Thoughts on economics and liberty

What Would I Do If I Became India’s Prime Minister? #7

School Education

Twelve years of education is now a norm in most free nations. My government will guarantee support for the education of all permanent residents of the country who want to study up to standard 12 or age 18(whichever comes first), noting that this does not amount to compulsory education. This would also include support for equivalent vocational training. Today, about 16 per cent of India’s children in the age group 6–14 do not go to school at all, amounting to tens of millions of children. Most also drop out of school well before completing high school.
Getting every Indian to complete standard 12 may therefore sound like a pipe dream. But it will be achieved quickly with the policies outlined below. My government’s solution will be to deliver high quality education to all children of India at the cheapest possible price. Since schooling is largely a state subject, therefore this policy will apply initially to Central Government schools only. However, states will be given incentives to move to this model.
My government will fund parents for their children’s education, and not manage schools or appoint teachers.If we apply the criteria for the review of government activities (outlined in Box 13 in the Online Notes[i]) to the school sector, we find that the government does not need to build, own and maintain schools, or deal with lakhs of school teachers directly, in order to educate every child. The current approach is too centralized and bureaucratic. It leads to mediocrity since local information can never be factored into the equation. Having been a secretary of the Education Department in Assam, I have at least some knowledge of the extensive corruption in the education departments and directorates of India. I have also inspected non-existent primary school buildings which were shown as having been completed on paper. Our current socialist approaches are completely inappropriate, both theoretically and empirically.
Governments are also very soft on their own failures. A Director of Schools will generally demand stringent standards from private schools that want to be licensed but will be pathetically indifferent to the shoddiest quality of education provided by government schools themselves. However, if all education services are provided by the private sector (i.e. by private citizens themselves), a government regulator can become an effective judge of school quality. We also know that parents generally prefer to send their children to private schools because the standards of accountability of these schools are much higher. Parents get full value for the extra money they invest in their children’s education. Privatizing all government schools will therefore ensure that all schools in India are fully accountable. Further, under the current system, the lands and buildings of government schools are not being used in the most efficient manner. Privatization will ensure much better resource utilization. By giving ownership – in most cases through educational consortiums – to teachers, the commitment of private school owners towards the maintenance of buildings and school infrastructure will also be enormously strengthened. As a rule, whatever exists without a specific owner is destined to be neglected. Finally, we know that managing a school is a hands-on exercise like managing a business. Governments are very inefficient in doing hands-on things and running businesses. The average government bureaucrat or teacher has good intentions but no incentive to deliver world-class educational services at the lowest possible cost. The private sector, on the other hand, can only make a living if it delivers high quality services in a cheaper and better way than its competition.
It will not be of concern to my government whether the privatized schools are run as ‘for-profit’ or ‘not-for-profit’ institutions. If, at the end of the process of maintaining a school and providing high quality educational services, a school can make a profit, this will only help, not hinder, the supply of more good schools. Profitability is the finest signal of quality in a marketplace. There is no reason why it should not be allowed to apply in the case of schools.
In this model, each child’s school education will be funded, individually, up to year (commonly known as ‘standard’ in India) 12, as follows:
  • Schooling will cost child ‘A’ nothing if parents choose a school which charges their ‘A’ a fee equal to or less than what the government is prepared to fund that particular child.
  • Schooling will be partially subsidized where parents choose a school which charges a fee for ‘A’ over and above what the government is prepared to fund that particular child.
Schools will bill the government for each child individually. Schools will not receive funding as a lump-sum which is unrelated to the size and nature of their enrolments; they will get a specific amount for each specific child they enrol. Schools will therefore have the incentive to go out and literally beg parents – such as parents of child labourers – to send their children to school. The more the children that these schools can enrol and pass out at an agreed, independently tested standard, the greater the money they will receive.
This method of private sector provision of education is as guaranteed to succeed as India’s current method is guaranteed to fail. This method will also ensure that the choices made by parents are honoured. Honouring parents’ choices can only be a good thing. No one could be a greater well-wisher of a child than his or her own parents. A government should never interfere with a parent’s choices without very good reason – only if both parents have a conclusive record of neglecting their children can a government make better decisions on behalf of the child. Let me now outline the model in detail.
School Privatization:
  • As a first step, my government will get completely out of school ownership and management. Over the course of the first 30 months, all government schools will be privatized. Their land,[ii] buildings and equipment will be sold at market rates through an open tender in which educationists working in these schools will be encouraged, through a (small) preference in the conditions of the sale, to form consortiums which can be registered as companies or societies, and make a bid. It is expected that such consortiums can create a persuasive business case to raise bank loans and buy the schools with repayments to be made from earnings made over the years.[iii]
  • Funds raised from the sale of schools will form part of a one-off increase in government revenues to be used to offset the initial increase in core function expenditures.
  • The following conditions would apply to the sale:
    • The school’s land cannot be sold for 50 years. The government would retain the right to acquire land from school owners for other public purposes where it becomes necessary to do so, upon payment of slightly greater than market value, after making suitable arrangements for the children affected.
    • The school’s land or buildings cannot be used for any primary purpose other than school education. School owners will be allowed to operate business activities approved by the (local government) council from the school campus after school hours. There is no incompatibility between having temporary shops or a small gym as a side-business operating in the school building after school hours so long as the funds raised from these activities by the school help to keep it solvent and keep its fees low, while also meeting the quality standards prescribed by the education regulator.
    • The consortium which buys the school will not disadvantage existing staff for up to five years from the time of purchase of the school on a similar sliding scale referred to earlier.
  • Schools will not be protected from competition in any way. Practically anyone could set up a school anywhere, charge any fee and try to attract students. There will be no quotas or limits on the number of schools in an area, even if this may make it harder to raise loans. This openness is necessary to prevent monopolies of any sort arising in what should be a completely free market. So long as a school complies with quality requirements, through ‘deemed licensing’, it could be launched. Schools would self-assess against standards established by an independent association of educators nominated by the education industry, and notify the education regulator of their existence – that would amount to becoming a licensee. Stiff penalties would apply if a school was later found to have violated the standards. Schools would be permitted to enrol children only at the beginning of a school year and parents will not be able to change their children’s schools during the year unless there are exceptional circumstances.
  • To prevent the financial collapse of schools through mismanagement, each school will be compulsorily required to purchase bankruptcy, fire, workers’ compensation and public liability insurance from the market, to be reinsured initially by the education regulator until the rates of school collapse are better assessed and private market premiums fine-tuned. If the buyers of a school turn out to be bad managers, or worse, this insurance will prevent the school from going belly-up and children from suffering.
  • This model will create a competitive market for high quality schooling. Only the most efficient schools, fully accountable to the parents for the quality of education they provide, will survive. Poorly managed schools will be bought out by more efficient schools. There will be no barrier to the potential size of a consortium. An efficient consortium could potentially buy out all schools in the country. So long as even one other efficient competitor could set up a school in any place in the country, the size of the consortium would not matter.

Child-based funding:

  • School will bill the government each month (or quarter), seeking reimbursement against eligible vouchers (eligibility below) for each child, by name.
  • By the thirtieth month, my government would have allotted a unique identification number to each child in India between the ages of four and eighteen, in preparation for this program. This number would be linked to a database which records key biological features[iv] of the child and photographs of his/her parents, to prevent potential falsification of records commonly done by illegal immigrants to India.[v] A new identification number would thereafter be allotted to each child who subsequently reaches the age of four. This database will be linked to the previous year’s income tax return of the child’s parents,and would generate a voucher of a specific value, linked to that income and to the expected educational costs for a child of that age. Vouchers will therefore differ in value. Children of poor parents will get vouchers of a much higher value than children of wealthy parents.
  • Children would go to a school selected by their parents. Parents would pay an amount over and above what the government voucher reimburses the school for each of their children separately. Poor parents would of course not pay anything since they would have high-value vouchers. Richer parents will pay a top-up amount.
  • This higher allocation for poorer parents is a crucial part of the model. The system today does not provide genuine equal opportunity even though it is based on the socialist ideology of equality. The quality difference between government and private schools is therefore quite vast, and does not allow children from rural areas or slums to prosper. My government’s policy would make schools in rural areas or slums extremely attractiveto potential school owners, since children with predominantly high-value vouchers will attend such schools. Therefore schools in economically backward areas will be able to afford much higher salaries for teachers, and potentially attract even better teachers than schools in urban areas. In this manner, all schools will be able to provide a robust quality education at the minimum.
  • An annual adjustment would be applied to the value of a child’s voucher after the income of the child’s parents is declared to the tax office. Excess payments made for the child to the school would be recouped through the parent’s future taxes.
  • The voucher system will be managed by a range of private service providers under strict conditions of accountability. The independent education regulator will monitor the quality of these providers and ensure the overall integrity of the voucher system. Stiff penalties will apply if preventable fraud is detected at any level.
  • Schools would be required to report a child’s death or transfer from the school within one month to the voucher service provider. Should it be found that a school has charged the government for a child who was no longer studying there, the school will face financial penalties including potential withdrawal of the school’s license and criminal prosecution of the school owners.
  • Education departments and directorates, as well as inspectorates of schools, would be mostly disbanded by the end of the thirtieth month; many of their teaching and non-teaching staff would have been, by then, employed by the larger consortiums. The social infrastructure department, which will manage the overall budget for school education, will work with the independent education regulator to ensure that minimum outcome standards of educational attainment are met by each school, and that vouchers are administered properly.

Higher Education

Higher education, on the other hand, is quite different from school education. There are no entitlements to this level of education.
No one can demand that every tennis player should be allowed to play in the Wimbledon tournament. It is one thing to provide a level playing field for people to develop their talent and quite another to demand entry to the highest levels of human activity. There is a thing called justice, by which only the best person, who not only has the talent but who has put in the necessary hard work, must win entry to the portals of higher competition. Entry into a portal of higher education is similarly a privilege, contingent upon significant hard work. It has nothing to do with providing anyone a level playing field.
Another reason why my government will not fund anyone’s higher education is because it would mean the poor would subsidize the rich. Tertiary institutions are ‘fishing nets’ to catch the society’s most talented people. Those who successfully complete tertiary education earn, on average, significantly more than those who are unable to gain admission to these institutions. The benefits of higher education are captured almost entirely by these people in exchange for services they provide when they join the workforce. Students going to tertiary institutes therefore will become much richer, on average, than the average taxpayer. If the average taxpayer were to subsidize their education it would amount to the poor subsidizing the (future) rich. There does remain the question of ensuring that all those who obtain admission to institutions of higher education are able to raise sufficient money to attend the courses. That can be easily resolved. In doing so, the policy outlined below will deliver the world’s best tertiary education system to India. The objective is to create a hundred Harvard Universities in India, each a centre of excellence operating only on student fees and alumni donations.
Low Interest Loans to Tertiary Sector Students:
  • Tertiary institutions will charge full fee virtually from everyone barring the few to whom they give scholarships. By the government not funding tertiary institutions, significant tax revenues currently allocated to higher education will be released for more essential purposes, even as the quality of university education and infrastructure is significantly boosted by the open market fee charged by universities.
  • Those admitted to a course by any recognized tertiary education provider will be loaned money for 15 years at a low rate of interest by the government to attend that course:
    • An Indian citizen (not overseas citizen of India or permanent resident), who gains admission into an approved tertiary institution in India will be eligible to borrow from the government all fees charged by that institution, as well as the cost of necessary books and equipment and modest living costs.
    • These loans will bear a low interest – around 1 per cent more than the (variable) Reserve Bank rate. The repayment would be through the income tax system after the student gets a job and starts earning above three times the level of the poverty line. This loan will enable all meritorious persons in India to pursue higher education.
    • Even after India becomes completely free there will remain some tendency on the part of some students to leave the country after being educated at the taxpayers’ expense. Such students may not return the loan and also pay taxes to other countries which did not invest a rupee in their education, but potentially not repay their loans to India. Where similar schemes operate elsewhere, as in Australia, an international agreement will be sought by those countries to ensure these loans are refunded to India. Either way, a system to monitor departing students will be established. Passports and immigration officials will be given access to the database of student loans. Students who leave India – even on a temporary visit – will need to furnish a bank guarantee equivalent to the amount of their currently outstanding loan plus the present value of all costs incurred by taxpayers on their school education. This guarantee would be forfeited should they fail to return within the stipulated time. Those without proof of this guarantee will be turned back at the immigration check and not permitted to leave India.
    • How will these student loans be funded? The basis of this loan model is that income streams from university students are far more secure than houses or land. Almost all university graduates will earn well, making it a trivial task to recover their loans through the tax system. Therefore, a rolling debt model will be used. From the thirty-first month, ten-year bonds will be issued equal in today’s real value to the student loans expected to be issued (not repaid) that year. Prudent investors in India, including banks, will buy these bonds.
    • The bonds will be retired after ten years using multiple-year recoveries from students who would by then be in the workforce, noting that not all bond repayments will be met from student loan recoveries in a particular given year. Apart from mismatches of timing between student earnings and the face value of the bonds, the residual costs of administering this programme will have to be paid by the taxpayer as well, plus the difference in interest costs between the effective rate of the bonds and the Bank rate and a write-off for defaults. This amount will form a subsidy for higher education. The justification for this small subsidy is that it provides an equal opportunity – to those selected for higher education – to complete their courses. With efficient management, the subsidy will be reduced considerably.

Tertiary Sector Privatization:

  •  As with schools, there is no reason for the government to manage the delivery of tertiary education. Indeed, there is even less reason, since no bureaucrat can teach an Einstein or tell him how to manage his discipline. Let experts manage their own institutions. All government universities, technical colleges and the like will be sold off by the thirtieth month on the same pattern as schools, and accredited by imposing on them a few conditions necessary to demarcate them as institutions of tertiary education. These institutions will become for-profit corporations with shares traded on the stock market. Their sole business objective would be to provide tertiary education and they would use their lands for the primary purpose of higher education for 999 years.
  • They will have operational independence. They would set their own salary structures to attract distinguished academic professionals and, consequently, bright students. They would determine the type and quality of tertiary education services they wish to deliver, the mix of courses to offer and other things that universities do. The competitive market will then deliver the best mix of options for students. Not one rupee will be spent on any ‘educational planner’ to predict the demand for graduates in specific areas. Only that much higher education will be provided as the market needs and will bear.
  • The reason why universities won’t jack up their fees to astronomical levels upon privatization is because of their critical need to attract customers – in this case, high quality students. High quality students, like any other self-interested person, will look for good quality but low cost education and force the fees down to competitive levels.
  • Will some academic disciplines be ousted from the teaching agenda by this model? Doubting Thomases will argue that privatization will affect the supply of courses in arts and philosophy. But this argument is without basis. Modern private sector corporations recognize the great value of liberal education in broadening the perspectives of managers. Indeed, arts graduates do better in modern businesses than technical graduates because innovation, entrepreneurship, leadership, people management and strategic thinking have little to do with technical skills.
  • In this manner, the freely operating tertiary education market will decide what courses are needed for India. I imagine we would get a hundred Indian Harvard Universities in a few decades through this model.
To be continued.
[Note: This is an extract from my book, Breaking Free of Nehru]

[ii] Where the land (as in many villages) has been donated by the community to the school, the proceeds of the sale relating to land will revert back to the local community.

[iii] If there are no buyers for schools in particularly remote areas, the existing arrangements will continue for another year, when a similar sale is attempted again.

[iv] Such as the iris of the eye, thumb/ finger prints; ideally, a DNA record.

[v] I refer to the example of Assam which has been swamped by well over a million illegal immigrants from Bangladesh. These immigrants usually obtain fake school certificates which link the illegal migrant to a pre-1964 migrant who was legalized by the Assam accord. The genuineness of these school certificates cannot be verified without a biological-based database. 

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