Private investment in K12 Education: Is the Govt killing the golden goose?
With around a 5% fiscal deficit, the government has limited scope to increase its spending kitty. The government also realizes the important role that basic education plays in the development of human capital and hence on the long term socio-economic growth of the country.
With limited resources at its disposal and with a massive task to provide schooling for more than 300 Million kids in the school going age, the government needs to enable a thriving ecosystem for private investment in K-12 education. A set of bold reforms similar to the economic reforms during the early 1990s is required to first make the sector attractive for more domestic private investment and later even open up for foreign investment. However some of the actions of the current and the previous governments are seemingly contrary to what it should be doing.
Contribution of Private Sector K12 Education in India
A recent EY-FICCI report articulates the extremely important role that the private sector K12 education plays in India. Some of the key findings of the report included:
- o Evidence of increasing enrolment in private schools in rural India- from 18.7% in 2006 to 25.6% in 2011 and declining enrolment in government schools.
- o The share of private schools enrolment at the primary level is 30.6% and 37.1% in upper primary levels. Secondary education accounts for 54.4% in the junior secondary level and 60.3% in the senior/higher secondary level.
- o 69 million students study in 247,843 private schools at the elementary level making the average number of students per school at 280.
- o India has more than 339,000 private K-12 schools, growing in the last five years at a CAGR of 4%.
- o Around 130,000 additional private schools will be required by 2022 given the current trends
Clearly the private K12 schools plays and is expected to play a very significant role in the education ecosystem in the country. However some of the existing and new structural blunders by the government might stifle the golden goose of private investment in the sector.
Challenges plaguing Private Sector in K12 Education in India
Shutting down of around 1000 private schools within a year in Haryana and Punjab, Numerous loan restructuring, NPA Cases and other financial woes (Educomp, Everonn, Zee Learn in the listed space) of education providers, No private equity / capital market activity for more than 3 years clearly highlights the impact of the challenges that the sector faces.
1. “Not for Profit” nature
Education sector in India is considered as a ‘not-for-profit’ segment by the Government. Therefore, the choice of entity for setting up a formal education institution is limited to societies, companies registered under Section 8 of the Companies Act, 2013 and trusts.These entity forms are highly regulated in India, and they are restricted under law to declare dividends/income to the promoters/ beneficiary.
Private investment by the nature of it requires returns to be generated for the shareholders and the “Not for Profit” requirement makes this sector unattractive for private investment. While structures have emerged wherein the private investment is made in For Profit companies which provide infrastructure and management services support to the not for profit entities, a number of investors are still not comfortable with the structure given the extreme dependence on the not for profit entities. Additionally these structures can result in significant leakage via direct and indirect tax route.
2. Complex regulatory environment
Education is a concurrent subject — which essentially means that education institutions are governed by both state and central laws. Education institutions need to comply with the requirements of the education board they are affiliated with apart from complying with the central and the state government requirements. All of these complex, inflexible and sometime conflicting requirements make the operating environment for education institutions worse than what the license raj used to do to most industries in the pre-liberalization era.
3. New service tax regime
Before the 2014 budget, most services including renting of premises by educational institutions was exempt from service tax. However the 2014 budget rolled out by FM Arun Jaitley further added to the woes of the sector. All services (including rending of premises) barring a very few were brought under the service tax regime. This essentially resulted in leakage of 12.36% to start with and slowly going to 16% as the GST comes in (2015 budget has already proposed to change the rate of leakage to 14.28%) for all services taken by the not for profit entity from For profit entity brought in for private investment purposes. This has made the already weak case for investing in private education even worse.
Most developed and developing jurisdictions including UK, Canada, China, Brazil etc treat input services taken by education institutions exempt from GST / VAT wherever applicable. In a country like ours where the goal of universal education is still far such stifling regulation while might result in minor gains in Government revenue in the immediate term can have a lasting negative impact on the economy by discouraging private investment.
4. Right to Education (RTE)
The RTE regulation, which came in force in 2009 and is yet to be implemented in some states, mandates private educational institutions to reserve 25% of seats for the EWS (economically weaker section) category. This is a classic case of a regulation which has had a completely opposite impact of what it was intended to do — “Make quality education available to children from all sections of the society”. There is tons of literature available on the web which has analysed how this regulation has failed and it will take me a separate post to summarize the issues with RTE.
In Conclusion, the private sector has an indispensable role in ensuring availability of high quality education for children across the country. While the Government might recognize the importance of the private investment in education, most of the existing and upcoming policies seem to discourage the same. Immediate and bold reforms are needed to prevent the golden goose from getting killed.
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