more of the same old, same old'.

"The early years and childcare sector supports this worthwhile initiative. But the Government must ensure that day nurseries and pre-schools are fully reimbursed for the free entitlement."

A spokesman at the Department for Education said: "The Government is spending more money than ever before on free early education.

"Funding for the free entitlement for two-year-olds will rise to £760m in 2014-15. From next year funding will be included in the ring-fenced education grant which will provide greater certainty about the money available, and more than four-fifths of providers have said they are keen to get involved in delivering this service.

"There is no single national hourly rate; it is right that funding is allocated to local authorities which determine appropriate funding rates based on the costs of provision locally.

"Local authorities must work with early education providers to establish the true cost of places and make sure that funding is fair and transparent. The new entitlement for two-year-olds is a great opportunity for early years providers to expand their businesses and provide quality experiences for even more children."

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