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How To Get The Private Enterprise Deliver Quality In Higher Education

The first question is - what went wrong? Only then can we address the other questions better. The trigger of the poor quality was the huge hungry demand back-log for education because of pre-independence regime’s regulatory inertia had starved supply of education. So when de-regulation started in mid-90s in many states [who followed the 4 states of AP, TN, Karnataka and Maharashtra], any capacity was good capacity.

The colour was glee. There was no other CSF for success. Just get started.
So while one CSF [resourcefulness] became pre-dominant in, two other critical dimensions – i.e domain capabilities and industry orientation took a serious back seat. Outside the 4 states mentioned above, most entrepreneurs [or edupreneurs as I like to call] who got into were under / unemployed graduates looking for a career or small time businessmen looking for low payback period businesses and who had expertise in running unorganized businesses and who thrived in an environment that required rent seeking temperament.

Mostly people who build the infrastructure [contractors who brought in the capital as sundry creditors] or those who brought in the students [savvy – read slimy – sales talkers or consultants who got the cash in] had a say. To a lesser extent people with corporate relations [people with interpersonal PR skills, who gave a semblance of quality/corporate acceptability]. This resulted in academicians having very little influence in critical decision making / direction setting.

Thus, academics, rarely never attracted high quality talent in large numbers. Expectedly a few people passionate about teaching and research were there, but the market dynamics led large talent sourcing [which we saw in software] never happened.

I don’t think corruption was the deciding factor. There are many other industries where private capital has thrived, despite corruption. In some cases - because of corruption - some private entrepreneurs have cracked the algo as to how the beat the system.

But the key is that the regulatory framework did not incentivize the second and third [domain knowledge and industry orientation] enough and got stuck up with the first only [capital/ resourcefulness]. If we have one looking at the AICTE norms for setting up a technical institute, it will be clear – it was all about land, building and bank balance. The regulations did not change, with the changed socio-economic context of the country of the 80’s and early 90’s.

That’s the long story of the poor quality of technical institutes in India. [Mind you only 30% engineers are employable, this is far lower than numbers in China.] But what next, what is the future? Clearly the overcapacity generated by recession is a huge opportunity for market efficiencies to take over and quality investments [or investors] will inevitably come in. But how?

Analysis shows that despite education being relatively a long pay-back period business [5-7 years for technical education and 10-15 years maybe for non professional / mass education], the IRRs are healthy. Even after considering the high asset intensity [and rightly so] of AICTE norms for formal education, healthy project IRRs of approx 25% can easily be designed [that too without considering the returns because of real estate appreciation]. This implies very high promoter IRRs, considering higher debt-equity ratios that can be secured for these projects [because annuity revenues, asset backed investments etc].

So clearly, private money would find this attractive from an investment perspective. We have many examples of private money going after longer pay-back period investments [airlines, oil exploration, power, ship-building, steel making etc]. There has been adequate wealth creation in the country to expect 10-20 mio USD [Rs. 50-100 crore] investments in a high quality institute, with requisite IRRs.

The crux is in regulatory woes of ownership and profit sharing. Equally importantly, for providing elegant exit options This is the reason, why sector has got side-stepped in the quality, formal investment growth story of the country. Many sectors, incl health, bio-technology, retail have got IPO, PE, LBOs and other capital market instruments to fund entities led by top drawer talent. However, almost all investments in formal education have been limited bank finance, over invoice margin money and to some extent probably is capitation money.

Small doses of private sector are seeking avenues to leverage education industry through a side door entry. That is it through special purpose vehicles, non-formal education, extra-curricular or co-curricular initiatives etc. But this is not enough. The cases have been far and few in between. Also, barring exceptions, the ticket sizes have been rather small.

In India like is every other economy of the world, education is the largest spending sector next to government sector. So there are huge opportunities to make this bigger and better. Good source of funds [broad based, pedigreed], invariably bring in the quality checks and balances. They automatically incentivize talent.

What do we need to do to get these quality investments into the system:
o Allow people to make and take profits home
o Increase the ‘say’ of academicians in the running of the institutes
o Bring in accountability in institute governance, everyone including teachers, needs to have targets [holistic, balanced ones], expected outcomes

If we get these three things right, the following predictions are likely to come true:
o Good investments with follow
o There will be exit option for bad investors [the investment will be protected by transfers]
o Innovation across multiple dimensions expected
o India expected to become a global education hub
o All these in max 10, years.
o The IT story will be repeated.

Government doesn’t have to do much. Maybe create a relatively non-intrusive yet pervasive regulatory body, like TRAI. It wouldn’t matter even if the body would be a bit inefficient and at times a bit corrupt. Market efficiencies would take care of them. In short, just create the right environment and sit tight.


August 31, 2010
Bhubaneshwar

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