Thursday, November 19, 2015

Should India Allow For-Profit Higher Education?

I was in a debate not long ago on the topic whether For-Profit Higher Education should be allowed in India. In a way, I have a predictable position, given that I have spent most of my working life in For-Profit companies. But there are more reasons why I should generally answer in the affirmative to this question. First, because I always argue for diversity of provisions in the Education sector. Second, and more importantly, I believe that the government is generally incapable of providing services, and should confine itself to providing infrastructure and maintaining regulatory frameworks. 

The aforementioned debate was conducted in equally predictable lines. There were some, arguing against For-Profit Higher Education, rooted their argument on a moral revulsion of Profit - that one should not be in education for making money! The other group, arguing in favour, was logic of the market - that it would improve access, bring innovation and enhance efficiency of the sector. These arguments, at its core, were so familiar that another debate on this seemed wholly superfluous.

Such a debate has a predictable outcome - stalemate! One could perhaps see that the two sides, clearly drawn, are using quite different arguments and appealing to their respective, committed to convinced, audiences. There is no basis, other than moral outrage, of saying that one should not make money out of education, when it is perfectly fine to sell food for money, for example. And, indeed, despite its rational sounding appeal, the other group would be hard put to prove that introduction of For-Profit Higher Education would expand access, bring innovation or enhance efficiency. In the end, such a debate is never a debate, but claims of entitlement - the academics were arguing against a loss of privilege (justifiably, as For-Profit Higher Education shifts the focus from academic staff to processes in search of efficiency) disguised as moral outrage, and the entrepreneurs and investors were arguing for a share of the education pie, one of the growth businesses in this slow-growth world, but pretending to use economic rationality.

In context, my position is nuanced, and perhaps because I have no battles of entitlement to fight. I have no moral outrage against Profit, which I see as a reward of taking risks - something essential if one has to deal with uncertainties and build forward. At a time when education needs innovation and be forward-looking, there is no doubt that For-Profit enterprises can, and should be allowed to, play a role in the sector. 

However, at the same time, I do not think the claims of access, innovation and efficiency really measure up. 

The objective of For-Profit is to earn a profit, and not to expand access. It is pretentious to say For-Profits would serve who need access. In fact, going by the track record, For-Profits serve the most profitable. This may indeed include some people who do not have the money to pay, but For-Profits only serve them if the Government - or some other agency - comes forward with the money. And, indeed, For-Profits do not lower the cost to expand access - they charge, following the business logic, the maximum that could be charged given the market mechanism. The task of expanding access, therefore, remains with the Government, and introducing For-Profits in the equation often increase the cost of expanding access rather than reducing it.

The same goes for innovation. The For-Profit business model is about extracting value by removing inefficiencies (I shall explore the efficiency argument further), often by refining processes or employing technologies. These innovations aim, more often than not, at cost savings than better outcomes. The important thing to understand about education is that at least at present, when India has only a fraction of the population who could go to college going to college, the sector experiences infinitely expanding demand - or, supply creating its own demand. In this setting, the business logic would dictate outcomes just as good as the other existing institutions. In summary, in situations of excess demand, there is no incentive for innovation for better outcome, though innovation for cost savings would go on. 

Finally, the efficiency argument. It follows from the innovation argument that For-Profits have no incentive to create better outcome. However, one could go further and say that introducing For-Profits in the mix would actually result in a loss of efficiency of the sector as a whole. Those who are familiar with the arguments made by the economist Albert Hirschman would recognise this process of voice and exit as it plays out in a sector which is partly privatised. The point is that the public sector is designed to be driven by voice - when a public university becomes inefficient, it is inherently designed to be driven to efficiency through active protests and participation of students and the faculty. The introduction of the For-Profit option in the mix would reduce the incentive for such voice, and would introduce the option of exit - those students and faculty dissatisfied with the system would simply leave. As Hirschman observed in the case of private schools, those who leave are likely to be the most active students (in case of schools, parents), denuding the public system of its most important incentive of efficiency - voice! 

I argued that our approach to For-Profit Higher Education should neither be defined by moral outrages nor by simplistic pretensions, but a more realistic approach balancing the two. If we accept the argument of the For-Profit side that they would either expand access, bring innovation and enhance efficiency that would create value for all stakeholders - and not just their owners and stock-holders - we need to create conditions so that the For-Profit intervention indeed does so (and offset the negative effects, such as the loss of efficiency in the public sector). There are possibly two ways of creating such options, and allowing For-Profits to play a role. 

First, One of the key value propositions that For-Profit Education bring is the ability to manage future risks, and to build educational options in nascent sectors and areas, and they should be allowed to do so. For-Profit education in IT, before the sector really expanded in India, was of enormous value, and the society benefits significantly by allowing a role for For-Profit players in such sectors. 

Second, the For-Profit players could be allowed to play a role in the mainstream Higher Education only if a regulatory structure could be created to align the maturity mismatches that arise in sectors which are being privatised. This is not about regulation of Higher Education, rather - this is about regulation of corporate structures. In this, I follow the argument of Colin Mayer, of Said Business School, that in sectors like this, regulatory structures should seek to create incentives for long term value creation. Indeed, the usual For-Profit cycles of IPOs and exits create maturity mismatches for educational assets, and the history of For-Profits is, therefore, littered with instances of overreach, abuse and plain fraud. Before one opens doors to For-Profits to set up educational institutions, the government is better off by exploring what kind of corporate structure these entities should have.

In the end, I shall recommend the two books that inform my perspectives in this debate. The first is Albert Hirschman's Exit, Voice and Loyalty (Harvard University Press, 1970) which offers great insights into the operations in the condition of excess demand (where inefficiencies are common, for the usual tight balance of supply and demand, and therefore, competitive markets, do not exist), which is indeed what we see in education. The other is, of course, as cited, Colin Mayer's Firm Commitment Why The Corporation Is Failing Us and How To Restore Trust In It (Oxford University Press, 2014) which looks into corporate governance issues, particularly in the context of privatisation of public services and explore various regulatory tools, including the use of tax codes, to create incentives for long term value creation. I have studied the history of For-Profit Education in different countries in the world (see my notes here) and believe that we are better off learning from the experiences and taking a nuanced view, rather than either resisting the phenomenon as evil or embracing it without reservations.


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