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Photo: HT
Photo: HT

The role of innovative finance in our education sector

Philanthropy, impact investing and state efforts could deliver better learning outcomes for India

The world over, education is widely regarded as a public good. Its provision, therefore, has largely remained the realm of government institutions or private philanthropy. The notion of generating a profit from education is often looked down upon, and for several reasons. The primary criticism of for-profit institutions is that with the goal of maximizing profits, they focus on increasing enrolment, often overlooking quality learning outcomes in the process.

In India, schools and colleges by law cannot be run for profit. Nonetheless, a number of private colleges of questionable quality have over the decades enriched their “promoters" through inventive schemes such as exorbitant capitation fees charged, often informally, at the time of admission. They focus on generating a good return on investment rather than learning outcomes. It is no wonder that studies such as those published by Aspiring Minds reveal that 80% of Indian engineers are unemployable.

By curious contrast, healthcare, which is no less regarded as a public good, is rife with quality hospitals that are run legitimately as for-profit enterprises. Moreover, big pharma, which invests in research to discover new drugs and facilities to manufacture them at scale, is made up of large for-profit companies. Allegations that they prioritize revenues over health outcomes are less common—it is accepted they must make a fair profit in order that they continue to invest in talent, infrastructure and research.

Why is this not the case with colleges? The reason is that there is no return on investment (RoI) in providing university education of high quality. Even the best universities globally incur up to $1.50 in expenses for every $1 they collect as student fees. This large deficit is often made up by contributions from their large endowments, or through philanthropic contributions from alumni and well-wishers. Beyond these operational deficits, universities also need to find ways to fund capital expenditure to build and maintain large campuses. As a result, we need private philanthropy or government spending to bridge the gap.

Unlike colleges, it is relatively easy for schools to self-sustain through fees and other student charges; they can also generate surpluses to service debt. The reality is that the private sector plays a vital role in school education in India—120 million children (nearly half of India’s school-children) attend private schools. There are about 450,000 privately-managed schools in India. Nearly 40% of the children studying in private unaided schools come from the “aspiring" or “deprived" segments.

The recent success of education-technology companies, especially during the pandemic, is proof that with the use of technology, it is possible to deliver quality learning while focusing on the bottom line. Ed-tech offerings have helped millions of students continue their learning from home. Given the market-driven forces at play, these companies need to consistently deliver quality learning outcomes to attract new learners, retain existing ones and have them willing to pay. While online platforms cannot substitute good school or university education, they can supplement it.

Due to their inherent scalability, these platforms are able to reach millions of students and address the issue of accessibility. Further, these companies are often built by entrepreneurs who are passionate about pursuing their stated purpose rather than purely chasing profits. They are backed by similar purpose-driven impact investors or reputed venture capital funds that have helped build some of the world’s most impactful companies.

There are examples like Bridge International Academies, which runs or supports nursery and primary schools for lower income segments in Nigeria, Kenya, Uganda, India and Liberia. It deploys in-depth teacher training and support, advanced lesson plans and wireless technology to provide a meaningful education. It runs or supports over 1,500 schools and has educated 750,000 children over the last decade. Similarly, the US company 2U enables colleges to provide online degree and certification courses. It works with 75 university partners and has enrolled 245,000 students over its lifetime.

Innovative devices such as social impact bonds present an interesting alternative by which purpose-driven investors can focus on impact delivery, even if it generates lower returns than a purely commercial investment would. In 2015, Educate Girls issued a $270,000 Development Impact Bond. In this payment-by-results model, Children’s Investment Fund Foundation (as an outcome payer) promised to pay back the investor, UBS Optimus Fund, the original investment amount plus returns if the agreed targets were delivered by Educate Girls (the service provider). The initiative covered 7,300 students in 166 schools across 140 villages in Bhilwara, Rajasthan. The targets were increased enrolment of marginalized girls as well as progress in children’s literacy and numeracy outcomes. Both were surpassed over the 3-year bond’s tenure.

India’s new National Education Policy lays down a framework for cooperation between public spending, private philanthropy and impact investing, with its “light but tight" regulatory approach. In a country like ours where the scale of requirements is this large, such partnerships can support purpose-driven institutions and help transform the education system.

These are the authors’ personal views.

Kapil Viswanathan and Roopa Kudva are respectively, chairman of the executive committee of Krea University, and managing partner of Omidyar Network India.

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