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Indian Entrepreneurs Find Ways To Profit From Education

Indian Entrepreneurs Find Ways To Profit From Education

Reporter ,  22-Oct-10

The Indian Government has always had a policy that the education sector is not meant for making profits. Private schools up to the K-12 level in the country can only be managed by trusts. The current structure forbids school trusts from taking out the money earned through tuitions, etc. and can spend it only on the school infrastructure etc. however, a number of schools have found ways to bypass this rule.

The Indian education sector up to K-12 is valued at approximately $20 billion a year, growing at 14% per year, and the money is attracting businesses and organised players. Though trusts cannot allow the surplus generated to flow out, it can be sent out in the form of payments for infrastructure, services et al. Companies and investors are tying up to create a business model that is legal as far as the letter of law is concerned, but is morally and ethically ambivalent to the spirit of the law.

Companies build and manage the infrastructure for schools, and in turn are paid at a rate determined mutually between the trust and the company. Though these dealings are supposed to be at arm’s length, the level of interaction is far closer than is shown on paper. Since the business is a fairly stable one – students rarely leave a school once they’ve joined – the cash flows are attractive to investors. In 2010 alone, an approximate $140 million in investments have been made in the sector. Investors are following one of two patterns to get their returns.

The first is the manage model, in which aspects of the school operations, such as lease, maintenance, transportation, supply of teachers and other staff is taken care of byu an outside agency, which is paid by the trust. Such companies call themselves school management companies and take on long term contracts to manage everything from the syllabus to the cafeteria.

The other model is the build and lease model, where the infrastructure is put up and leased to schools, which in turn pay an annual lease for it. If the building were put up by the trust, it could not take any money out. Part of the property in such cases can even be used for commercial purposes, albeit with certain criteria being adhered to. 

Only certain states allow the setting up of for-profit education institutions, such as Haryana, where a number of schools following the international Baccalaureate (IB) syllabus have come up. Thanks to their proximity to Delhi, being located in the satellite areas of Gurgaon, Faridabad and Rewari, these schools are riding a boom. Investors in the sector estimate a 40-55% return once classrooms are full.

There are areas where for profit education institutions thrive, such as coaching and preparatory classes, pre-schools and vocational training. In the remaining areas, the regulatory framework is shaky and represents a risk for investors should the Government clamp down on the present practices followed by schools. Till then, investors are making hay.

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