metadata: authors: 0: author: Sosale,Shobhana
docna: 0: docna: Trends in private sector development in
            World Bank education projects
docty: Policy Research Working Paper
subtopic: Private Sector Economics,State Owned Enterprise Reform,Public Sector Administrative & Civil
            Service Reform,Primary Education,Economics of Education,Educational Sciences,Private Sector Development Law,Privatization,Education Finance,Energy Privatization,Marketing,Democratic Government,Economics and Finance of Public
            Institution Development,Public Sector Administrative and Civil
            Service Reform,De Facto Governments
teratopic: Public Sector Development,Health, Nutrition and Population,Gender,Education
abstracts: cdata!: Emerging trends in education show the
            private sector to be playing an increasingly important role
            in financing and providing educational services in many
            countries. Private sector development has not arisen
            primarily through public policy design, but has of course
            been affected by the design, and limitations of public
            policy. The author traces trends in private sector
            development in eleven of seventy World Bank education
            projects in 1995-97, asking two questions: What has been the
            rationale for Bank lending in education? And, in countries
            where there is both privately financed, and publicly
            financed, and provided education, how has the Bank
            encouraged the private sector to thrive? The eleven country
            samples reveal that the Bank's interest in private
            sector development is basically in capacity-oriented
            privatization, to absorb excess demand for education. This
            is crucial to the Bank's general strategy for education
            lending: promoting access with equity, focusing on
            efficiency in resource allocation, promoting quality, and
            supporting capacity building. Absorbing excess demand tends
            to involve poorer families, usually much poorer than those
            that take advantage of other forms of privatized education.
            The Bank emphasizes capacity-oriented privatization,
            especially of teacher training for primary, and secondary
            schools, as well as institutional capacity building for
            tertiary, and vocational education. The underlying principle
            is that strengthening the private sector's role in
            non-compulsory education over time, will release public
            resources for the compulsory (primary) level. The private
            sector is emerging as a force governments, donors, and other
            technical assistance agencies cannot ignore. Often the term
            private sector encompasses households' out-of-pocket
            expenses, rather than describing for-profit, or
            not-for-profit (religious or otherwise) sectors. And lumpy
            investments, supporting both private, and public education,
            are the norm.
repnme: repnme: Trends in private sector development in
            World Bank education projects
display_title: Trends in private sector development
            in World Bank education projects
listing_relative_url: /research/2000/09/693061/trends-private-sector-development-world-bank-education-projects
topicv3: Private Sector Development m1326060 1921,Primary Education m1326139 480,Education m1327048 470,Privatization m1327236 1283,Private Education m1327271 1490
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Public Sector Development,Health, Nutrition and Population,Gender,Education
no_of_pages: 62
author_keys: 0: author_key: 95566
model_extractions: # I

### POLICY **RESEARCH WORKING PAPER** 2452

## Summary fndings

Emerging trends in education show the private sector to be playing an increasingly important role in financing and providing educational services in many countries. Private sector development has not arisen primarily through public policy design but has of course been affected by the design and limitations of public policy.

Sosale traces trends in private sector development in 11 of 70 World Bank education projects in 1995-97, asking two questions: What has been the rationale for Bank lending in education? And in countries where there is both privately financed and publicly financed and provided education, how has the Bank encouraged the private sector to thrive?

The 11 country samples reveal that the Bank's interest in private sector development is basically in capacityoriented privatization to absorb excess demand for education. This is crucial to the Bank's general strategy for education lending: promoting access with equity, focusing on efficiency in resource allocation, promoting quality, and supporting capacity building. Absorbing excess demand tends to involve poorer families, usually much poorer than those that take advantage of other forms of privatized education.

The Bank emphasizes capacity-oriented privatization, especially of teacher training for primary and secondary schools, as well as institutional capacity building for tertiary and vocational education.

The underlying principle is that strengthening the private sector's role in noncompulsory education over time will release public resources for the compulsory (primary) level. The private sector is emerging as a force governments, donors, and other technical assistance agencies cannot ignore.

Often the term _private sector_ encompasses households' out-of-pocket expenses rather than describing for-profit or not-for-profit (religious or otherwise) sectors. And lumpy investments, supporting both private and public education, are the norm.

This paper-a product of the Education Team, Human Development Network-is part of a larger effort in the network to synthesize and disseminate knowledge about private sector development in education. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Shobhana Sosale, room G8-057, telephone 202-473-6490, fax 202-522-3233, email address ssosaleC@worldbank.org. Policy Research Working Papers are also posted on the Web at www.worldbank.org/research/workingpapers. September 2000. (49 pages) _The Policy Research Working Paper Series disseminates the findings_ **_of_** _work in progress to encourage the exchange of ideas about development issues. An objective of tbe series is to get the findings out quickly, even if_ **_the_** _presentations are less than fully polished. Tbe papers carry the names of the authors and should be cited ac4ordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessatily represent the view of the World Bank, its Executive Directors, or the countries they represent._
# **Trends in Private Sector Development in World Bank Education Projects**

by

## Shobhana Sosale *

The World Bank 1818 H Street N.W. Washington, D.C. 20433

* The views expressed in this paper are those of the author and are not to be attributed to the World Bank. The author thanks Prof. Daniel Levy (State University of New York, Albany) and Prof. Alain Mingat (Institut de Recherche sur l'Economie de l'Education, Dijon, France) for providing valuable comments, and for their insights in improving the basic content and presentation of the subject matter. Thanks also to Harry Patrinos, Jacob van Lutsenburg Maas, Arthur Karlin, Gerver Torres, Madalena dos Santos, Sam Carlson, William Experton and Jeffrey Waite for supporting this research, commenting on the draft paper, and providing useful suggestions for improvement, and to Nandita Tannan for data on World Bank lending.
_Trends in Private Sector Development in World Bank Education Projects_

# Contents

|_Forewo_|_rd_<br>_...................._<br>|ii<br>|
|---|---|---|
|_Abstrac_|_t_<br>_...................._<br>|iii|
|_Executi_|_ve Summary ....................._<br>|iv|
|I.|Introduction and Background .1||
|II.|Market for Education.|3|
|III.|Government's Role in the Marketplace .10||
|IV.|World Bank Lending for Private Sector Development<sup>in Education .12</sup>||
|V.|Findings .15||
|VI.|The Future Role of the World Bank Group in<sup>Education .18</sup>||
|VII.|Conclusion .21||
|_Annex._|Country Case Studies<br>..................|23|
|_Bibliog_|_raphy_<br>_..................._|_44_|

i
# **FOREWORD**

Education can be a strategic investment. Education is important for developing human capital, improving productivity and promoting economic growth. Historically education has been financed and provided by the private sector. During the 20 century, education became the domain of the public sector, to be funded and provided by governments for reasons of nation building, social integration, sharing a set of central values - all necessary to achieve social cohesion. Donors have assisted governments in their effort to improve the quality of education and to promote literate societies. In recent years, however, governments and donors have been working increasingly in resource constrained environments.

This paper evaluates the context within which World Bank education projects have been developed in recent years. The paper traces the World Bank's emerging trends for private sector development in education. It highlights changing trends in the financing and provision of education in some of the Bank's client countries, and describes the types of support that the Bank is extending in response to the changing trends. The findings emphasize the complementary role of the private sector in financing and providing educational services.

This research paper is part of the Economics of Education Thematic Group's effort to synthesize and disseminate knowledge on private sector development in education.

**11**
# ABSTRACT

Emerging trends in education<sup>show that the private sector is playing an increasingly important role in</sup> financing and providing educational<sup>services in many countries. Private sector development in</sup> education has not arisen primarily<sup>through public policy design though it has, of course, been affected</sup> by the designs and limitations of<sup>public policy. This paper traces trends in private sector development</sup> in World Bank education projects.<sup>In this paper, 11 out of a total of 70 World Bank education projects</sup> during the period 1995-97 have<sup>been studied to trace the trends. The 11 country examples reveal that</sup> the Bank's interest in private sector<sup>development is fundamentally in capacity-oriented privatization to</sup> address excess demand for education.<sup>World Bank lending for private sector development in education</sup> does not vary widely from the<sup>Bank's overall strategy for education lending: promoting access with</sup> equity, focusing on efficiency<sup>in resource allocation, promoting quality and supporting capacity</sup> building. The Bank's focus on<sup>private sector development in education emphasizes increasing private</sup> sector access to public funding and<sup>opportunities for capacity-building, especially teacher training for</sup> primary and secondary levels, and<sup>overall institutional capacity building at tertiary and vocational</sup> levels. The underlying principle being<sup>that strengthening the private sector's role over time at the non-</sup> compulsory levels of education will<sup>release public resources to be utilized at the compulsory, primary</sup> level. The 11 country examples help<sup>to demonstrate that the role of the private sector in education is</sup> emerging as a large force that governments,<sup>donors, and other technical assistance agencies cannot</sup> ignore.

iii
# **Executive Summary**

A majority of World Bank supported projects in education focus on improvements in public education. This, however, is not the case in all projects. This paper traces trends in private sector development in 11 World Bank education projects spanning a three-year period (1995-97). The paper explores the issue of how the Bank is supporting and might support an environment for private financing and provision of educational services to flourish alongside public education. The review of projects includes examples of Bank financing in some countries in Africa, Latin America and South East Asia. Evidence indicates that justification for Bank support in the sample countries is based on a reasonably balanced analysis of the respective roles of the private and public sectors in education.

The 11 examples reveal answers to two questions: (1) What have been the rationales for Bank lending in education (sectoral/sub-sectoral) in some of the client countries? (2) In countries where private sector presence exists alongside publicly financed and provided education, how has the Bank encouraged the private sector to thrive? Project Staff Appraisal Reports (SARs) and Project Appraisal Documents (PADs) constitute the basic information sources, along with interviews with task team leaders who were responsible for leading project design and preparation. Analysis of the 11 case studies provides glimpses into the Bank's rationales for supporting private sector development in education. The rationales are multiple and reveal emerging trends in Bank lending. The project examples are not presented as the proven best policies but rather as illustrative approaches, among others, for the particular circumstances confronted by the Bank.

The 11 country case studies reveal that: (a) the role of the private sector in education, both from demand and supply perspectives, has been growing over the years; (b) in the context of countryspecific project design, there is a growing need to carry out comprehensive assessments (at the macro or country level, as well as at the micro level) about the respective roles of public and private education to better understand the responsibilities of all parties before projects are designed; (c) in those instances where the role of the private sector is analyzed, there is an absence of a country-specific definition of the "private sector" in education. Often the private sector is a term utilized to encompass out-of-pocket expenses of households rather than for-profit or not-for-profit (religious or otherwise) sectors. In many countries the use of the term "non-governmental sector" encompasses the private sector; and (d) within iv
those projects that do support public and private education, lumpy investments are the norm - it is difficult to distinguish between support for public education as opposed to private education.

Absorbing excess demand is the main type of private sector activity that is of greatest interest to the World Bank. It is crucial to access, coverage and equity (the focus of the Bank's overall strategy for education lending) for it tends to involve poorer farnilies, usually much poorer than those who take advantage of other forms of privatized education. This does not imply that other forms of privatization such as supporting educational institutions of excellence based on international reputation are bad or unimportant. The Bank is largely indifferent to those when compared to the need to address the issues of excess demand for educational services, particularly at lower levels of education, to supplement public resources, and to tap increased household interest in paying for quality education. The Bank's interest is also in capacity-oriented privatization. This has implications for its policies in lending for education.

Conclusions drawn from the 11 case studies support a middle ground approach to education financing and provision on the basis that public and private sectors have complementary (privatepublic mix) rather than substitution (private _versus_ public) roles in financing and providing educational services. In many cases, particularly at lower levels of education (specifically at the primary level), justification for Bank support to the public sector might be reasonably straightforward. At upper levels of education (secondary, tertiary and training levels), the justification for Bank support of public education tends to be challenging, particularly in countries where private provision (management and ownership) thrives alongside the public sector. In this regard, the emerging role of the International Finance Corporation (IFC) - the private sector lending arm of the World Bank Group - is seen as complementary to the Bank's continued work in education. The paper concludes with a summary of the current initiatives being undertaken by the World Bank Group (World Bank, IFC and the Multilateral Investment Guarantee Agency - MIGA).

v
# **i. Introduction and Background**

Education can be a strategic investment. Conventional arguments hold that _provision of education_ depends on whether education is defined to be a public good or a private good. If the consumption of a good results in _positive externalities_ (i.e., spillover effects, that benefit society at large, since an educated population contributes to increased productivity in the economy), it can be deemed to be a public good. A private good by definition is characterized by benefits that accrue to the individual alone. The characteristics of education as an economic "good" reveal that at any one time, it is both a public _and_ a private good due to the fuzzy nature of the distribution of benefits. Hence, education can be viewed as a "quasi-public good." Historically, the private sector was responsible for financing and providing educational services. During the course of the 20th century, however, the role of the state (public sector) assumed predominance for purposes of nation-building and instilling national identity.

Towards the end of the 20 Century, governments are facing numerous constraints in financing and providing educational services:

- (1) Inefficient systems prevail in countries where there is low efficiency in resource allocation. The scenario varies by country. For example, there is great variation in government spending and efficiency levels in sub-Saharan African countries (Mingat and Suchaut 1998). In countries where the requirement is six years of compulsory education, Mingat and Suchaut (1998) find that public expenditure on education as a percentage of Gross Domestic Product (GDP) varies from as low as 2 percent in Uganda to more than 7 percent in Cote d'Ivoire.

- (2) Population growth has been significant in many countries, and globalization is promoting migration. Excess demand and demand from special groups such as ethnic minorities and other disadvantaged people, is increasingly challenging the ability of governments to meet differentiated educational requirements.

- (3) Expansion of public schooling to meet excess demand has imposed considerable strain on government coffers. The cost of keeping and expanding public education systems has become a major issue. Tuition subsidies continue to take up a good portion of public

1
spending and governments are increasingly resorting to cost recovery measures to meet recurrent expenditures, and to meet shrinking budgets.

- (4) Misallocation of public spending within the public sector domain has resulted in skewed school expansion with inappropriate types of schooling for children from certain backgrounds, leaving out significant proportions of the population - girls, indigenous peoples, tribal groups, disadvantaged minorities, the poor, children with learning disabilities, children with physiological and psychological problems, and homeless children. If skewed expansion is not corrected, equity of access to educational services will become an even larger issue for govermnents to handle. This implies improving efficiency of resource allocation.

- _(5)_ In many countries misallocation of public spending is also responsible for inappropriate and over-subsidized tertiary education at the expense of basic education.

- (6) The principle of "bearing the burden for education" is directly related to government policies of taxation. In poorer countries where the tax base and tax rates are low, regressive taxation poses problems for governments to generate sufficient tax revenue to fund public education. Under such circumstances, governments seek alternative sources of funding, including funding from donors and private providers of education to supplement public funding of public education.

Excess demand for education can be accommodated in one of three ways: (a) within the context of the public sector, by moving from input oriented, centralized approach to output oriented, decentralized approach; by focusing on the internal market for education within the public sector by reapportioning the inputs mix and by improving efficiency; (b) by focusing on the external market for education i.e., by encouraging private financing and provision of educational services depending on the level of education - initial or terminal/higher education levels; and (c) by focusing on a public-private mix, again depending on the level of education. This paper highlights approaches (b) and (c).

The central purpose of this paper is to provide evidence on two fronts: (I) that across countries, the role of private sector in financing and providing educational services varies by 2
level of education; and (2) that the World Bank's rationales for private sector development in education are multiple. The paper sets forth some of the key rationales. The main thrust is to delineate not only that mixed education systems prevail in the Bank's client countries, but also to explain that Bank lending essentially responds to country contexts in absorbing excess demand through access beyond that offered by the public sector. In trying to explain variance in privatization in education around the world, as well as the Bank's rationales, the paper attempts to tie the multiplicity of rationales to the multiplicity of factors that give rise to private sector growth in education. The term "privatization" is used not in the sense of selling off assets of public educational institutions to private owners, but more broadly to indicate a dynamic progression in the financing and provision (management and ownership) of education in general, and by level of education in particular.

The paper is divided into seven sections. Section II traces the market for education, substantiated with a review of literature with the purpose of tracing the growing role of the private sector in education. Section III includes a discussion of government's role in the marketplace. Section IV reviews World Bank lending for education during the period 1995-97. Section V summarizes the findings from the country case studies, and describes the approaches of World Bank lending for private sector development in education. Section VI provides a brief overview of the future role of the World Bank Group in education. The paper concludes with a note on the implications of the findings for the World Bank's strategy in education. The annex following the main text summarizes the country case studies.

# **II. Market for education**

The debate on who should pay for schooling, who should support public and private education, and what share of the total cost should be borne by taxpayers rather than by direct beneficiaries is an ongoing one (Cohn and Geske 1990). Riddell (1993) observed that the debate on alternative forms of educational finance is heavily biased in favor of decentralized and private alternatives, almost as if the norm were public, centralized educational systems, although these are the exception rather than the rule. Cummings and Riddell (1992) found that as early as 1975, 3
of a total 127 countries for which data were available, only 22 countries (17 percent) were found to have had no private schools at the primary and secondary levels, and only 15 countries (12 percent) had neither private schools nor any decentralized funding below the national level.

_Supply-side factors._ The market response to situations where government provided services do not meet the needs of the people is the demand for and supply of private services. A narrow definition of "private sector" being for-profit institutions and a broader definition encompassing combinations of financing, ownership and management by the entire gamut of forprofit commercial, not-for-profit, religious, charitable institutions, NGOs and communities all constituting non-public institutions. A caution with reference to the last point is that the definition of the "private" sector is not clear-cut in situations where private schools are heavily funded and regulated by the State (James 1993). For example, if one were to consider charter schools it would be important to distinguish between private financing and provision, maybe even ownership and management aspects in defining the private sector in education.

Bray (1996) provides examples of countries where private financing in a publicly provided system is common. Private financing is defined as households' direct cost of schooling. For example, private financing in China takes the forms of cost recovery which include student fees, cost of textbooks, public security, education funds, office expenses, desk and chair fee, fee for students who are not locals, teaching materials, health checkup, fee for taking care of students' bicycle in schools (parking facilities), tutoring fee, and funds for teacher retirement. In Thailand household direct costs of primary schooling as of 1987 included school bags, shoes, sportswear and contributions in-kind.

In Chile, historically, public funding of private schools preceded the military junta and even the Marxist government that preceded it (1970-73). As part of reforming its education system, in 1980 the Chilean Ministry of Education began providing capitation grants - fixed payments per student enrolled - to both public and private schools. Because the per-student payment was based on the average cost of education in the public sector, public school expenditures per student were 70 percent less than in the private sector. Private schools eagerly 4
vied for students because of the government supported capitation grants which essentially reduced expenditures per-student. By 1986 primary enrollment in private schools had more than doubled, from 14 to 29 percent of total enrollment, and enrollment in private secondary schools had increased almost fourfold. Worthy private-public policies are not all of recent origin and have not necessarily come from a new wave of market-oriented regimes.

Issues pertaining to education financing and provision (ownership and management) differ considerably depending on the type of market response. Financing and provision can be vested with the same entity or with different entities. Public/private funding and provision combination varies most fundamentally, by level of education (primary, secondary, tertiary or training), preferences of tax-payers, by country, level of development, time frame under study, type of government or political system, demographic conditions, and the size of the private sector vis-a-vis the public sector.

Today, both developed and developing countries exhibit hybrids (mixed) of public or private financing and/or management in the provision of education. A simple, but useful matrix could be utilized to assess the situation (see Table 1).

Table. **I Public/Private Assessment Matrix**

||**Public financing**|**Private financing**|
|---|---|---|
|**Public provision* **|_Traditional public schools_|_User Fees_|
|**Private provision ***|_National Voucher Schemes,_<br>Chile and**the**Netherlands<br>_Charter Schools, USA_<br>_Education Action Zones,_UK|_Home Schooling_<br>_Pure private schools_|

*** provision encompasses ownership and management**

Examples of mixed systems dominated by the state sector include countries of South Asia (including India), Africa and Western Europe (Tilak 1991). Tilak (1991) suggests that these systems can be aptly described as "parallel public and private sectors." His research shows that in some welfare states such as the Netherlands and Belgium, both coexist under state funding. Tilak (1991) draws from Geiger's research (1987) that in systems where the private sector has a 5
very limited role, as in Sweden, the United Kingdom, France, Spain and Thailand, an apt description would be the presence of a "peripheral private sector." _Demand-side factors._ Major determninants of choice between public and private education include a host of variables. Some of the variables are: price, income, wealth, heterogeneity of populations specifically with regard to religion, population density, parental education, location, perception of quality, levels of direct and indirect costs, size of urban or rural area, and other sociological factors such as preference, peer group effects, gender mix in schools (mixed versus all boys or all girls institutions), availability of facilities such as separate lavatories for boys and girls, midday meals being offered, and existence of multi-grade shifts.

Demand for private education services can be viewed as a response to situations where public or government education services are not adequate or of the kind that people would like. In some developing countries, high poverty and low-quality public education force parents to choose between sending their children to school or not at all. In environments where social stratification is the basis of civil society, due to caste and class structures, parental decision to send their children to school is one dimension, the intra-sectoral choice within public and private realms, is another. Choice of public versus private schools may be irrelevant because there are never more than a few schools in a village. Characteristics which generally determine the educational preferences of the poor include the opportunity cost of sending children to school when family size is large, with few adult members who work to support the entire family. Consequently, children have to work most of the day to supplement the income of adult members.

Demand is influenced by other factors, such as the definition of traditional roles of boys and girls within society. In several ethnic groups, parents' decisions are skewed in favor of sending boys rather than girls to school. Female children upon reaching marriageable age are reasoned to be leaving and not contributing directly to the continued welfare of the family and hence do not warrant the same education level as male children. In middle-class families school 6
choice is based on social status, parental commitment to equip and empower their children with what they consider is appropriate values and knowledge to function in a competitive social or labor market environment.

_Excess Demand and Differentiated Demand._ Several hypotheses have been tested to explain the phenomenon of increasing enrollments in private versus publicly provided education. James (1993) observed that the large percentage of enrollments in privately provided education at the secondary level in developing countries is due to limited public spending, which creates an "excess demand" from people who would otherwise prefer to use public schools but are unable to find a place. James (1995) further argued that low public spending on secondary education is modeled as a collective decision which is strongly influenced by a coalition of high income, high tax families and low income families who have opted for. quantity over quality of children in developing countries. The "excess demand" explanation according to James (1995) helps to resolve a seeming anomaly as to why the private sector has grown relatively large in some developing countries where, paradoxically, the public sector is considered superior, and vice versa. To assert, therefore, that private education replaces public education is incorrect.

James (1993) reasons that differential preferences about quality could also lead to the development of private schools. In particular, a low quality public system may stimulate the growth of a high quality private sector thereby meeting the demand of those willing and able to pay the price. If educational quality is assumed to have a high income elasticity of demand, and if the public sector provides a quality level that just satisfies the median family, greater income diversity within the population implies greater dissatisfaction among upper income people who will seek superior education in the private market. James (1993) cites two examples of such phenomenon: Brazil and the Philippines, where at the secondary level 25 percent and 38 percent of enrollments, respectively, are in private schools that are considered to be better than public secondary schools. But if greater income diversity means that upper income groups also control the govermment, they may use this power to choose a public system that is high in quality, low in quantity, and rationed to them. In that case, James (1993) argues, a large excess demand may develop as at the higher education level in Brazil and the Philippines.

7
Private markets function effectively if they provide the pattern of goods and services that consumers prefer, given their levels of income. Private education thrives in a market environment where competition, efficiency and profits are guiding factors. The production of education is considered to be efficient if there is no opportunity in the economy by which more or better education could be produced to make everyone better off. If the efficiency and effectiveness properties do not hold, markets do not function effectively. An important mechanism for promoting efficiency is to increase the scope of competition in providing education. Mechanisms such as demand-side financing (money follows students) are being designed to promote choice in education for reasons of equity in access. Vouchers are increasingly cited as a possible mechanism for this purpose. Students are given vouchers funded by public tax dollars but redeemable at any school, private or public. Parents have the liberty to choose the school their children will attend. This in turn is expected to induce schools to compete for students. For country examples of voucher schemes, see Patrinos and Ariasingam (1997).

_Willingness to pay._ The other aspect which is important to note is that people are willing to pay for the desired service and cost recovery through fees as a feasible financing method. Empirical evidence from 1990 and 1992 household surveys data indicate a remarkable willingness of households in Bolivia to pay for private education for their children (Psacharopoulos, Arieira and Mattson 1997) (Box 1). Other examples include the Philippines, Colombia, Brazil and Tanzania.

Box. **1. Bolivia: Private Education in a Poor Country** Bolivia is among the poorest developing countries in South America, with a GNP per capita income of US$800 (1995). High illiteracy and repetition rates are some of the pervasive characteristics of the country. Private education is found at all levels of schooling in Bolivia, and comprises approximately 20 percent of school types (78 percent being public and 2 percent, mixed). In Bolivia, mean household expenditure on private education increases dramatically by income decile. On average, approximately 800 bolivianos/year is spent on private education by families who fall in the uppermost income decile, and about 50 bolivianos/year isspend by families in the lowest income decile. Why are parents willing to undertake such investmnents? What are the factors which influence private expenditures? The quality of public educational system is low, generating the high repetition rates. Sending their children to private schools might indicate the social status of families. The size of the family i.e., number of school going children in the family is another determinant. In Bolivia, it has been observed that: (i) households with more children spend less per student on private schooling; (ii) Migrant **s** pend less than non8
migrants; and (iii) per student education expenditure<sup>varies widely according to the city of residence and the head</sup> of household's occupation. Cities with higher public<sup>school repetition rates have a higher incidence of private</sup> school enrollments.

_Source:_ Psacharopoulos, Ariera and Mattson 1997 Findings of a study jointly commissioned<sup>by the World Bank and UNICEF, and</sup> conducted by Bray (1996), revealed<sup>that poor households in nine East Asian countries</sup> (Cambodia, China, Indonesia, Lao People's<sup>Democratic Republic, Mongolia, Myanmar, the</sup> Philippines, Thailand and Vietnam) already<sup>contribute a significant share of the total cost of</sup> public education. In these countries,<sup>household expenditure on education forms a significant</sup> share of household income. Given high<sup>inequality and inequity in income distribution, the</sup> poorest households' burden is much greater<sup>than that borne by the wealthiest households.</sup> Findings of the 1996 World Bank-UNICEF study<sup>also revealed that in some of the South-East</sup> Asian countries mentioned above, household<sup>contributions to education are greater than</sup> government contributions. In China, for<sup>example, where over 70 percent of the population</sup> resides in rural areas and where wages are about<sup>half of those in urban areas, parents and village</sup> communities have financed primary education<sup>through cash and/or in-kind contributions for</sup> both teachers' salaries and construction of school<sup>buildings. In some countries, awareness of</sup> such demands on household income discourages<sup>parents from enrolling their children in school.</sup> Governments and donors have been accused<sup>of showing little awareness of the magnitude of the</sup> burden to households.

All this goes to show that there is a growing<sup>market for education which is characterized</sup> by numerous factors pertaining to excess<sup>demand, differentiated demand, and consumer</sup> willingness to pay for educational services. A<sup>comparative analysis of five developing countries</sup> - Colombia, the Dominican Republic, the<sup>Philippines, Tanzania and Thailand (Jimenez and</sup> Lockheed 1995) - revealed that (1) although<sup>students in private schools came from more</sup> privileged families than those in public<sup>schools, on average, there was a significant overlap</sup> between the two groups; (2) with student<sup>background and selection bias held constant, students</sup> in private schools out-performed students in public<sup>schools on a variety of achievement tests; (3)</sup> unit costs of private schools were lower than<sup>those of public schools; and (4) private schools</sup> 9
were organized for greater school-level decision making and emphasis on enhancing student achievement. This the authors concluded seemed to affect the mix of inputs that private versus public schools choose. They observe two policy implications: (1) that over-restrictive regulations on private schools, including outright prohibition in some countries, may be suppressing an efficient way to provide education; and (2) that in some cases governments could encourage greater private sector participation in education, but that the relative efficiency of private schools is highly dependent on the institutional regime and structure of incentives under which they operate.

# **III. Government's Role in the Marketplace**

Governments are not limited to direct financing and provision of public education alone. They can also finance and regulate private financing and provision of educational services. The role of governments is to put in place the "ground rules establishing a framework in which private enterprise can operate effectively and in a manner responsive to the needs of society" (Clausen 1985).

Of late, not only within the private sector, but also within the government sector, school authorities are increasingly expected to operate with market principles in mind (Mok 1997, drawing on research from Lingard, Knight and Porter 1993; Bray 1996). Depending on the nature of the market failure, governments step in to improve matters by adopting appropriate remedies which may take the form of regulation, taxation, or subsidized production by private contractors at public expense (Roth 1987). It is noteworthy that the changing nature of the state is promoting a more transparent and accountable public sector in keeping with the notion of "new public management" - managerialism, the aim in simple terms being more effective control of work practices - and marketization, referring to the development of market mechanisms and adoption of market criteria within the public sector (Mok 1997). Mok (1997) points out that even in China such changes can be traced back to the mid-eighties, when the Communist Party began to diversify educational services, allowing and encouraging the establishment of schools 10
run by the non-state sector. Mok (1997) notes that in recent years private education has been undergoing a rapid development, particularly in China's big cities. He observes that reductions in state regulation, provision and subsidy in education have already indicated that China's recent educational development marks a move towards privatization and quasi-marketization.

Mok (1997) draws from the definition of privatization that Le Grand and Robinson (1985) and Johnson (1990) delineate, that privatization is closely associated with reduction in state activities, especially reduction in state provision, state subsidy and regulation, and is concerned with the transfer of responsibility for the production of goods and services from the state to the non-state sector (that is, the market, the family, the informal sector and individuals). In short, in pursuing the objectives of enhancing effectiveness, economy and efficiency in the delivery of public services, Mok (1997) observes that market criteria such as profit, affordability, fee-charging and self-supporting, accountability, customer choice and effective management are increasingly being adopted as operational principles in rationing or distributing social services. Mok (1997) points out that the failure of the public sector lies in the absence of an internal market focus - non-measurement of the product and incentives, and to adjust the practices and the mix of inputs. Reform focus could be from outside the public sector, through competition or from inside the public sector. The objective is to make the public sector more efficient to allow private funding and provision of education.

Private financing can be considered as a strong supplement to public financing. Private financing can be utilized either to fund private institutions or to supplement income of publicly fimded institutions. Private institutions are typically financed through fees. Some countries prohibit private schools and universities, while others regulate them excessively. Such restrictions crowd out private spending on education that would otherwise have been possible, and increase pressure on publicly funded institutions.

Against this background, what has been the role of the World Bank in fostering private sector development through its lending for projects? How has the Bank promoted public-private partnerships in education?

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# IV. **World Bank Lending for Private Sector Development in Education**

According to data from the World Bank's review, _Priorities and Strategies in Education_ (World Bank 1995b), the Bank was at the time of publication, the largest single source of external assistance for education in developing countries, accounting for about a quarter of all external support. In the span of 30 years from the first project in 1963 through 1994, about $19.2 billion worth (over 500 projects in more than 100 countries) was lent to developing countries to finance education projects. Both in absolute and relative terms there was significant expansion in lending for education between 1963-95. Bank lending for education increased from an average of US$914 million in 1988-89 to US$1.9 billion in 1995-96, a nominal increase of 108 percent (Bennell and Furlong 1997). Increase in lending has not been uniform in all regions. Bennell and Furlong (1997) report that in sub-Saharan Africa, for instance, Bank lending for education declined markedly from about US$400 million annually in 1992 and 1993 to a third of this level by 1996, representing barely 5 percent of total Bank lending in the region and less than 10 percent of total Bank lending for education.

In the span of the three years (1995-97) the Bank has provided about $4.9 billion to assist education reform efforts in its client countries. Overall Bank lending for education dropped from US$2.1 billion in fiscal year 1995 to US$1.0 billion in fiscal year 1997. This indicates a 51.5 percent decline in total lending. The trend varies from a sub-sectoral perspective: levels of lending are increasing for pre-primary and higher education; the scenario appears to be more or less constant for secondary general lending; lending for primary education declined from 38 percent in 1995 to 26 percent in 1997. The drop in lending could be attributed to better targeting.

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During the three-year period 1995-97, the Bank's lending for education amounted to US$4.9 billion for a total of 70 projects. Components in 11 out of the 70 projects (for a total of US$484.2 million), best illustrate the Bank's work on private sector development in education in recent years. The 11 case studies are designed to address the same objectives as the majority of the 59 projects during the 1995-97 period. The difference is that the 59 projects dealt with access/coverage, equity, and capacity building issues in the public sector, while components in the 11 examples focused on providing equal opportunities for the private sector as well. The 11 examples represent neither successes nor failures since the projects have been analyzed at the earliest stages of the project cycle: the design and preparation stages. Finally, the findings do not relate to impact of Bank support for private education.

The 11 examples reveal answers to two questions: (1) In justifying World Bank support for private and public education, what have been the rationales for Bank lending in education (sectoral/sub-sectoral) in some of the client countries? (2) In countries where private sector presence exists alongside publicly financed and provided education, how has the Bank encouraged the private sector to thrive? Project Staff Appraisal Reports (SARs) and Project Appraisal Documents (PADs) constitute the basic information sources, along with interviews with task team leaders who were responsible for leading project design and preparation. In some cases (Mauritania, Indonesia, Comoros), the environment within which the Bank projects were developed has necessitated detailed explanation of the sectoral context. Analysis of the 11 case studies provides glimpses into the Bank's rationales for supporting private sector development in education. The rationales are multiple and reveal emerging trends in Bank lending. The project examples are not presented as the proven best policies but rather as illustrative approaches, among others, for the particular circumstances confronted by the Bank. Table 2 provides a sumrnary.

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# Table. 2 Private Sector Development in World Bank Education Projects (1995-97)

||**Types of assi**|**stance**||
|---|---|---|---|
|**Country & Year**|**Institutional development**|**Alternate funding**<br>**mechanisms**|**Level**|
|Dominican Republic<br>1995|Strengthening public entity to better<br>manage and assist private providers of<br>education. Opportunities for training<br>private sector school teachers.||Primary and secondary<br>Education|
|Maldives<br>1995||Fellowship program for pfivate<br>sector teacher development on<br>cost recovery basis|Primary and Secondary<br>education|
|Chile<br>1995|Strengthening sector managerial capacity<br>to improve internal & external efficiency,<br>quality and equity of municipal &<br>government subsidized private secondary<br>schools|<br>|Secondary technical and<br>vocational education|
|Mauritania<br>1995|Modifying legal framework to facilitate<br>private sector expansion<br>Expanding training opportunities for<br>private school teachers||All levels except higher<br>education|
|Argentina<br>1995|<br>Self evaluation of public and private<br>sector universities|Competition for funding through<br>permanent instrument FOMEC|Higher education|
|Senegal<br>1996|Strengthening capacity of non-<br>govemment sector to deliver effective<br>programs; capacity of public sector to<br>monitor, evaluate and coordinate sectoral<br>investments||Adult education|
|Burkina Faso<br>1996||Matching public-private grant<br>scheme for additional private<br>school classrooms|Lower secondary<br>education|
|Mali<br>1996|Assisting private sector employers to<br>develop human resource plans;<br>Private sector participation in<br>negotiations to move informal training<br>into formal training|Vocational Training Skills Fund<br>(VTSF) for skills upgrading to<br>bring informal into formal sector.<br>Govemment tax for sustaining<br>project benefits|Vocational and technical<br>training|
|Indonesia<br>1996|<br>Competitive principles to encourage<br>private-public institutions;<br>TA to assist govemment in articulating<br>competitive & decentralized strategy for<br>assisting graduate research||Higher education|
|El Salvador<br>1997|<br>Quality improvement in teacher training<br>and curriculum programs for private<br>schools.|Public funding of scholarship<br>program as opposed to student<br>loans (high cost of administration<br>and low collection rates) for<br>private sector.<br>Private banks to transfer funds to<br>students.|Secondary education|
|Comoros<br>1997||Vocational Training Fund (VTF)<br>for private sector participation;<br>Contract training program: sub-<br>projects by public & private<br>institutions through competition<br>for VTF resources based on pre-<br>defined qualifications and<br>selection criteria. Partial cost<br>recovery from beneficiaries.|Vocational and technical<br>training|

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# V. **Findings**

Emerging trends for private sector development in education do not vary widely from the Bank's overall strategy for education lending: promoting access with equity, focusing on efficiency in resource allocation, promoting quality and supporting capacity building. The Bank's emerging trends for private sector development in education emphasize increasing private sector access to public funding and capacity-building - especially teacher training for primary and secondary, and overall institutional capacity building at tertiary and vocational levels. The projects are designed to respond to excess demand for opportunities, to improve the quality of privately provided educational services, and indirectly to provide vital, additional resources. Private sector entities are required to participate in financing training and resource mobilization mechanisms on a sliding scale basis to sustain project benefits in the long run. The underlying principle being that strengthening the private sector's role over time at the non-compulsory levels of education will release public resources to be utilized at the compulsory primary level.

The 11 country examples reveal that the Bank's interest in private sector development is fundamentally in capacity-oriented privatization to address excess demand for education. The case studies reveal that:

- Many of the Bank's client countries have existing, explicit policies toward promoting public and private education alike. In many instances, the role of privately financed and provided education is significant. Under the circumstances, any form of external support must take into consideration the value added by both the public and private sectors, individually as well as complements.

- There is a move to utilize public funding for private sector improvements, as shown in the country case studies. Governments have borrowed to provide opportunities to the private sector to access financing, and to take advantage of opportunities for training and capacity building at compulsory and non-compulsory levels of education.

- The existence of mixed public-private education systems is more predominant at the secondary, vocational and tertiary levels of education (i.e., non-compulsory level).

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- Private institutions are predominantly located in urban and peri-urban areas.

- The definition of the "private sector" in many of the country case studies is unclear. For example, no distinction is made between for-profit, not-for-profit and religious institutions. Moreover, parents' out-of-pocket expenses are also included in the definition of the "private sector."

- The Bank's support in monetary and technical assistance terms is relatively small. The support has been extended for input-oriented quality improvements for private education, with a large portion being for capacity building, accreditation and teacher training. A major portion of Bank funding, however, is still being utilized for access and quality improvements to public education.

- . The Bank is supporting alternative funding strategies for private sector access to education - scholarship and fellowship programs. In many instances competitive processes have been put in place to foster quality improvements.

- Bank assistance focuses on policy-based investment for capacity-oriented privatization, a similar approach to that being utilized for public education.

Bank support for private sector development in education has predominantly addressed institutional development and alternative funding mechanisms with the underlying principles of:

- I1. Demand absorption through improved access and equity to private sector for public funding

- Equity in all municipal and government-subsidized private secondary schools (Chile)

- Pilot program to initiate public support for private schools assisting low-income populations (Dominican Republic)

- Policy-based investment for selection of best teaching candidates from either public or private sector with a focus (80 percent earmnarked for lower cost regional training institutions). The objective is to increase opportunity for private sector teachers to take advantage of public sector training teacher training fellowships. The mechanism is, however, not based on a voucher system but on appropriate eligibility criteria (Maldives)

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- Public support for policy reform and<sup>investment to promote private sector provision</sup> of education, specifically to increase access<sup>to schooling (Mauritania)</sup>

- Public support for promotion of non-governmental<sup>literacy programs (Senegal)</sup>

- Public incentives to promote expansion<sup>of private sector schools (Burkina Faso)</sup>

- Public support for enrollment expansion<sup>in both public and private secondary schools</sup> (El Salvador)

2. Quality improvements in private and public education

- . Strengthening sectoral managerial capacity<sup>to better manage and assist private</sup> providers of education (Dominican Republic,<sup>Chile); capacity to develop human</sup> resource plans (Mali); articulating competitive<sup>and decentralized strategy for assisting</sup> in graduate research (Indonesia); developing<sup>apprenticeship training certification</sup> criteria (Mali)

- Expanding opportunities for teacher training<sup>(Mauritania, Mali, El Salvador)</sup>

- Self evaluation of public and private sector universities<sup>(Argentina)</sup>

# 3. Alternative funding mechanisms and competitive<sup>processes</sup>

- Fellowship programs for private sector<sup>teacher development (Maldives); matching</sup> grant scheme for additional private school classrooms<sup>(Burkina Faso); skills training</sup> funds (Mali, Comoros)

- . Competitive processes for funding (Maldives,<sup>Argentina)</sup>

The case studies reveal that: (a) in the context<sup>of country-specific project design, there is</sup> growing need to carry out comprehensive<sup>assessments (at the macro or country level, as well as</sup> at the micro level) about the respective roles<sup>of public and private education; (b) in those</sup> instances where the role of the private sector<sup>is analyzed, there is an absence of a country-</sup> specific definition of the "private sector"<sup>in education. Often the private sector is a term utilized</sup> to encompass the entire gamut of private<sup>participation: out-of-pocket expenses of households,</sup> for-profit, non-profit (religious or otherwise)<sup>sectors; and (d) within those projects that support</sup> 17
public and private education, lumpy investments are the norn - it is difficult to clearly distinguish as to how much investment is being channeled for supporting private sector development in education.

Addressing excess demand for education is a primary concern for all governments and donors. The responses to excess demand depend on the level of education under review: primary/initial, secondary, tertiary/terminal or vocational (for a succinct discussion, see Mingat and Suchaut 1998:215). The change agents lie in two domains: either within the realm of the public sector, or through a mix of public-private financing and provision of educational services. Within the domain of the public sector, some countries use input-oriented, centralized systems. Here, addressing excess demand could mean moving to output-oriented, decentralized systems such that more options for additional resource mobilization, such as private funds (from firms and industry), are tapped. Alternatively, the problem could be tackled with a public-private mix, where the market for private services assumes a portion of the burden and the internal market within the public system assumes another portion. Here the input mix and efficiency aspects would be oriented in such a manner that the public and private sectors complement, and do not substitute, one another.

Further investigation into project progress needs to be carried out within the next year or two to assess the progress of project implementation. The country examples help to demonstrate that the role of the private sector in education is emerging as a large force that governments, donors and other technical assistance agencies cannot ignore.

# VI. **The Future Role of the World Bank Group in Education**

The Bank Group has taken note of the emerging global trends, and is now exploring several options to collaborate with the private sector.

- _World Bank and IFC partnership in education:_ As early as May 1996, the International Finance Corporation (IFC) - the private sector lending arm of the World Bank Group - has

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been involved in lending for private education. New opportunities are arising for IFC to help expand access to education. By expanding resources available to education and by promoting private participation in the sector, the Beaconhouse project will help to reduce the financial burden on the Government of Pakistan. It is expected that the development of quality private education through the Beaconhouse project will, through competition, lead to improve standards and efficiency in both public and private schools. The project will also promote education of girls. Forty percent of Beaconhouse students are girls and women account for 70 percent of all staff and occupy most of the key positions.

In 1997, the IFC financed the expansion of one of Nairobi's leading moderately priced private educational institutions, the Makini School. Middle-class Kenyan parents' disappointment with the quality of public education have created a booming market for such schools, which currently have a combined enrollment of 20,000 students in Nairobi. But with local banks generally unable to lend at maturities beyond three or four years, few can afford to expand, given the long gestation period of most education projects. IFC is helping fill this void by providing a long-term loan to Makini, a profitable and well-run nursery and primary school that will add secondary grades and establish another school to meet strong demand from parents. The resulting quality education will increase employment opportunities for the students, serve as a model for other such ventures, and create 126 jobs for teachers and administrative staff (IFC 1997).

As of May 1999, IFC investment in education numbered 11 projects for a total amount of US$100 million of which IFC financing is US$44 million. IFC applies the following broad criteria to assess the viability of education project proposals: (a) the _Business Case_ to determine whether there is a market for education in the country, level of competition, management structure, type of private education activity (for profit), aspects relating to government control of private education; (b) the _Education Case_ to determine project effectiveness, student achievements, innovation in education, and levels of skilled staff; (c) The _Social Case_ to determine the extension of educational opportunities to the local community, outreach aspects, financial aid from different sources; and (d) the _Economic_ 19
_Case_ to identify potential for enhancing human capital and cost effectiveness of project proposals. While the Bank has education policy and public investment expertise, IFC has private sector investment expertise. Continued information exchange between the Bank and IFC, even joint missions under appropriate circumstances would provide opportunities for clearly targeted policies and investments in client countries within the public and private sectors.

- In 1997-98, IFC sponsored a global study on potential investment opportunities in

- education. The study highlights the importance of the World Bank Group's role in assisting governments to create enabling environments through appropriate regulatory framework for the private sector to function in an unfettered manner alongside the public sector in order to enhance the educational and developmental viability of education projects (Tooley 1999:126). More recently, in November-December 1999, in an effort to bring together private sector investors in education, the IFC and the Bank jointly sponsored a conference on Investment Opportunities for Private Education in Africa was held in Abidjan, Cote d'lvoire. _An explicit strategy for private sector development in education:_ The World Bank's 1999 Education Sector Strategy Paper (ESSP) sets out some priorities in the context of changing international trends. More specifically, the Bank's strategy would be to encourage investment in education. ESSP clearly recognizes that it is part of many governments' strategy to expand education supply - especially of secondary and tertiary places and technical and vocational training - by encouraging investment by not-for-profit groups and entrepreneurs (World Bank 1999:x). The World Bank is working in several West African countries (targeting especially Senegal, the Gambia, CBte d'Ivoire and Mauritania), surveying the market for education and helping governments create an enabling framework for private sector development in education (World Bank 1999:35).

- _Facilitating information exchange:_ In February 1999, the World Bank Group (World Bank, IFC and the Multilateral Investment Guarantee Agency - MIGA) created an education investment information facility called Edinvest _[http://www.worldbank orgledinvest!l._

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Edinvest is a forum for bringing together individuals, corporations, and other institutions interested in education and the future of developing countries. As a service of the World Bank Group, Edinvest will provide information for making private investment in education possible on a global scale.

_Educational materials and the private sector:_ The role of the private sector in educational teaching and learning materials should also be emphasized. Huge amounts of funds in the form of aid (loans or grants) are being channeled to support the ultimate objective of putting educational books in the hands of end users. The role of the publishing industry is crucial in this activity. In September 1998, the Bank invited stakeholders (representatives from publishing houses and publishing associations in both developed and developing countries, as well as donor representatives with a strong interest in developing publishing capacities in developing countries) from different parts of the world to share their experiences. The objectives were to: (i) better understand the stakeholders associated with educational books, (ii) delve into the issue of whether current processes are effective, and (iii) acquire an understanding about the education book industry. For papers and discussion on the proceedings of the conference, see Sosale 1999.

The World Bank is currently reviewing its lending policy for textbooks, and will recast procurement procedures applicable for textbooks. The World Bank textbook policy note will emphasize the responsibility of the private sector and promote competitive processes for the development, production and delivery of textbooks and reading materials as characteristics for sustainable book provision. Efforts will be directed toward breaking up monopolies in textbook development, production and delivery. Meaningful partnerships between local and foreign companies, particularly in the area of electronic publishing will be emphasized. The Bank seeks to act as catalyst in promoting local, private publishing industry to thrive while continuing to respect the role of the government.

# **VII. Conclusion**

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Absorbing demand is the main type of private sector activity that is of greatest interest to the World Bank. It is crucial to access, coverage and equity (the focus of the Bank's strategy for education lending) for it tends to involve poorer families, usually much poorer than those who take advantage of other forms of private education. This does not imply that other forms of privatization such as supporting educational institutions of excellence based on international reputation are bad or unimportant. The Bank is largely indifferent to those when compared to the need to accommodate excess demand for educational services particularly at lower levels of education, declining public resources and increased household interest in paying for quality education. The Bank's interest is also in capacity-oriented privatization. This has implications for its policies in lending for education.

The Bank's unique position in leveraging financial and advisory resources, together with its ability to provide a risk cushion that attracts other multilateral and bilateral donors to lend for education, combine to vest with the Bank: (1) responsibility for the impartial analysis of economic and financial changes in the course of development; and (2) opportunity to spearhead appropriate changes to support changing priorities of client countries, and therefore responsibility to devise creative mechanisms jointly with client governments and other partner agencies to ensure that public resources are optimally utilized in line with changing priorities. In short, the Bank's role now and into the 21st century is to act as facilitator and catalyst for policy direction and analysis, and by far the most important, for exploring new directions in development with the assistance of partner agencies.

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