Home > Uncategorized > Should we have profit-making schools?

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.

Advertisements
Categories: Uncategorized Tags: ,
  1. March 12, 2013 at 9:47 am

    Simon – interesting points, but I agree with Sam. You appear to be considering one approach based on a commissioned services model. But I’d imagine most 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.The difference with the model you discuss is that parents rather than central planners become the arbiters of quality.

    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.

    None of this is to say that allowing profit-makers in is a good idea in practice. But I think the theoretical arguments are stronger than you say.

  2. March 7, 2013 at 3:00 pm

    Reblogged this on Seyi's thoughts on education and commented:
    An incredibly well-balanced and informative article on the topic, profit-making schools.
    “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.”

    “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.”

  3. Sam Sims
    March 7, 2013 at 10:01 am

    Simon, I think you are missing a key point about the link between quality and profit.

    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.

    Cutting costs or increasing revenue per student are not the only other two options.

    I’m not saying for profit schools are a good thing, but it seems to me that there is indeed something that schools can do to raise profit by increasing the quality of the schooling they provide.

    Moreover, as long as an individual teachers performance is partly a function of the schools in which they operate (through training, management support, good supporting policies, etc) then the expansion of good schools (and contraction of weaker schools) will, other things equal, raise teaching quality.

    Again, I’m not saying for-profit schools are the answer, but surely you are too quick to say that average teaching quality will not be “strongly or directly affected by for-profit schools.”

    Sam Sims

    sam.sims@instituteforgovernment.org.uk

  1. March 8, 2013 at 2:31 pm

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: