Involving the private sector in school education

In comments to a previous post, both Tsquared and Vivek, raised interesting points on involving the private sector in school education, which I thought are worthy of more discussion and so I've moved the discussion to a new post.

Tsquared and Vivek raised the following points:
- There will be transmission/distribution losses and poor efficiency as well compared to the private sector, if the goverment is to invest in education directly.
- Channeling government funds into education through the private sector (through tax-credits, vouchers and other mechanisms) can help in overcoming the T&D losses as well as in increasing operational efficiency.
- Primary education must be available free (or at very very nominal cost) for everyone to benefit, especially the poor.

Vivek raised a relevant question on why private companies would want to invest large sums of money in education (apart from gaining from the tax credits they would get for doing so), especially if the schools were non-profit schools. I think we need to clarify what we mean by non-profit here (and in general). Non-profit organisations are mostly not (and should not be) organisations with no means of raising revenue except through large grants from the government or donor agencies. Any organisation subsisting purely on such grants, will be in trouble if the grants dry up - and they almost always will at some time. The Non-profits must find a way to generate some recurring income in return for services it offers, to cover most of the operational costs at the least (see this recent report on Action Aid's fund-raising strategy - Action Aid are offering tangible value in return for your and my money, though they're still terming it as "Donor Benefits" for marketing reasons). Non-profit doesn't mean non-profit-making, but only non-profit-distributing. The Non-profit must aim to make profits, only the profits can't go out of the non-profit entity as dividends or any other means to the trustees or any other individuals or organisations involved in running the Non-profit.

So if the government was to tell any private sector company that if it set up a trust to run schools (and got some tax credits just for setting up the school) and if the school makes profits, then the company that set up the trust and runs the school is eligible for more tax credits based on the profits, with the profits used to set up more such schools. Incentive for profit can thus be built in. When we say private sector company, it need not be just a company in the legal sense - the same tax credits (in the form of grants from the government) could as well also be offered to Panchayats that decide to invest in setting up a local school and operate it profitably.

Now the challenge is to address the issue of how a school can make "profits" if it is not to actually charge fees (or only charge very nominal fees) from its customers (the students/parents). I think we must look at alternative models whereby the school creates value for some other set of customers who will pay for that value, by leveraging the non-paying customers(students/parents). To provide an analogy, when we watch a free-to-air television channel, we as the viewers pay nothing to the broadcaster. The broadcaster leverages us (the audience) to deliver value to advertisers who pay the broadcasters for aggregating the audience they want to communicate to. Let me emphasise that I'm not for one moment saying advertisers paying the school for aggregating an audience of children is the model for schools - the above analogy is just to show how there are working models with one set of non-paying customers who demand quality and in return help create another set of paying customers.

I have been thinking about such models for a few years now and have described one possible model in the context of undergraduate education in a previous post where a college can generate additional revenues by leveraging its students.