Profits in schools – response

Author: Simon Burgess

Profits in schools – response

There were some interesting comments on the recent post I wrote on profit-making schools. This post offers a brief reply to those points.

First, one comment was that allowing profit-making is a solution to the lack of capital for schools:

“advocates see profit-making as a way to tap the private finance that might allow supply-side liberalisation, which would in turn allow choice to operate more effectively than it does at present. Theoretically, of course, this boost to capacity could be done with public finance. But it’s questionable whether the necessary level of spare capacity would be politically sustainable given all the other calls on public spending (especially now). So private finance is (arguably) one solution to that problem.”

It may be a solution to that problem, but it is not a necessary solution, there are other ways. The PFI programme has been funding capital spending on schools for over a decade now.  Nor is it just a thing of the past: in 2011 Michael Gove announced capital expenditure through PFI of around £2bn to rebuild 300 schools. The latest estimates are that PFI expenditure on education will top £260m in 2012-13, and the whole programme has generated over £7bn for school building. The PFI obviously utilises the profit motive in the capital market to get funds into school building without needing profits in the schools themselves.

Second is the question of just how profits can be made. Given fixed revenue per student, it is not possible to directly make a greater rate of return by raising quality (the indirect route is discussed below). Profits can be made by reducing costs. This may be possible without reducing quality, or not. That possibility is that other agents can come in, re-arrange the budget, reduce costs and maintain quality by raising quality per pound spent. The comment was:

“You also argue that ‘outsiders’ are unlikely to know best how best to deploy their budgets. This seems like an odd argument. The market’s virtue is supposed to be innovation and the ability to scale good practice quickly through incentives to mimic the best. If you don’t think that works then I can’t see why you’d be interested in the practical aspects of for-profit schools, since there wouldn’t even be any benefits in principle.”

It is certainly true that schools are unlikely to be making completely optimal decisions. Our own work shows a huge degree of heterogeneity in schools’ financial decisions which is very unlikely all to be optimal. So they certainly have scope for learning. And schools may be able to learn from each other: a lot of people interpret the success of London schools as down to ‘London Challenge’ – and a lot of people interpret the success of that to collaboration, to learning from other schools. In fact, we are in the design stage of a large-scale RCT to test this out. But the key point is that with the current system for school revenue, allowing profit-making provides incentives to reduce costs but no direct incentive to raise quality. So again profits might be a way of encouraging collaboration, but there are other, easier, ways of doing the same thing.

The indirect channel for profit making to affect quality is a dynamic one. The third comment is:

“Presumably if you designed the admission and information systems properly then schools in which children make more progress will expand (either on site, or on another site) due to increased demand This could either come from parents choosing higher performing schools or commissioners awarding contracts/charters to higher performing schools. Then, assuming the school makes a fixed profit on each student they ‘process’, they will increase their profit through increased market share. Student progress up > Market share up > Profit up.”

The key here is the word “presumably”. Yes – this is the standard dynamic market process. If this worked in schools, then this would make choice and competition more effective in raising quality. But it does not appear to work well, as we described here. Understanding the best way to reform the revenue stream for schools to encourage expansion is the important part; profit-making may eventually be part of an incentive mechanism, but is currently tangential to the main problem.

I’m an economist, I believe that incentives matter hugely. Indeed, many of the things that I write or say to the Department for Education involve the phrase “you need to make it matter more”. But that is about individual incentives: perhaps making the pay of Headteachers contingent on school outcomes, perhaps introducing some form of performance incentive for teachers.  These people can raise quality, and can be rewarded for doing so.

Within the present rules of the game, schools cannot be rewarded for raising quality, because the revenue they would receive is independent of quality. Clearly, profit-making schools can introduce individual performance incentives; but so can – and have – non-profit making schools. Again profit-making is a side issue. It’s the wrong battle to fight.

Money for Good?

Author: Sarah Smith

Money for Good? 

On Thursday, New Philanthropy Capital published a new report, Money for Good UK, about why people give and what might be done to encourage them to give more. The very next day, the 25^th Comic Relief raised a record-breaking £75 million for charity and in doing so, served to illustrate a number of the key themes from the report. One of the messages from the report is that around half of donors feel no underlying obligation (moral or otherwise) to give money to charity. 47 per cent of those asked (mainly people who had given money to charity in the previous year) agreed that people should donate money to charity if they have the means. But nearly the same number (44 per cent) agreed that people should not feel obliged to donate money to charity. Comic Relief is a testament to the efforts of literally thousands of people to persuade other people to give to good causes.

So, what does persuade people to give? The report found that the personal touch is important – whether personalized communications from charities that donors have relationships with or an approach from friends, family and colleagues – and perhaps the odd famous celebrity.

People also say they care about impact. When asked about what factors they pay attention to when they give to charity, the most important is how the organization will use their donation (with 63 per cent of donors pay close or extremely close attention) and evidence that the organization is having an impact (with 58 per cent paying close or extremely close attention. This mirrors similar findings from a recent survey done on Justgiving donors. It is certainly something that Comic Relief understands – interspersing the comedy with clips showing where the money is going and how it is going to be spent.

It is a commonly held view that giving isn’t a rational decision. Providing evidence that donors care about impact and evidence of impact is therefore important. And it helps charities and fundraisers think about what kind of messages they need to deliver. But, it needs probing a little further. What does impact mean to donors and what kind of evidence do they want? On one level, it is clear that donors don’t want their money to be wasted, but do they really want to be presented with detailed accounts or impact studies? The report is careful not to push this too far – they emphasize that few donors do detailed research before giving to charity. Indeed, one possible explanation for the importance of personal recommendations is that friends and family are effectively vouching for the quality of the charity and acting as a substitute for the donor’s own research.

Following the report, NPC have emphasized that charities need to do more to demonstrate impact. But, another important next step is to find out more about what kind of information donors want – and how they respond to messages about charity impact and different types of evidence. There has been some limited work in this area showing that donors respond better to simple messages about personal cases rather than detailed statistics. These findings come from simple field experiments in which donors are randomly given different information to test the effect of alternative messages. More worryingly, the experiments show that donations actually appear to decline if donors are given, alongside the personal cases of individuals who are going to be helped, statistical data about similar victims caught up in a larger pattern of illness, hunger or neglect. The authors of the research concluded that donors respond to real rather than statistical lives. So while it is important for charities to generate data about their impact, it would also be worth finding out how best to deliver effective messages about charity impact in ways that – like Comic Relief – elicit positive responses from donors.

Should we have profit-making schools?

Author: Simon Burgess

Should we have profit-making schools?

Profit-making schools have returned to the education debate in England. This is an emotive issue for many, but an economic analysis is useful in defining the real issues.

There are some simple claims that can be quickly dealt with.

• “Education is far too important to be left to the mercy of profit-making companies.” Education is undoubtedly very important, for long-run growth, for social mobility, and for personal well-being. But think about possibly the most elemental of human needs, the production and distribution of food. While this is regulated by government, we are happy to leave all the decisions to profit-making companies. No-one seriously advocates the nationalisation of food.
• “It just won’t work.” It clearly does at a general level. Countries around the world, including those with well-regarded education systems such as Sweden, allow profit-making schools.
• “No-one should make money out of education.” Obviously they do at the moment: schools buy things from profit-making companies. This obviously has to be the case unless schools are going to start making their own books, desks and computers. So the real issues are (1) what kind of deal can schools get to minimise profiteering, and (2) what services are best bought in from outside as opposed to provided by the school itself

The appeal of allowing profit is the view that it makes decisions matter more. It provides strong rewards to organisations to innovate, to raise quality, and to do things more efficiently. Crudely, on a per-unit basis, organisations are pushed to improve quality and therefore revenue, or to reduce cost.

What would be the effects of this in the current education system in England? To answer this, we need to think about the parameters of the market.

Start with revenue. Schools get revenue for having students on the books. It is more or less a per-capita fee, albeit with some extras and some adjustment by the LA (for community schools). But to adopt the language of business, this money is for processing the students. The revenue that the school receives for each student depends not at all on the progress that the student makes.

This is central to the issue. Given the current system, there is nothing that profit maximising schools could do to raise their revenue per student by raising quality. Immediately, a great deal of the appeal of profit-making is removed.

The only way that schools could make profits is by driving down costs. This may be fine; it may be that this doesn’t really affect the quality of education if done in a smart way. If not done in a smart way, the quality of education would suffer and attainment would fall. It is clear that even the optimistic scenario does not improve education systemically in any way, either statically or dynamically through encouraging entry. The quality of education is the same, and the overall cost to the taxpayer is necessarily the same.

The counter-argument is that the pressure for profit might reduce slack enough so that the fall in costs allowed for profits and an increase in money spent wisely so that attainment increased. For this to work, it has to be that school budgets are spent very unwisely, and that an outside organisation could identify and cut ‘bad’ spending, take some profit and raise ‘good’ spending. It is certainly true that there is a huge amount of idiosyncratic variation in school financial decisions, variation that is unlikely to all be the result of optimal decision-making. Schools either know how to better deploy their budgets but are not sufficiently incentivised to do so, or they do not know. If they do not know, it is unlikely that outsiders will do (other schools may know; but that is another issue, only very clumsily mimicked by profit-making). Profit-making may answer the first point, but so do two other approaches, discussed below.

So profit-making is pointless at best: under the current market set-up, improvements in attainment would not make money (so would not happen) with profit-making schools, and cutting costs would make money but would either reduce attainment or leave it unchanged.

There are alternative strategies that might get some of the benefits of the innovative drive that profits might unleash, but in a more productive way: paying for attainment and incentivising cost reductions through resources for the school.

Paying for attainment. A positive step that keeps the current non-profit system intact but provides some of the same incentive is tying schools’ revenue to their pupils’ attainment. This would be straightforward to administer in principle, but there are some critical issues to resolve before it could be implemented. Chief among these is: should we pay for the simple ‘output’ of the school (GCSE points) or for pupil progress? There are good arguments both ways, to be visited in another post.  Of course, schools do much more than produce attainment, but this is the focus of policy.

Incentivising greater efficiency in other ways.   What if any surplus generated by this process had to be re-invested in the schools? Perhaps schools need some strong incentive to reduce costs. This might well be true, but this is not profit-making: profit-making by definition means the taking of monetary reward out of the school. An alternative scheme would be essentially equivalent to a team (school)-based incentive scheme in which the incentive is not money for the teachers, but resources for the school – resources saved are kept in the school. This is again potentially a good idea, worth looking at and some way short of profit-making.

Profit making in schools would either solve all schools’ problems nor signal the end of civilisation; the issue provokes strong feelings, but largely misses what should be the central policy concerns. Big gains in levels of attainment depend on raising average teacher effectiveness and big gains in equity depend on weakening the importance of proximity as an admissions rule and on changing the allocation of effective teachers across schools.  None of these would be strongly or directly affected by for-profit schools. However, there are certainly merits in piloting policies that link school’s revenue per student to the progress of that student, and incentivising cost reductions through keeping the surplus in the school.