IFC – Major investment in private higher education

Reflecting the extraordinary growth of private education worldwide, the International Finance Corporation (IFC) has built an investment portfolio of US$400 million involving 69 projects in 33 countries, many of them in higher education.

“Like it or not, the private sector will increasingly be part of the solution in offering skills to young people all over the world,” said Guy Ellena, the IFC’s Istanbul-based regional director of manufacturing, agribusiness and services for Europe, the Middle East and North Africa.

“We really believe there is a major role for the private sector to complement public education,” he told University World News.

Next month in Dubai, the IFC, part of the Washington DC-based World Bank Group, will hold its fifth private education conference, “Making Global Connections”. Private education providers worldwide will discuss issues such as the global skills gap and possible responses, the role of equity in private education, building and maintaining quality and supporting graduate employment. University World News is the media partner to the conference.

Previously, the conference has been a closed event to IFC clients and held in Washington DC. This time, reflecting the growing global reach of the IFC’s involvement in private education and a wish to broaden the international exchange of experience and ideas, the gathering is in Dubai. It will be invitation-only on the first day but open on the second.

Background

Traditionally, education and health were seen as solidly public mandates. But by the mid-1990s it had become clear that “this was not fitting reality on the ground. In both health and education, to varying degrees, there was significant private sector-led activity,” said Ellena.

The private sector-focused IFC became interested and made its first investment in education in a private high school in Pakistan. There were also small programmes in Africa at the high school level. “These were the very first steps, and they were pretty unstructured,” he recalled.

By the end of the 1990s the focus had turned to Latin America, where the private sector was increasingly active in education and there was a clear demand for the long-term financing that the IFC could provide. Ellena moved from the World Bank to the IFC to work in the private health and education sectors in Latin America and the Caribbean.

“In all humility, I can say I’m the grandfather of IFC’s involvement in the education sector.”

From 1998 to 2000 there were a number of transactions in Latin America, most involving church-related not-for-profit private universities in Argentina and Brazil. There were also successful transactions in Peru and Mexico.

In April 2000 the IFC’s management decided to expand its work in education. Ellena’s small group was upgraded and grew to around eight professionals working in health and education with a global scope.

“The first step was to develop a strategy that clarified what we were trying to do. We argued that there was a major shortage of financing in developing countries where the private sector was playing an important role in supporting the public sector in education,” Ellena recalled.

“Also, there was a growing middle-class interested in a different type of education that was more labour market-oriented than what was on offer at public institutions.”

The strategy articulated the different areas in which the IFC had a role to play, within the overarching goals of supporting expanded access to affordable private education in developing and emerging countries, improving quality and efficiency, strengthening the employability of graduates and complementing the public education sector.

In Latin America, the public sector was strongly invested in school education so the IFC focused on higher education and professional training. Private education was starting to expand in Asia too, and the IFC’s first investment there was in a private university in Vietnam. There was also a focus on Sub-Saharan Africa.

During the next decade the IFC’s involvement in education grew rapidly and its strategy was refined. The group was upgraded to a fully fledged department based in Washington, now led by Elena Sterlin, global manager of consumer and social services.

Today, the IFC is the world’s largest multilateral investor in the private education sector in emerging markets. Its projects have reached 1.5 million students and employ 16,000 people. The total cost of these projects is US$1.5 billion.

“About five years ago there was a major step-up in private higher education as it started to become more affordable, with Brazil leading the way,” Sterlin told University World News.

Affordable education was consolidated or set up through networks, often close to where people live, and the IFC has been investing in and supporting institutions targeting mass education, mostly in Latin America and Asia.

“That was a major change for us. Seventy percent of IFC’s portfolio is now invested in higher education institutions that provide access to affordable education for more people.”

In parallel, the IFC has set up mechanisms with banks to finance smaller institutions. “We get local banks interested in financing smaller institutions with our support, especially in Africa. We’ve done a lot of work training banks [in] how to do this.”

A development focus

As part of the World Bank Group, the IFC’s mandate is development-oriented and it has increasingly been supporting local and foreign investors to develop the middle-income and in some cases lower-income segments of the education market.

“We’ve had to demonstrate that in being involved in private education – especially higher education – we bring additional resources to the sector,” said Ellena. “Put differently, it would be difficult to support a select private university in Brazil catering to the well-off.”

The role and approach of the private sector in education vary across regions.

For a long time it was assumed that private education could only succeed at the top end of the market. But in a reversal of that assumption, investors came to realise that profit can be linked to size and the capacity to deliver quality progammes at low cost.

“There are hundreds of thousands of students finishing school who are looking for skills but cannot afford US$15,000 a year,” Ellena explained. “Investors are developing models that start from what people can afford and look at how to provide quality education for, say, US$2,000 a year by involving hundreds of thousands of students.”

Companies in Brazil and Mexico especially are modifying delivery and streamlining costs by, for instance, not investing in sports facilities or luxurious classrooms, but concentrating instead on what provides students with skills that can sell on the market.

In Eastern Europe, Russia and the Balkans, the private sector plays a significant role but does not fit the IFC’s mandate as student populations are declining and public institutions have begun charging student fees and providing better quality services. “There is very little room for significant green field investment from the private sector,” said Ellena.

A major factor for growth has been an amenable regulatory environment that governments have created in Latin American countries. A condition for IFC investment is a stable regulatory environment allowing the private sector to function transparently and successfully.

Turkey has a young and growing population but its private education laws are geared to non-profits. This is true in other countries as well, and it makes it harder for the IFC to engage.

“The government [in Turkey] is looking at reforms along the lines of Brazil, where institutions can be not-for-profit or can elect to have a shareholding type of structure with all the legal and regulatory processes. We believe that will open the sector to private investors.”

Graduate unemployment

Around the world, graduate unemployment has become a problem, including in some parts of Europe and in fast-growing emerging nations such as India and Turkey.

The most dramatic problem is in the Middle East and North Africa, where the mismatch between the skills of graduates, job market needs and youth unemployment has been one of the reasons behind the political upheaval of the past year.

A few years ago, the IFC started developing an action plan for youth joblessness in the Arab world, which has the world’s highest youth unemployment rate, at around 25%. “This was before the turmoil, so we were seen as holding a crystal ball,” Ellena recalled.

The IFC launched its major e4e initiative in April last year, in partnership with the Islamic Development Bank, focused on post-secondary education and aimed at increasing the supply of work-ready students through improving access and affordability of quality education.

Student finance

Most of the IFC’s work in post-secondary education has been on the supply side, but more recently it has entered the demand side of student finance. It does not provide individual student loans, but supports banks, specialised institutions and sometimes the university itself, to provide loans.

In developed countries, student loans are guaranteed by public institutions. Most developing countries don’t have that and banks have been reluctant to get into student loans because of the risks and long period between loan and payback.

One way of easing the risk has been to forge triangular relationships between the IFC, a local bank and an education institution that is large and can offer students a framework of support.

For instance, one successful programme in Chile involves a large private institution that has high demand for its courses and is very confident of its business model and the employability of its graduates. It agreed to take the first 10% of losses, and the remaining 90% of risk is shared between the bank and IFC. On this basis, local banks agreed to get involved.

“We have about 12 projects that are trying to tackle the access issue from the demand side, enabling students to afford to go to university,” said Elena Sterlin.

The future

The IFC’s approach going forward will not change dramatically, although there are trends around which it is seeing what it can do.

One is technology-related and involves publishers moving from print to electronic curriculum materials and entering emerging markets. “We want to explore the area of electronic content provision as we believe this has the potential to be a game-changer in education,” Sterlin said.

A second area is around electronic devices, such as tablets, and seeing how they can help to overcome problems such as access and lack of qualified teachers in remote areas. A third trend is Western institutions entering emerging markets. “We’re holding judgment on how serious this is. Currently there are not many niche players.”

These trends will be debated at the “Making Global Connections” conference from 6-7 March. Companies such as Laureate International Universities, which has 55 institutions in 27 countries, and publisher Pearson, will be among the participants.

“They’re coming to show us what they are doing and what they are thinking about. We’re not looking for the best in class, but want to discover what’s out there,” said Sterlin, adding that it is part of the IFC’s role to facilitate global exchange of ideas and best practice in private education.