October 21, 2010

School Deregulation: An Erosion of trust

In its most recent report on the education sector, IDFC SSKI quotes Union HRD minister Kapil Sibal as saying: “We cannot have companies listed on the stock exchange to run educational institutions and pay dividends to shareholdefrom the fees parents pay. We cannot allow education to be subject to risk factors.” But it’s happening, whether it’s a listed company or, in several cases, a non-profit trust.

In its steadfast, principled intentions, the trust model works. Paul Machado, principal of Campion School , a private ICSE board school in South Mumbai, is against privatisation of education, as he feels it is not a commercial activity. “Our charitable trust collects tuition fees to maintain the institute,” he says, adding that he fails to understand why some schools would need to outsource their management and operations. “These are the loopholes in the system that lead to corruption,” he says.

But there are others who say it is na├»ve to believe in the trust model anymore. Madhav Chavan of Pratham likens the current non-profit trust structure in schools to prohibition: it encourages illegal trade and manufacturing, people still drink, and the only loss is that of tax revenues for the state. “It’s hypocrisy to say schools can’t make profits,” says Chavan.
“Everyone ultimately makes money except the government.”

It’s why many educationists say deregulate the sector and do away with the non-profit trust structure. Allow management companies to bring in private capital, which can enable more and better schools. “It is better to regulate schools by allowing them to be profit-making,” says Chavan.

This, he says, will make the system more transparent and draw in private capital.One of the ways the government can regulate schools is through the recent quota system, wherein all schools are required to enrol 25% of students from the weaker sections.


Money in the Classroom

Earlier this month, Career Point Infosystems , a Kota-based tutorial service provider, had a dream debut on the bourses. Its shares more than doubled on listing, and the company raised 115 crore from its initial public offer (IPO). The overwhelming investor response was as much a comment on Career Point’s old business, tutorials, as it was on its new business, schools.

The concept of schools as a business is at odds with the government’s stated position on the issue. Saying schools shouldn’t be run like a business, the government mandated a ‘trust’ structure for all schools from kindergarten till class 12, or K-12 schools. So, only non-profit trusts can operate schools; and if a trust has a surplus, it has to reinvest it in the school it runs. At least on paper.

In reality, there are ways and ways to take money out of a school. The surplus of a trust can’t flow out, but money can flow out on the pretext of payments — real or fictitious — for services provided to the school. “It’s been happening all these years,” says Madhav Chavan, CEO and president of Pratham Education Foundation, a voluntary organisation focused on educating underprivileged children in India.

Increasingly, it’s getting organised. Companies and investoare hooking up to devise business models that are legal, but are morally ambivalent in the present construct of the law. The essence of these business models is companies providing services to schools — for example, leasing a building or managing its operations — in return for a fee. That fee is negotiated between the trust and the company; in dealings that are not at arm’s length, this arrangement makes a mockery of the trust structure.

For companies and investors, it is making available an increasing chunk of the schools segment — $20 billion, and growing at 14% a year, according to Kaizen private equity’s education report. Suddenly, schools have become big business. In 2010, till August, private equity funds had invested $168 million into the sector through 14 deals, according to VC Circle, an investment research firm tracking private equity, M&A and venture capital (See table: Going to School).

It’s a stable business, as children tend to continue in one school till they graduate. And it offeterrific growth. “Only 40% to 50% of the 360 million population below the age of 20 is enrolled in a primary or secondary school. In higher education, just 10% are,” says Rashi Prasad, associate director — strategic and commercial intelligence, transaction services at KPMG India. Sorting out the farce of trusts or allowing for-profit schools is another debate, one that is unlikely to be resolved soon given its sensitive nature (See box: An Erosion of Trust).

Meanwhile, companies are nudging their way past the regulatory network using two business models. They are also tapping two other business models in which there is no ambiguity on their presence.

The Manage Model
In what is the most common model, companies provide services related to the day-to-day running of schools to those that don’t have the capabilities or resources. So, companies train and supply teacheto schools, manage transportation, supply textbooks and uniforms, and design curricula, among other things. They call themselves ‘school management companies’.
Most school management companies provide one or a few of these services to a school. Then, there are some that provide end-to-end services like K-12 Techno Services in Andhra Pradesh. K-12 earns a management fee, which is a proportion of revenues the school earns from students. In just eight months of operations, K-12 Techno has earned 22% on its investment. When 32-year-old Maguluri Srikanth started the company, he struck gold without even taking off. Mr Srikanth placed a small advertisement in a local newspaper asking schools to contact him if they needed help running their institutions. The response was stunning. “Within three days, 190 private schools in Andhra called us,” says Mr Srikanth.

Today, K-12 manages 64 institutions — 53 schools (till class X) under the brand name Gowtham Model Schools, and 10 junior colleges (grades 11 and 12) and one international school under the brand name Orchids. “In two months, we will engage with 20 more institutions,” says a proud Mr Srikanth. It took Mr Srikanth and his family two yeato build their business model. They got help, strategic and financial, from two venture capital (VC) funds, Sequoia Capital and Song Investment Advisors. The two VCs invested 68.5 crore in K-12 in January. “It took us two yeato get Sequoia and Song on board,” says Mr Srikanth.

KP Balaraj, managing director of Sequoia, refuses to elaborate on the business model. “We have spent a lot of time on this and want our competitoto come up with their own model,” is all he says. Another company that has got into the school management business is TutorVista.com, which began as an online-education company four yeaago. It’s a highly profitable business, says founder and CEO K Ganesh. “After the initial years, once the classrooms get filled up, schools give a profit margin of 50%,” says Mr Ganesh.

TutorVista conducts its schools business through the brand name Manipal K-12 Education, in which the holding company of the Manipal Education and Medical Group is an investor. Manipal K-12 taps schools in two ways. One, it provides computers, projectoand technical equipment to 3,000 schools, including four in Nepal. Two, it manages schools — currently, 13 in Hyderabad, Pune, Manesar (in Haryana), Mangalore, Bangalore and Manipal.

In the past four years, TutorVista has raised $37.25 million, in three rounds, from Sequoia, Lightspeed Venture Partners , the Pearson Group, and the Manipal Education and Medical Group. The company is in the process of raising another $50 million, says Ganesh, most of which will go into its schools business.

The Build Model
Then, there’s the lease model: construct a school building, lease it out to a non-profit trust, and collect the rentals. Take Career Point. While it manages schools, its fully-owned subsidiary, Career Point Infra, provides construction services for building schools. Since it builds and manages, Career Point is effectively running schools. Had it done so under the trust structure, it wouldn’t have been able to take out profits.

But by becoming a service provider, while retaining the trust format, it is able to capitalise on the growth and profitability the K- 12 segment offers. And the 115 crore raised through the IPO give it funds to scale up. “We raised funds to get into formal education and increase our pan-India presence,” says Pramod Maheshwari, managing director of Career Point.
Like TutorVista, Career Point started off as a tutorial services provider in 1993. It provides coaching for entrance exams. The company has 33 study centres across 12 states in northern, central and eastern India. It has covered about 200,000 students though its tutorial and school- management services. In 2007, Career Point raised external funds for the first time, with Volrado Ventures, an Indian venture capital Fund managed by the Enam Group, investing 5 crore.
In 2009, Franklin Templeton Private Equity invested 50 crore. This January, NS Raghavan, one of the seven foundeof Infosys Technologies , put in 10 crore. “There’s a huge demand-supply gap in education,” says Maheshwari. “It’s a huge opportunity for companies.”

Career Point, which posted revenues of 68 crore in 2009-10, is positioning itself as a one-stop shop for both schools and colleges. So, the company can be an architect: help clients with concept planning and location survey. It can be a consultant: conduct a project feasibility study and advise clients on getting government approvals. It can be a builder: construct the building. And it can be a manager: manage the educational institution.

The lease model needs capital. It’s a bit like a real estate company building an office complex, leasing it out, and recovering the investment over seven to 10 years. Another listed company taking a similar route as Career Point is Everonn Education . Three months ago, Everonn sold 23% stake to Nikhil Gandhi, group chairman of SKIL Infrastructure, for 225 crore. “We are looking to enter the K-12 schools segment and are looking for partnewho will put in money,” says P Kishore, managing director of Everonn.

On his part, Gandhi had been waiting for a launching pad into education for the past 15 years. His attempts at starting an education knowledge park around 1992, in Mumbai’s outskirts, were thwarted by the government, which didn’t give him regulatory approvals. A few months ago, Gandhi spotted his opportunity. “Everonn has domain knowledge and has reached scale,” says Gandhi. “We wanted to leverage their strength with our infrastructure company to build schools.”
SKIL will provide Everonn infrastructure support to build schools, while Everonn will manage them for the non-profit trusts. “Over the next four years, I will have the opportunity to invest $4 billion more,” says Gandhi. He has plans to tie up with premier foreign universities and to scale up the Everonn schools business.

The For-profit Model
Education is a state subject. So, though the central government advocates a non-profit and trust model, the final call rests with the states. Haryana, for instance, allows for-profit schools that follow the ‘international baccalaureate’ curriculum. That led Prashant Jain to diversify from exporting marble to running a school in Gurgaon, Haryana. Through his holding company, Sarla Holdings, Mr Jain floated Pathways World School , a for-profit IB curriculum school. And he found takers. Pathways has received an investment of $30 million from the $225-million Reliance Private Equity, fund. ”We liked this sector very much as its growth is far higher than that of the economy,” says Reliance PE CEO Ramesh Venkat.
Mr Jain, who is a director in the school, says Pathways earns an operating margin of about 55%. Adds Mr Venkat: “We expect a return on investment of 25-30%. We see a waiting period of four to five yeafor an exit opportunity.”

The public-private partnership Model
Some states are inviting private companies to bid for tendeto run public schools on the PPP model. The state government asks private companies to bid for a project on the premise that any viability gap funding — the period between setting up the school and starting operations, till it can break even — will be borne by the government. The organisation that quotes the lowest viability gap wins the bid. The government provides the land, and the private player builds and runs the school on a 25-to-30-year lease.

In July 2010, the Rajasthan government invited bids for 50 schools. One of the shortlisted candidates is IL&FS Education and Technology Services (IETS), the education arm of IL&FS, the infrastructure and financial services company. IETS provides content and teacher training, and upgrades school infrastructure. RCM Reddy, managing director of IETS, defines his business as one that will cater to the needs of students, from pre-primary to graduate levels and everything in between. “Next year, we will enter into managing schools,” says Mr Reddy. But unlike the others, Mr Reddy is playing safe, choosing the PPP model. “This is the only way to get out of any uncertainty in this area,” he says.

This January, India Equity Partneinvested 170 crore for a 28% equity stake in IETS. “We are introducing them to other companies to form alliances or go in for acquisitions,” says KK Iyer, managing director of IEP. Both the investor and IETS are very clear about where they’re going, though. “Education companies command an attractive valuation in the market,” says Mr Reddy. Iyer feels an IPO is the most obvious exit in this sector. “In three to four years’ time, the company should be large enough for an IPO.”

Opportunities aside, the regulatory risks in the schools business are real. Admits Balaraj of Sequoia: “There is significant regulatory risk and business-model risk.” He feels a lot of capital will be invested in the education sector in the hope that regulatory risks will get sorted out. “This may not happen in the near future,” adds KPMG’s Prasad. Not all avenues of investment in the education space are unsafe. In verticals like pre-schools, vocational training, coaching classes, e-learning and test preparatory classes, regulations allow education companies to run as commercial entities. SAIF Partners, a foreign private equity firm, takes this distinction seriously.

“As foreign investors, we want to subscribe to the letter and spirit of the law, and our focus is vocational training,” says Vibhor Mehra, principal, SAIF Partners. But elsewhere, companies, private equity playeand, increasingly, small investoare laughing their way to the bank by going to school.


October 06, 2010

Parents to certify fitness of school buses

HYDERABAD: The transport department has made it mandatory that both parents’ committee and the school management should jointly verify fitness of school vehicles every month. The decision was taken after recent instances of mishaps involving school and college buses.

The provision was included by the transport department as guidelines issued for educational institution vehicles. After verification, both of them are expected to record their findings in a separate register meant for this purpose. Besides, a separate complaint book shall be made available by the principal. The principal concerned should also go check it at the end of every month and take necessary action.

Principal secretary (Transport department) SP Singh said a school/college bus should carry a list which mentions the names of students, their class, residential address and route plan. “The bus driver should not be more than 60 years of age. Managements should maintain a health card for each driver which must contain details of his eyesight, blood pressure and sugar level in each quarter,’’ SP Singh said in a order.

From now on, it is mandatory for the school management to appoint a driver only after confirming whether he has a genuine driver licence by cross-checking with Regional Transport Authority (RTA) officials. Every bus should have its name, address, telephone or mobile number printed on the rear of the vehicle. Doors should be fitted with a safe locking system.

Officials said these guidelines would be implemented after 30 days with suggestions and objections from various stake holders taken into consideration.