Education is seen as a public good, rather than the realm of private investment. It is a sector dominated by politics and vested interests such as the teaching unions, which are typically hostile towards markets. However, entrepreneurs are skilled at innovating, and our education systems need to become more productive and deliver better value for taxpayers. Consequently, schools and universities should embrace the possibilities of private investment.
All except 7% of primary and secondary schoolchildren in Britain are taught at state institutions, although many, such as academies, are now free from local authority control. Even a fair proportion of fee-paying schools are non-profit institutions. Meanwhile, the vast majority of Britain’s roughly 150 universities are independent charities. The only degree-awarding institutions that are genuine for-profit businesses are BPP University, the University of Law and Arden University.
However, the recently enacted Higher Education and Research Act should lead to the creation of more private sector universities. The government hopes this will generate greater competition and choice among students and promote social mobility. I chair the council of Britain’s newest medical school at Buckingham University, which has been oversubscribed even though it has to charge students more than £9,000 a year as it receives no taxpayer subsidy. This shows there is unsatisfied demand for the right undergraduate courses.
Surprisingly, most of Britain’s roughly 12,000 pre-school nurseries are privately operated. There are more than 100 small chains, with groups such as Busy Bees, Bright Horizons and Banana Moon each having more than 40 branches. The sector is probably worth at least £10bn a year and is likely to see further consolidation. This compares with about £87bn a year spent by government on education, or roughly 12.5% of total public spending.
The main role for business in education is as supplier of everything from classroom equipment to school meals and the construction and repair of school buildings. I was co-owner of a staffing company offering recruitment of teachers. As there are about 500,000 teachers in England, it addressed a large market, but I still managed to only break even after seven years. As the giant outsourcers have discovered, working for the government does not always
deliver great returns to shareholders.
Regulation, customer concentration and low margins are characteristic of the industry. The leading supplier to the education sector is probably Pearson, which calls itself “the world’s learning company”. It publishes textbooks and courses, organises exams and sells software, with an increasingly digital product range. When I was a stockbroker and analysed the company in the 1980s, it was a media conglomerate, but since it decided to specialise in education and shed assets, such as the Financial Times, its share price has gone nowhere.
Certain areas of education are dominated by private firms — foreign language training institutes, after-school tutoring and many forms of professional certification. For mainstream education of children, critics argue that there is an inherent clash of cultures between the profit motive and the task of delivering a decent education to pupils.
Last year, Jonathan Knee published a book, Class Clowns, which describes how various sophisticated US investors lost billions in education ventures, including Michael Milken and Rupert Murdoch, along with various private equity, hedge, pension and sovereign wealth funds. They obviously hoped to do well by doing good, but in few cases did they achieve the returns expected.
One obvious way for the private sector to secure a competitive advantage in education is technological innovation. Traditional public sector institutions have been slow to adopt new methods of learning, whereas commercial ventures have pioneered alternative techniques, such as massive online open courses (Moocs) produced by players such as Coursera, Udacity, edX and Britain’s FutureLearn, owned by the Open University. Many thousands of courses are available, particularly in subjects such as management and computer sciences. There are problems over the credentials of such courses, a lack of academic rigour and low completion rates. Nevertheless, they make higher education available to wider audiences and expose the old-fashioned way many universities conduct their teaching.
Most industries have simple customer/supplier markets. By contrast, education businesses must satisfy several constituents — students, parents, teachers and administrators — as well as local and central governments and regulators. Moreover, shareholder-owned concerns in education often compete with non-profit rivals that can afford to undercut them. Investors who fail to understand these complexities are unlikely to succeed in education.