At Cambridge Day Nursery, three little boys are excitedly hula-hooping around each other on the large artificial grass lawn, while their friends scurry in and out of wooden wendy houses, banging doors in their wake. At the bottom of the garden, there is a small patch of wild woodland where the nursery holds its forest school classes and encourages the children to make dens and learn about nature. “Children love it here. But providing them with all of this costs money,” said director Liz Aldous. “I don’t think anyone comes into childcare to be a millionaire – but we do at least need to be able to cover our costs.”

What is worrying Aldous is a new flagship policy from the Department for Education that is designed to help parents with the exorbitant cost of childcare but instead is already causing widespread confusion and panic.

From 1 September, the government hopes that nurseries, pre-schools and childminders across the country will provide working parents of three- and four-year-olds with 30 free hours of childcare, during term time. The government has promised local authorities an additional £1bn in funding per year by 2019-20 to pay for the handout, which doubles the amount of free childcare currently available to working parents during school terms. But many parents will not be able to access the scheme because childcare providers say they cannot afford to offer it and are therefore opting out, while others will expect parents to pay new charges to make up for funding shortfalls. Five days from launch, a well-intentioned pledge is in danger of becoming mired in confusion.

Aldous is facing a 66p shortfall in the hourly rate of funding she receives from the council – but the DfE forbids nurseries to offer the 30 free hours and then ask parents to simply top up the council’s hourly rate. Instead, a £3 daily supplement, for extras Aldous would not previously have charged parents for, will make up the difference. “We either have to make up that shortfall somewhere, or we’d have to tell parents that we’re really sorry, but we don’t offer funded-only places. Otherwise, the nursery would go out of business.”

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The Pre-school Learning Alliance, which represents nurseries, estimates there is a 20% shortfall in the government funding being given to providers to roll out the “free” scheme. As a result, it said around 40% of nurseries haven’t committed to providing it, with less than a week to go before the start date.

Tracy Brabin, the shadow minister for early years, said: “Nurseries are worried that if they don’t offer the 30 hours, they won’t get the children and they will go under, but if they do offer it, they won’t be able to provide the quality of care they want to.”

She thinks managers may be tempted to cut staff costs by hiring cheaper, less-experienced and less-qualified workers, and is concerned standards will fall. “It’s completely counterintuitive of the government not to put the money where it matters: at the beginning of education,” said Brabin. “There’s empirical evidence that quality childcare when you’re under five has an impact on your GCSE marks later in life.”

While Brabin is in favour of offering parents of pre-school children more free childcare – the idea was originally Labour’s – she wants the government to promise to pay nurseries the going rate that parents at that nursery would normally pay.

Eve Wort now hates having to go past the locked doors of the Hampshire village nursery school she ran for more than 20 years. Even the thought of its silent, empty rooms and once-beloved toys and children’s equipment, gathering dust, is too much for her. “I can’t bear it. I feel absolutely devastated.”

Wort shut down the outstanding nursery this summer because she could not afford to offer the 30 hours of free childcare and knew that she would lose children as a result of that decision. “For me, quality of care for children must come first,” she said. “But I knew parents would have an expectation in September that they could get 30 hours for free, and there might be a stampede, in the short term, to other nurseries which joined the scheme. Then I might have been left without enough money to pay my staff redundancies.”

Wort normally charged parents around £6.25 per hour, but despite her outstanding Ofsted rating, she says her local authority was only prepared to pay her a maximum of £4.36 for each “free” hour of entitlement she provided. There was no allowance for the fact that, unlike some of her cheaper competitors, Wort employed more highly qualified staff per child than the legal minimum and paid them more than the national minimum wage.

Since Wort shut her doors in July, two other nurseries have closed down within a five-mile radius. “The whole thing is a farce,” she said. “At that rate, I wouldn’t even have covered my costs and I was not prepared to compromise on quality.” Since the DfE forbids nurseries to offer the 30 hours and then ask parents to top-up the rate paid by the council, she could not see any way to make up the shortfall, even though one mother begged her in tears not to close. “It was heartbreaking.”

A recent study by the Family and Childcare Trust found that nurseries and pre-schools awarded “outstanding” pay their staff 12.5% more per hour, on average, than nurseries that have achieved a “good” grade. Nurseries graded ‘requires improvement’ or ‘inadequate’ typically pay staff 20% less than outstanding nurseries.Sarah Dowzell is one of those parents who feels misled by the government’s promise of free childcare, which she now believes was made solely to win votes from working parents. She runs her own start-up, Natural HR, in Birmingham and was looking forward to receiving 30 free hours of childcare for her three-year-old son Finn in September, so she could increase her working hours. Then she got a letter from her son’s nursery.

“It said they had struggled to find a financially viable way of offering the scheme.” Instead of being able to request the hours whenever she wanted, she would be forced to take the free 30 hours between 9am and 3pm each weekday. If she wanted any additional hours, she would have to pay a massive £28 “daily charge”.

Overall, joining the scheme would actually increase her weekly childcare costs by 7%. “It appears the nursery was trying to limit take-up in a way that the scheme wouldn’t work for working parents, because it didn’t want to lay off staff and reduce the quality of the provision it offers. So I don’t blame the nursery, I blame the government. It is the government that isn’t meeting the funding requirements of nurseries to provide the 30 free hours. It is the government that made me a promise – a promise it hasn’t delivered.”

Facebook Twitter Pinterest Cambridge Day Nursery director Liz Aldous says scheme is causing confusion and panic in the sector. Photograph: Sonja Horsman

In a survey of 1,147 nurseries by National Day Nurseries and ITV News, 54% of nurseries who were planning to offer the scheme said that they would be restricting the number of places on offer, with some offering them to just one or two children. One in six said they would not be offering the 30-hour scheme at all.

The Professional Association for Childcare and Early Years (Pacey) said the vast majority of childminders do not intend to offer any funded 30-hour places, because for every full 30-hour place they offer, the average childminder would experience a shortfall of over £400 per year. “Why in the world would they bother?” asked chief executive Liz Bayram.

She fears that as a result, the number of registered childminders will significantly decline over the next two to three years, as parents opt for nurseries willing to offer free places. “If childminders aren’t able to be a part of this scheme, you lose both continuity of care and parental choice.”

Only a third of local authorities told the Family and Childcare Trust they believed there would be enough childcare in their area for families who are eligible for the scheme. Local Government Association chair Richard Watts said councils are concerned the funding they have been allocated by the DfE will not be enough to secure provision for all parents who want it. “These concerns are particularly around the impact on quality of provision, with a risk that insufficient funding will lead providers to employ less-qualified staff, or struggle to provide enough support for children with additional needs or disabilities.”

The DfE said the scheme was not underfunded and that the rate paid by the government was far higher than the average hourly cost of providing childcare for three- and four-year-olds. It claims that a report it commissioned puts the average hourly cost of childcare in the UK at £3.72 – a figure childcare associations say they are unable to reconcile – and that it is offering an hourly rate of £4.94 to providers. It later admitted to the Observer that councils need only pass on 93% of this funding to nurseries and childminders. Both Pacey and the Pre-School Learning Alliance estimate that, in fact, local authorities only pay childcare providers £4.27 per hour, on average.

Robert Goodwill, minister for children and families, said: “We are determined to support as many families as possible with access to high-quality, affordable childcare. We know providers are committed to offering 30 hours and we are already seeing the positive benefits the additional hours are having. Early delivery of the 30 hours has been a great success.” In York, where nurseries have been piloting the scheme since last September, he said 100% of nurseries that used to offer 15 hours of free childcare now offer .

When the Observer spoke to Sticky Fingers, one of the nurseries which took part in the York pilot, manager Paula Baker revealed it was facing a funding shortfall of around £1.20 an hour per child from the local council. “We’re having to ask parents to pay for trips, visits and everyday things like baby wipes and nappies. Before, I used to provide those things for free.”

Last month, the DfE was forced to amend its guidance for the scheme, first issued in April. It now explicitly states that parents receiving the 30 free hours of childcare can expect to pay for extras like meals, nappies and additional activities (such as trips out). However, parents still must not be required to pay any fee as a condition of taking up a free entitlement place.

In practice, Neil Leitch, chief executive of the Pre-School Learning Alliance, believes any parent who walks into a nursery on 1 September and expects to get 30 free hours of childcare, with no additional charges attached, is being naive.

“The implication of the change in the guidance is that shortfall in funding is being dumped into the laps of providers. We are being expected to do the government’s dirty work and get parents to make up the difference by charging them for these extras – and then it will be providers who are criticised,” said Leitch.

He is concerned that, unless the government acts quickly to close the funding gap, it will soon be too late for the sector to recover. “We’ve told the government there’s a shortfall, but it haven’t listened and it still isn’t listening. By the time the government wakes up, it may well have destroyed the infrastructure of our early-years sector.”

WHO GETS WHAT?

Three- and four-year-old children are already entitled to 15 hours of free childcare a week during school term time (or 570 hours each year), whether or not their parents are working.

From 1 September, these children will qualify for an extra 15 hours a week in term time (so for 38 weeks a year, not 52), as long as both parents work and each earns less than £100,000.

To qualify, parents must also already be earning at least as much as a worker on the national living or minimum wage would earn for 16 hours a week.

So, a two-parent household with an income of just under £200,000 will now be entitled to an extra 570 hours of free childcare, while parents who are trying to return to work will not be eligible.

“You have to get a job first - but as a working mother myself, there’s no way I’d take a job without having sorted out childcare,” says Labour’s Tracy Brabin.