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The Case for Allowing For-profits to run Schools

Student First! Issue 7, November 08
By Sridhar Rajagopalan

In this article, I am going to make a case for why profit-making bodies should be allowed to run schools. Let me start by saying that till not very long ago, I too was opposed to the idea of private, profit-making bodies running schools. Even today I have little sympathy for most groups that are running schools to make money. And yet I believe that the current law, which disallows for-profits from running schools, needs to be amended.

To summarise my view in one para, I would say that the education problem today is a large and challenging one and deserves all the energy that can be directed towards solving it. Allowing for-profits allows a much large section of people to engage with the problem. For-profits bring in passion, expertise and innovation and the poorer quality representatives (of all varieties) will get shaken out in the process, especially if there is a simple and transparent regulatory and complaints mechanism in place.

The reasons I would argue for for-profits being allowed to run schools are not the conventional ones. If you go to a seminar on privatization, you will hear that government has not been able to run anything successfully, hence you need privatization; or simply that everything should be privatized including schooling. And finally you have the 'pragmatic' argument - that since the law that schools should not be run for profit is being violated quite blatantly in practice, it should be changed. But, my reasons are different.

I must at the outset clarify that I have been involved in starting and running a school (and teacher training college) for five and half years (as a non-profit, by the way, in form and spirit) in the late nineties. That was before it was a 'fashionable' and seen as lucrative to start schools. For the last 6 years, I have been running a for-profit company that engages deeply with school education, and - let me clarify - has no intent or interest in starting or running schools.

1. What do you think of, when you hear the term 'profit-making'?

2. The problem with non-profits

3. What for-profits bring to the table

4. Why the for-profit model is structurally superior

5. Responses to common criticisms against for-profits

6. Conclusions

1. What do you think of, when you hear the term 'profit-making'?

Over the past year or so, I have come to realise something very interesting and non-intuitive. It is that when we hear the term 'profit-making company' we look at it very differently in India compared to many other places. Especially in India today, probably due to what has happened in the past 50-60 years, we think that for-profits exist solely for profit . Further, they will cut corners , exploit employees and exploit customers . These are part of our psyche in India. It is like if it is a profit making company it must be doing that. C.K Prahlad said it best. He said "Where I come from, business equals cheating".

So this is something, probably in our subconscious, which we need to realise. Yet, interestingly, there is a completely different view of profit in most western societies. That view is that businesses add value to society and improve the quality of life . The best businesses are the ones that are successful and ethical . The culture of giving is strongly established - a business tycoon is as likely to donate his money to a university as to leave it to his kids (there is also an inheritance tax involved here) This probably helps things being looked at positively.

Now it is not that this thinking is alien to India, if you look at Buddhism you talk about 'sama aajiviko' you say that the way you earn your living should be such that it does not hurt or harm anyone . So it is to say that there is nothing wrong in business if you keep these things in mind, it is a way to serve society. Mahatma Gandhi's concept of trusteeship is also very similar.

So a lot of our views on for-profits is going to be determined by our subconscious view of their role. I prefer the second one - apart from the reason that I run a business - because it is a more positive view of 'other people'.

2. The problem with non-profits

My first argument in favour of for-profits being allowed to run schools is that they tend to use resources more efficiently than non-profits . This is probably because they have to earn them from the very people who are using their services. I have had many experiences of this. During the 2001 Gujarat earthquake, we were involved in helping rebuild schools in Gujarat, and we found that the kind of money that was available to us allowed us to negotiate great terms from suppliers of cement and steel. Our Chairman, who also headed a company, shared that when they had to buy these commodities as a corporate , funds were much less freely available, and the terms got were far worse!

Maybe the Gujarat earthquake experience cannot be generalised, but I have more examples! One such experience is when I am called to Bombay as a member of a trust of a non-profit, I usually fly, but even today as MD of my small company, I take a train or some other economical mode. Accountability and better financial controls will, I feel, tend to make for-profits use resources better than non-profits.

My second argument in that the non-profit model is inherently not a very sustainable one. I have seen established non-profits doing good work after 15-20 years of their existence, and yet being at the mercy of donors. One solution for a non-profit is to develop expertise in a new area - fund raising - which means that you are, in a sense, defocusing from your core area. For-profits deal with one constituency - their clients - and their efforts of training, sales, customer education are all directed towards this group and hence synergistic.

The model for serving social causes: Incidentally I believe that non-profits should continue with their aim and vision, but function in a for-profit model. For example, a non-profit working in disability, I believe, should start a private company and work in that area. Instead of seeking grants from donors, it should charge fees either from the people it is working for or from those supporting the cause. The organisation can clarify in its mission (as we have in ours in spite of being a for-profit) that 'commercial success without impact will be seen as failure'. This approach will allow the non-profit to assess its financial viability and impact better and make it much more sustainable long term.

3. What for-profits bring to the table

The arguments so far have more dealt with the weaknesses of the non-profit model and are not the real positive arguments. Before getting into those points, let me clarify that I do not believe that the primary goal of a for-profit is profit. Even if this sounds oxymoronic to many people, this is no different from saying that though we cannot, as human beings, survive without oxygen, the goal of our living is not to breathe. Profits are like oxygen for a company - necessary for survival, but definitely not the goal. To understand what I believe the true goals of a corporate are, we need to look at the positives they bring to the table.

The first thing an entrepreneur brings to the table is 'passion for his work or his goal' . This may not be true for every person working in that organisation and this would be less and less true for the low-quality organisations, but this is true for many entrepreneurs who usually have an easier 'salaried job' option that they choose not to exercise. (In many cases entrepreneurs or corporates start with narrower aims of survival or profit, but move up to higher goals like excellence, attaining leadership positions, etc. which represents this passion.)

The other thing corporates bring to the table often is expertise, and I would say that many of them do manage to institutionalize this expertise fairly well. Talking of education, imagine if there was an organization that had deep expertise in language learning in primary classes, and another had deep expertise in assessment and another with deep expertise in special education - that's what is needed today. It is not that it is impossible to do this with not-for-profits, but for many reasons, it is much more likely for it to happen in a for-profit organization.

The third contribution of a corporate is innovation - a new way to look at an existing problem. Recent examples in India relate to privatisation in telecom and air travel. But world over it is found that private education uses resources comparable to public education, but uses it more effectively.

A fourth advantage for-profits have is target-setting, planning and processes . This may seem minor, but I find it makes enormous difference in practice. Target-setting pushes us to stretch and planning provides the discipline and process reduce the dependence on individuals. The opposite of these is the approach that commitment alone can make a difference. Though they need not, many non-profits seem to approach their task that way.

No sector can flourish unless the best minds work in that sector. And mostly, people move to sectors or jobs where they get paid well. This is, in practice, a big advantage for-profits have, as they are able to pay higher salaries . Though non-profits often have more committed members, attracting talent is critical and for-profits can do it much better.

Competition has a lot of positives because it forces you to do your best and stay on your toes. There is also a cross-pollination of powerful ideas, when two bright organisations (or individuals) pit their wits against each other.

4. Why the for-profit model is structurally superior

What gives for-profits the edge over non-profits on all these dimensions - can't non-profits develop them? I think there are some inherent strengths in the for-profit model:

1. Human nature: For-profits align individual interests and larger interests far more effectively than non-profits. After tasting some success, human beings become broader in their outlook, sometimes more philanthropic, but a large number of people feel insecure at the start of their career and prefer roles that seem financially attractive.

2. In for-profits, the group one works with, one gets feedback from and who pays for the services are all the same - this is a stronger model because the feedback is quicker and more accurate .

3. Discretionary profits are essential for innovation and excellence: As Bill Gates puts it, discretionary profits go back to fund research and innovation. Before you get one thing that works, you have to try ten things that fail. And I can say this from our own experience also. If you are an NGO and you are asking for funding, most funders are not willing to fund experiments that will are going to get you answers. Profits let you do that. If I have profits, I try ten things and one of them works and if I do not try those ten things I will not get the one thing that works. So that cycle has to be funded in one way and profits are the best is one way to fund that.

5. Responses to common criticisms against for-profits

Some of the arguments against for-profits is that business ventures venture into an area only when there are clear profits I don't think this is true. I think that there are a lot of businesses that are about innovation. And there are a lot of areas where businesses have gone into, where conventional wisdom said that there isn't profit here. I would argue that every successful business should be in an area where conventional wisdom says we can not make any money.

I want to also quote this quote from a person from a large ship building company the person who started it and a lot of people who believe that.you know he said that "we must build great ships. At a profit if we can and at a loss if we must! But we must build great ships." And there are many examples where companies have bet their future, when they have said that we want to do this in this sector, because it was very impassioned about that. You know IBM did that when they built the IBM 360 machine. They said that if this failed we are, we will completely sink as a company. But they said our mission is to build the best computers in the world. So there are lots of examples to show for-profits not driven by profits alone, but there is a larger vision or a goal. This risk-taking leads to new solutions.

6. Conclusions

Though I have not brought it out at every stage, the connection between the above and education is obvious. Education needs passion, expertise and innovation. It needs the best minds to address big challenges. All these can be brought in by the for-profit section.

Meanwhile, I completely agree that it is the duty of the state to provide education for all. So I am not saying, nonprofits should not be allowed in education. I am only asking for for-profits to be allowed to run schools. Today what is happening is you have low-cost for-profit schools that we are not aware of. Like you have 600 schools in Hyderabad that you don't even know exist, they don't even exist in the government records. So the students are either not enrolled or they are shown as enrolled in government schools. So what happens is that now these are part of the system. The government actually becomes responsible for the education that even these children get. We regulate them in some minimal way and you know that we think is possible, you look at their performance and so on. Today what happens is we have a system where for-profits exists but exist invisible to the government, this is the case where the government is able to escape their responsibility. So if you actually legalize them, it actually allows you to hold the government responsible for the quality in these schools also. So even from that argument it makes sense to allow these schools.

I just want to end with a quote from Andrew Carnegie which sounds very similar to what Mahatma Gandhi used to say also. He says, "This then is held to be the duty of the man of wealth, first to set an example of modest unostentatious living, second to provide moderately for the legitimate wants of those dependent on him; and after doing so, to consider all surplus revenues .. simply as trust funds which he is called upon to administer... to produce the most beneficial results for the community."