For-profit provision is not compatible with compulsory education

No recommendation of the 2021/2 GEM Report on non-state actors in education has been discussed as much as its position that profit making in primary and secondary education is inconsistent with the fulfilment of state obligations to provide 12 years of free education. The GEM Report is not the first to question the place of profit in education. Many countries are nervous about it. As our analysis of national regulations from the PEER website showed, 21 countries have introduced regulations on profit-making over the past 10 years. On current counting, 27% of countries have made for-profit provision illegal at the primary and secondary level. Such regulations aim to guard against profit maximization negatively impacting student or taxpayer interests.

The extent to which non-state providers are motivated by profit orientation varies. Admittedly it is often difficult to define profit in education. Single proprietors of schools may be making a profit which is impossible to distinguish from their salary, the risks they are undertaking by setting up a business, and the payment they expect to receive for making their building available as a school. Distinctions can also be blurred. In the United Kingdom, for instance, schools sometimes opt to be classified as ‘for-profit’ to increase autonomy and reduce the regulation associated with operating as a charitable trust. Distinctions are particularly muddied in higher education. In Malaysia, a for-profit company held by a non-profit entity owns two institutions. But concerns arise over publicly traded and private equity-owned firms, whose loyalties are with their shareholders rather than their students.

In early childhood education, Iceland allows for-profit provision if the profit is reinvested in development of education. In Greece, private early childhood centres can be established as for-profit or non-profit entities with provisions corresponding to commercial companies, but the government may provide financial assistance only to centres established by non-profit entities. Norway’s Kindergarten Act allows private kindergartens to have a ‘reasonable’ profit but any government grants and fees received must go towards meeting government objectives and conditions to benefit children. South Africa’s 2015 National Integrated Early Childhood Development Policy allows for-profit provision, but such providers qualify for government aid only if they are contracted by the state to provide services to vulnerable groups.

In primary and secondary education, an estimated US$500 million of public funding was retained by owners of for-profit government dependent private schools allowed to charge top-up fees in Chile in 2013 instead of being reinvested in education. The policy changed, requiring all for-profit schools to convert to non-profit status: by 2018, 97% of them had already begun transferring to a non-profit legal entity. In China, a 2021 law bans firms teaching compulsory schooling curricula from making profits and also from raising capital. Companies need to become non-profit to continue operations.

Donors too have begun setting stricter policies on the issue. Out of an education portfolio of almost US$1.2 billion, the International Finance Corporation allocated 15% to private school chains but froze its investment in fee-charging private schools in 2019, following pressure from civil society organizations. There is now a clause prohibiting use of Global Partnership for Education funds to support for-profit provision of core education services. Similarly, in 2018, a European Parliament Resolution instructed the European Commission not to fund for-profit education actors, making special reference to international commercial operations. The resolution noted the importance of core education – including elements such as school supplies, transport and food – being free of charge.

Profit-making universities have courted with controversy

Many of the concerns about profit making in compulsory education come from the experience of countries with for-profit tertiary education operators. In Brazil, for-profit institutions account for about half of tertiary education enrolment. The 10 largest companies, many of which are international, made up 30% of total tertiary education enrolment and over 60% of enrolment in for-profit institutions. The competition regulation authority has blocked the acquisition of the second-largest company by the largest, which would have increased market concentration above 30%.

In the United States, for-profit institutions account for about 5% of tertiary education students but are highly subsidized: around 90% of their revenue comes from federal grants and federally guaranteed loans. Yet, student outcomes were found to deteriorate as profit maximization incentives increased. For instance, acquisition of a for-profit institution by a private equity-owned firm led to declines in graduation rates, loan repayment and labour market earnings as a result of a decrease in the number of faculty per student and the share of expenditure devoted to instruction and core services, in order to generate higher investor return. For-profit institutions have also been found to engage in deceptive business practices, such as predatory recruitment and fraudulent marketing strategies: 7 of the 10 biggest for-profit companies have been investigated and found to have indulged in such practices.

Publicly traded tertiary education conglomerates have emerged with strong lobbying powers. Politicians have received generous donations from for-profit tertiary education companies, raising concerns about potentially undue influence on regulation. The Canadian Association of University Teachers has expressed concern about the shift towards corporate-like management of universities as a result of the growing presence of board members from the for-profit corporate sector.

Quality assurance mechanisms in middle-income countries focus on fake, unregistered for-profit institutions that often enrol marginalized people. In 2017, Pakistan’s Higher Education Commission issued a public notice with a list of 153 illegal universities and degree-awarding institutions. In South Africa, the number of fake and unregistered institutions led the government to launch an awareness campaign and, in 2019, promulgate the National Qualifications Framework Amendment Act, making it a crime to claim or hold a fraudulent qualification. In Viet Nam, several university officials were recently prosecuted on charges of selling diplomas or other types of corruption and wrongdoing.

A matter of principle or fact?

There are three key arguments on debates over private actors and, especially, profit making in education. First, education is not only a public good; it also has clear private good characteristics. For-profit actors respond to demand for education goods and services, which cater for wealthier and aspiring families that are willing and can afford to consume more education in order to give their children an advantage, exacerbating inequality and exclusion along the way.

Second, profit may be seen as a fair reward for innovation. But what is presented as innovation may be hard to verify and possibly exaggerated for marketing purposes. In addition, education should not be seen as a market where ‘producers’ try to outcompete  each other. Instead, new ideas need to be tested and, if proven, adopted with government support in all schools. They cannot be a commercial secret.

Third, some raise the following question: why private providers should not be allowed to make a profit if they deliver what the government contracts them to do, in other words education free of charge but more efficiently than public providers. This in turn boils down to the question where such efficiency gains can actually come from. The largest education cost is teacher salaries. If a case could be made that teachers in a country were paid too much, then this should be a matter for public policy to resolve, not a reason for changing the model of provision. Non-state actors may increase cost-efficiency by hiring young or unqualified teachers, but this is not a sustainable solution. For-profit providers may also be tempted to focus on subjects whose results are measured and on which their funding depends or engage in practices as those observed in for-profit tertiary education. And public schools tend to serve more disadvantaged populations, which are costlier to educate.

Ultimately, taking a position against profit making in compulsory education is as likely to be a matter of principle as a matter of fact. What are your views?

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