cfi-bm-1999-investing in private education in developing countries

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mnvestingnaclucationinDEVELOPINGCOUNTRIES

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International Finance Corporation


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Investing inPrivate Educationin Developing Countries


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Investing inPrivate Educationin Developing Countries

INTERNATIONAL INANCECORPORATIONWashington,D.C.1999


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The text in this volume is based on Education: IFC's En-try Strategy,RevisedPaper, submitted to the IFC BoardofDirectors on September 23, 1999, document number IFC/SecM99-38/1. The paper was revised to take into accountcomments receivedduring a June 30, 1999, discussion bythe World Bank Group's Committee on Development Ef-fectiveness.

Copyright 0 1999International Finance Corporation2121 PennsylvaniaAvenue, N.W.Washington, D.C. 20433, USA

The International Finance Corporation, part of the WorldBank Group, fosters economic growth in the developingworld by financing private sector investments, mobilizingcapital in the international financial markets, and provid-ing technicalassistance nd advice o governments nd busi-nesses.Our mission s to promoteprivate sector nvestment n devel-opingcountries,which will reducepovertynd improvepeopleslives.


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'AlI agree hat the singlemostimportantkey todevelopment nd topovertyalleviations education.

James D. WolfensohnPresident, World Bank Group

A Proposal for a Comprehensive Development Framework


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ContentsForeword, Peter Woicke ix

1 The World Bank Group Framework 12 IFC's Entry Strategy 33 Investment Criteria 74 IFC Roles in Education Investment 95 IFC Partnerships 116 Family Education Finance 137 Support Services to ImproveEducational Quality 158 Recently Approved IFCEducation Investments 179 Preparing Proposals for New

Education Investments 21

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ForewordIt s widely known that the World Bank has been providingfunds and adviceto public education throughout the de-velopingworld. What is lessknown is that the World BankGroup'sInternationalFinanceCorporation,which financesonlyprivate institutions and private enterprise,has begun to supportprivate education, if only to a small extent so far.

I recentlyinaugurated the new wing of an elementaryschoolin Africa receivingsupport from IFC. I was deeplymoved bythe quality of this school and by the enthusiasmof the manag-ers, the teachers, and the children.The experience helped merealize the developmentvalue that private education can pro-vide to a country.Over the past few years, various owners and operators ofprivate schools,colleges, and universities have asked whether

IFC could support investment n private education in develop-ing countries.As a result, we came up with a strategyfor enter-ing thissector, which has beenendorsed by our Boardof Direc-tors. This volume grew out of that strategypaper.We have come to see what an important complement pri-

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FOREWORD

vate education is to public education especially n developingcountries, which face so many public resource constraints andother challenges.We have also recognizedhow much innova-tion is going on in private education. I have become firmlyconvinced that IFC must do more in this sector. This book laysout our approach and attempts to answersome of the questionsof those readers who are surprised to find IFC entering the ex-citing field of education. We have also provided some practicalguidelines.

PETER WOICKEExecutiveVice President, IFCManagingDirector,WorldBank,With responsibilityorprivate sector evelopment

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1The World Bank GroupFrameworkF r more than 35 years, the World Bank has been pro-viding governments of developing countries with fi-nancial and technical upport for educationalgrowth andimprovement. The World Bank'sEducation Sector Strategyof1999 describes a rapidly changing world, where the desire toimprove access is matched by the need to improve quality andefficiency n educational delivery. t observes hat the growingunderstanding of the actual and potential roles of private sectorinvolvement in education points up an important opportunityfor the International Finance Corporation. IFC is the privatesector arm of the World Bank Group.

The World Bank strategy identifies some of the principalbenefits that private provision (and IFC financing) can contrib-ute toward a balanced developmentof education today:o Supplement limited governmentalcapacity: Governmentscannot do everything.Fiscalconsiderations.. make it diffi-cult for most governments-even those whose philosophies

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INVESTING IN PRIVATE EDUCATION

might push them in this direction-from being the soleproviderof 'free' education to all who seek it at every evel.There are manyareasof educationserviceprovision . .whereactors other than the governmenttend to be more effectiveand efficient.O Expand educational pportunities:Large private school sys-tems exist n many countries, in some casesextending edu-cationalopportunities to lesswell-off.Private inancing andprovision can expand the number of student places, espe-ciallyat secondary and tertiary levels-so critical for build-ing institutional capacity and absorbing technological ad-vances.O Targetpublicubsidies etter: Subsidies o education arenotalwayswell targeted. The richest householdsgain by far thelargestshareof the subsidies....Private inancingcan .. allowpublic resources to be better targeted to the poor... IFC

financing of secondary and higher education can help fa-cilitate the redirectingof government subsidies o the poor,where they belong. The more that better-off families payfor education (as they do when they choose private educa-tion), the more the governmentcan use its resources or thepoor.* Increase fficiency nd innovation: Privatefinancing can bemore efficientthan the public sector when quality is main-tained at a lower unit cost, and increase the potential forinnovation in education, especially n the presenceof com-petitivepressures.

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2IFC's Entry StrategyT he International Finance Corporation is enteringthe education sector because of the exceptional de-velopmental benefits that education can create and theinnovative, constructive roles that private ownership can playin the sector. IFC's entry provides significantly new instrumentswith which to enhance the Bank Group's capacity to promotegrowth and reduce poverty by investing in human capitalthrough education.

From 1995 through 1997, IFC approved one investmentin private education each year. In 1998, however, IFC's invest-ment activity increased in response to rapid growth in clientdemand, especially in Africa. Thus far all IFC investments in-volve independent private schools or universities. Some of theseare for-profit while others are not-for-profit. IFC is able to lendto not-for-profits as long as they operate in a transparent, busi-nesslike mode and make sufficient regular surpluses to be ableto meet their debt obligations while operating effectively.Table1 presents basic information on all IFC's education investmentsapproved to date. This table conveys some essential facts:

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Table 1: IFC Approved Education Investments as of June 30 1999(US millions)

IFC Financing ProductsApproval Project Project Local OtherLoan

Country Date Project Name GIE Size Finance otal Loan qujity QE PM Guarantee Lender B Loan LendersUganda 7-94 AEF Rainbow G 1.9 0.79 0.79 0.79Pakistan 5-96 Beaconhouse E 18.6 10.60 7.60 7 00 0.60 3Kenya 1-97 AEF Makini E 1.8 0.55 0.55 0.55The Gambia 3-98 SEF NMHS E 0.5 0.24 0.24 0.24 IBCSenegal 5-98 SEF Fanaicha E 0.5 0.25 0.25 0.25 CBAOArgentina 5-98 U. de Belgrano E 49.0 22.00 22.00 22.00Guinea Bissau 6-98 SEF SITEC E 0.8 0.30 0.30 0.30 BIGB .15/ FUNC6te d'voire 6-98 AEF Pitchounes E 0.9 0.37 0.37 0.37 SGBCI 0.185/SGBUzbekistan 6-98 SEF Exe Trng Ctr G 1.1 0.24 0.24 0.24Guinea 6-98 SEF Hamdallaye E 0.2 0.10 0.10 0.10 BICIGArgentina 1-99 Di Tella University E 25.0 9.00 9.00 9.00Total 100.3 44.44 41.40 39.30 0.24 0 0.60 1.26 3Subtotal for AEFISEF 7.7 2.84 2.84 1.34 0.24 0 0.00 1.26 0Subtotal for mainstream 92.6 41.60 38.60 38.00 0.00 0 0.60 0.00 3Note: Investments are listed chronologically by management approval date given in BMS.

a. Where IFC provides a guarantee, disbursement is done by a local bank in local currency.Key: Local Lenders:AEF = African Enterprise Fund BICIG = Banque Internationale pour le Commerce et 'Industrie de GuineaSEF = Small Enterprise Fund SGBCI = Societe Generale de Banques en C6te d'lvoireG/E = Greenfield or expansion FUNDEI = Fundacao Guineense para o Desenvolvimento Empresarial IndustrialQE = Quasi-equity BIGB E anco Internacional da Guine BissauRM Risk Management Facility CBAO = Compagnie Bancaire de l'Afrique de l'Ouest

IBC - International Bank for Commerce


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IFC'S STRATEGY

* IFC has just begun its entry into this new sector with 11approvals as of June 30, 1999.o As of June 30, 1999, $15.8 million has been committed(for six projects) and $3.6 million disbursed (for fourprojects).* Sevenof the first 11 approvalswere for projects in very lowincome countries in Sub-SaharanAfrica.* IFC's investment windows for small-scale nterprises wereused frequently since many of the earliest IFC educationinvestments have been small.o Additional financialresourcesare being mobilized hroughB-loans,guarantees, and parallel financing.o The actual portfolio is still young and small.

StrategyBecause ts education portfolio is so small and immature, IFCcurrently lacks the knowledge base on which to build a com-plete education sector investment strategy. Even though IFChas been urged to decide on preferentialsubsectors n the edu-cation industry, the Corporation has deliberatelychosen not tomake such choicessince neither IFC nor anyoneelse possesseseither the experience, knowledge, or wisdom to choose well.Therefore, IFC's education entry strategy is to acquire criticalsector knowledge by learning lessons from actual experience.Specifically,he strategyfocuses on three tasks:* to learn rapidly which private investments do and do not

work in this sector* to identify the main risks* to learn how to mitigate them.This strategy requires IFC to increase the pace and range ofnew education investments and to intensify their supervision,monitoring, and evaluation.As its experiencebuilds, IFC willactivelydisseminate its findings, particularly o those in the in-

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INVESTING IN PRIVATEEDUCATION

vestment community who hesitate to enter this frontier sectorin developingcountries.In support of this learning approach, IFC has sponsoredaglobal study of investmentopportunities in private education

in developing countries and studies on student finance mar-kets. Other selected studies will be sponsored as appropriate.The globalstudy has been published as The GlobalEducationIndustry:Lessonsrom PrivateEducation n DevelopingCountries,by James N. Tooley (Institute of Economic Affairs,London,1999). It distilled lessons from 12 developing country profilesand 18 private institution casestudies.

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3Investment CriteriaW hat are IFC's criteriafor investing n education?During this current phase IFC could support an edu-cation investment that can make a business, educa-tion, social, and economic case.

The Business CaseThe investment is profitable; it operates with bottom line dis-cipline and is therefore self-sustaining. The projected internalrate of return of IFC education investments approved to dateaverages 18 percent, based on a range of 11 percent to 28 per-cent. Recent experience of education companies in developedcountries likewise demonstrates the industry's profitability, withincreasing numbers of such companies entering major stock mar-kets to raise capital. The project entity can compete successfullyin its product and factor markets. It identifies major risks andhow they are to be managed. It fulfills normal IFC standardsfor financial management and controls, including generally ac-cepted accounting practices and external audits.

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The EducationCaseThe investment improves educational effectivenessand effi-ciency. It emphasizes innovation, skilled management, moti-vated and skilled staff, parental satisfaction, and improved per-formance on standardized tests. It can demonstrate successesfor emulation by other schools in the community and reach outto help them.

The Social CaseThe investment extends educational opportunities. It attemptsto reach families from many income groups through variousmeans, such as tuition discounting, student financial aid, andoutreach programs or by piloting and then rolling out scal-able distribution models over large populations. Depending onpublic policy response, it may displace misused public educa-tion subsidies that are currently consumed largely by higher-income groups that can afford to pay for schooling. For ex-ample, a recent $9 million IFC investment in a university woulddisplace an estimated $51 million in public higher educationsubsidies over a 30-year period if the government shifts thesesubsidies to primary and secondary education. Increased subsi-dies to primary and secondary education can benefit the poor,who generally can ill afford the opportunity cost of participat-ing in higher education.

The Economic CaseThe investment contributes to economic growth through en-hancing the quality and size of a country's stock of human capi-tal, its key asset. It can create modern facilities and programs atreasonable cost. The investment reduces the government's fiscaldeficit by providing services for which consumers are willing topay.

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4IFC Roles in EducationInvestmentJC plays everal mportant rolesby supportingeducation and

training investments n developingcountries.Pioneer Role

Financial nstitutions in developing ountries raditionally voidinvesting in education with the view that it is either a state, acharitable, or a loss-makingsector. IFC is the first major insti-tution to (1) enter this new industry in the emerging marketsand (2) introduce privateeducation entrepreneurs n emergingmarkets to the practiceof raising capital from financial institu-tions by preparingviable business plans.RiskMitigationRole

IFC helps project sponsors dentify,understand, reduce, or oth-erwisemanage isks particular o education investments hroughits appraisaland supervision unctions.9


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Social and FiscalRolesIn many countries,publicexpenditureson education have fallenin real terms in the past decade and half Restricted supply re-sults in servicing primarily the upper end of the market. Byincreasing upply,IFC investmentshelp to move the educationmarket downmarket. They also promote social equity andreduce fiscalwaste by displacingmisallocatedpublic subsidies,particularly n higher education, which disproportionatelyben-efit high-income groups that can afford the opportunity costsand pay the fees.This socialrole can be enlargedwhen endow-ment funds are created to finance means-testedscholarshipsatinstitutions supported by IFC.

CatalyticRoleIFC by itseifcould never fill he private education sector fund-ing gap of a country. But as IFC demonstrates he feasibilityofprofitable investment n the education sector, t can encourageother financial nstitutions to becomeactive players ather thanremain on the sidelines.The additional resources hey wouldbring might fill the gaps.

KnowledgeRoleIFC will disseminatelessonsdistilled from its experience o theeducation industry and the investment community. The cata-lytic and knowledge roles could become IFC's most importantavenues for achievingdevelopment impact.

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5IFC PartnershipsT he International Finance Corporation'spartnership

with the World Bank has been pivotal to its entryinto the education sector. A strong partnership buildson the natural complementarities that the two organizations

can bring to solve problems. As the Bank's education strategypaper states, IFC support for private investment in educationcan complement the Bank's aim of having public monies tar-geted more on helping the poor gain access to quality basic edu-cation. The more private investment enters the education sec-tor, the easier it becomes for governments, with Bank support,to target their subsidies to the poor.

IFC's first education specialist was transferred from the Bankin 1998. Immediately thereafter, IFC created an Education BestPractice Group, which includes Bank as well as IFC staff andmanagers to facilitate the sharing of best practice across the BankGroup. The partnership is also seen in the design of the GlobalStudy and country studies on student loan markets in prepar-ing a series of international conferences and in operating anexternal website.

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INVESTING N PRIVATE DUCATION

At the country levelIFC staff rely heavily on Bank educa-tion reports and strategy papers and work with Bank staff toincreaseBank Group synergies.Bank and IFC staff have joinedeachother'smissions,and Bankstaff forwardprivate investmentplans theyreceive o IFC for consideration. FC staffassistBankstaff in advisinggovernmentson creating regulatory environ-ments that foster private nvestment. The goal is to offer a BankGroup menu of complementary public and private investmentoptions and advisoryservices,country by country.

On-line Education nvestment nformationFacilityThe World Bank Group has the capacity o operate acrossboththe public and the private sectors, bringing together govern-ments, investors,and private project sponsors.The Group hascreated a new Internet forum for enhanced privatesector devel-opment in education at http://www.worldbank.org/edinvest.This website provides information to potential investors fromdeveloped countriesinterested in pursuing investment oppor-tunities in developingcountries. Project sponsorsand potentialinvestorsare able to provide online information about their or-ganizations, investment objectives, nd highlights of proposedprojects.

Regional private education investment conferences areplanned in various regions. These conferenceswill be used tocreate or expand networksand disseminatemarket informationand best practices.The first regional conference akes place inlate 1999 in West Africa, where most of IFC's initial educationinvestmentsare located and where severalWorld Bank-financedprojectspromote private sector development in education. Theconference will be cosponsored by the African DevelopmentBank.

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6Family Education FinanceP rivate schools, universities,or training institutions that

typically rely on fees for virtually all revenues dependon the willingness of families to pay those fees in cash,

placing pressure on the incomes or assets of low- and middle-income parents. Interhousehold transfers and subsidies by gov-ernments or charities can provide support in such cases. Some-times private foundations or donors endow scholarship funds,and many private schools practice tuition discounting, wherebysuccessful low-income applicants receive scholarship support fi-nanced from the school income derived from charging higher-income parents the full sticker price. These supports, how-ever, are frequently insufficient.

In such situations market-based financial institutions canhelp fill the parents' education funding gap. They can do so bycreating contractual education savings or annuity programs andby lending to the parents or guardians of students, thereby avoid-ing the risks involved in lending to students who lack collateral,a credit history, and immediate cash flow.

As part of its broad objective of improving the functioning

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of capital and credit markets, IFC has a potentially importantrole to play in developing parent-of-student finance markets. Ithas supported surveys of such markets in India, Mexico, Egypt,Lebanon, and the Philippines, which provide examples of inno-vative solutions. IFC seeks opportunities to disseminate knowl-edge of these solutions and to help financial and higher educa-tional institutions address this funding gap, through lines ofcredit, guarantees, or other risk-management instruments. Inaddition, IFC will explore how to help educational institutionsadopt best practices in capitalizing endowment funds for financ-ing scholarships on a permanent basis to further expand accessby academically qualified students from very low-income fami-lies.

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7Support Servicesto Improve EducationalQuality

Shools and universities depend on an array of sup-porting goods and services. These include textbooks,teacher training, testing, examinations,certification, ac-creditation, and specialized nstructional equipment. The digi-tal revolution is producing new goods and services, includingeducationaland schoolmanagementsoftware nd Internet-basedor satellite-transmitteddistance nstruction. These diverse er-vices are often produced and distributed by private enterprisesand sometimeshave significant earningpotential from exports.In some countries, however,such servicescontinue to be pro-vided by less-than-adequate tate-ownedenterprises.IFC couldprovide advisory services or restructuring such enterprises. Astudy of investment potential in education goods and services splanned.

IFC has not yet supported a project in this field, but notbecause of lack of interest. When a suitable project presents it-15


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self, IFC will pursue it. By financing projects in this area, IFCcan boost the environment for public schoolsas well, for thesecompanies provide developingcountries with textbooks, otherteaching materials,and various servicesneeded by both publicand private school systems.

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8Recently Approved IFCEducation Investments

West AfricaSven of IFC's first 11 educationinvestments are in Afri-can countries, and five of those seven were approved in1998. All five are in low-income West African countriesand were financed by either IFC's Small Enterprise Fund (SEF)or its Africa Enterprise Fund (AEF). In each case IFC is provid-ing a guarantee to a local bank that is making a local currencyloan to the project sponsor. The IFC guarantee produces im-portant benefits to the sponsor: (1) it eliminates the foreignexchange risk that would be created through a hard currencyloan when the revenue stream generated by the investment isentirely in local currency; and (2) it reduces the otherwise pre-vailing commercial interest rate on the local currency loan sinceIFC's guarantee covers the lender's default risk. The project spon-sor pays an annual guarantee fee to IFC calculated on the dis-bursed and outstanding principal of the local currency loan.These school investments represent the first time most of thelocal banks are taking exposures in the education sector. It is

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hoped that they will continue to lend to schools n the futureindependent of whether IFC provides upport, thus mobilizingadditional long-term resourcesfor the education sector.The most common project model was the creation of a sec-

ondary schoolon a revenue platform derivedfrom an ongoingprimary school, which also supplies ready-made clientele forthe new investment. The five West African investments are asfollows:Ndow Middle and High School.The owner of Ndow Middleand High School n Kanafing, he Gambia,Mrs. Harriet Ndow,was a schoolteacherand headmistress or 30 yearsbefore retire-ment, when she created the Ndow Schools Group, beginningwith a nursery and primary school.The Ndow Group was ableto obtain a loan from a local bank, the International Bank forCommerce, through the support of an IFC guarantee (SEF) oconstruct and equip additional facilities equired to double en-rollments to 1,200 boys and girls at the school.GroupeScolaireFanaicha.Mme. Coumba Toure, formerly n-spector of nursery schoolsbefore her early retirement from theNational Ministry of Education, is the owner of the GroupeScolaireFanaicha n Dakar, Senegal.Today she is increasing heenrollment capacityof the Groupe from 500 to 900 students,mostly in the secondary school grades, through the support ofan IFC guarantee (SEF) for a local currency loan from a localbank, Compagnie Bancaire de l'Afrique de l'Ouest.Groupe Scolaire Hamdallaye. In Conakry, Guinea, Mr.Abdoulaye Wann, an accountant at the local electricitycom-pany and owner of the Groupe ScolaireHamdallaye, has ob-tained an IFC guarantee (SEF) to enable Hamdallaye to bor-row local currency funds from Banque Internationale pour le18


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RECENT INVESTMENTS

Commerce et l'Industrie de Guinee to build a new secondaryschool.This investment enableshim to respond o the demandsof the parents of his primaryschool pupils who wish to sendtheir children on to secondaryschool.College Prive LesPitchounes. n Abidjan, Cote d'Ivoire, theowners of L'Ecole Primaire Les Pitchounes, Mr. Assane Sarrand Mr. SekouDiarra, are constructingfacilities or the CollegePrive LesPitchounes, through the support of an IFC guaran-tee (AEF) or a localcurrency oan fromthe SocieteGenerale deBanques en Cote d'Ivoire. SGBCI is also providing an addi-tional loan amount not coveredby the IFC guarantee.Whereasthe standard method for teaching science subjects in C6ted'Ivoire's public schools is through theory and drill, LesPitchouneswill be equippedwith thescience acilities nd equip-ment to teach sciencesubjects through experimental methods.Being the first such school in the country not targeted exclu-sivelyat high-income families,Les Pitchounes will be in a posi-tion to demonstrate the feasibilityof introducing modern edu-cation methods to the Ivoirian education system at large.

A booklet entitled Four Case Studies of IFC EducationInvestments n West Africa, published by the Centre for Brit-ish Teachers(CfBT), describes ome of IFC's early nvestments.Latin America

IFC has approved investments in two private universities inArgentina.The UniversityTorcuato Di Tella (UTDT) was cre-ated as a nonprofit foundation in 1991. UTDT is embarkingon an ambitious expansion plan that will increase its total en-rollment from 884 students in 1998 to over 1,900 students by2005. To accommodate this increase, IFC is helping financethe university's xpansion into a 20,000 square meter buildinglocated in the Nufiez neighborhood of BuenosAires.The $25

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million project will alleviate UTDT's current shortage of spaceand improve its quality of education and services, helping itmeet the demands of an increasingly competitive market forhigher education. By inducing students from middle- andhigher-income families to attend UTDT, rather than attend freepublic universities, it is estimated that IFC's investment inUTDT would displace an estimated $51 million in public highereducation subsidies over a 30-year period if the government shiftsthese subsidies from universities to primary and secondary edu-cation where they can benefit the poor. One million of IFC's $9million loan will support the creation of a parent-of-studentloan scheme aimed at attracting qualified applicants from fami-lies that cannot afford UTDT's tuition on a cash basis.

Universidad de Belgrano (UB) is one of Argentina's oldestand largest private universities. Since its establishment in 1964,UB has operated as a nonprofit foundation. The university hasmore than 10,000 students and offers a wide variety of under-graduate, graduate, and technical degrees, and its facilities arespread throughout Buenos Aires. The project includes a $6 mil-lion refinancing of debt, a $2 million student loan financingprogram, and a $41 million expansion and modernizationproject consisting of the construction and furnishing of a new28,000 square meter building that will alleviate the university'scurrent shortage of space. The project will also improve UB'squality of education and services, helping it to meet the de-mands of an increasingly competitive market for higher educa-tion.

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9Preparing Proposalsfor New EducationInvestments

There is no standard application orm for obtainingIFC financing. A company or entrepreneur, for-eign or domestic, seeking to establisha new venture orexpand an existingenterprise in a member developingcountrycan approach IFC directly.This can be done by reading he IFCinvestment guidelines, requesting a meeting, and submittingpreliminary project or corporate information to the appropri-ate IFC department or the closest IFC field office. A conve-nient source of information is the IFC website, http://www.ifc.org/products.After these initial contacts and a preliminary review, FCwill request a detailed feasibility tudy or businessplan to deter-mine whether to appraise the project. As a rule, the enterprisesthat IFC finances must be majority private sector owned andcontrolled. Like other private sector investorsand commercial

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lenders, IFC requires repayment of principal plus interest orprofitable returns, prices its financeand services n line with themarket, and shares full project risks with its partners. Eventhough IFC does not take any government guarantees for itsfinancing, IFC's work often requires close cooperation withgovernmentagencies n developingcountries.

IFC Productsand ServicesIFC offers three broad and complementary services. FC's tra-ditional and largestactivity sprojectfinance. sing ts own funds,IFC provides both loan and equity finance to private sectorprojects that meet IFC's appraisalcriteria.The Corporation alsooffersguarantees,quasi-equity,and financial risk managementproducts. It is important to point out that, although IFC lendson market erms, IFC doesnot competewith, but rather comple-ments, private capital.

Another major activity s that of resource obilization. FCraisesadditional funds from foreign commercialbanks throughits syndicated loan participation program. It helps individualcorporationsfrom emergingmarkets ap the international capi-tal markets. IFC also raises funds from institutional investorsthrough underwriting arrangements or public offeringsor theprivate placement of shares, debentures, and other corporatesecurities.IFC's third and increasingly xpanding activity s providingcountry, industry, financial, and technical advisory ervicesomember country governments and to private sector corpora-tions.

BeneficialRoleIFC's status as an independent international organization-which understands and works comfortably with both the pri-22


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PROPOSALSFOR EDUCATION INVESTMENT

vatesectorand host countrygovernments-makes t an attrac-tive partner for foreignand local nvestors nd gives hem anaddedmeasure f confidence.FC hasplayed he roleof honestbroker n helping ompanies nd sponsorsnegotiatewith hostgovernments.n addition, he Corporation's ositionas a neu-tral partner reassuresoreign nvestors nd host countries.Be-cause IFC's role is to enhancenationaldevelopment, overn-ments trust IFC, and companies now hat IFC understandsprivatesectorneeds.Foreignnvestors eekIFC'sparticipationbecause f the Corporation's xtensive ands-onknowledge fhow to do business n developing ountriesand its excellentrelationships ith developingountrygovernments.Since FC actsas a catalyst nd induces ther financiers ndinvestorso participate,ts presences considered eneficialo aproject,roma political swellas atechnical nd financial tand-point.Because f ts extensiveroject inancing xperience,FChas a largenetwork f company ontactsanda special bility omatch sponsors nd partnerswith investors.

Educationnvestment roposalsSponsors eeking FC consideration hould provide FC withthe followingnformation n their educationproject.The cat-egories re organized rimarily or financing nvestments ndmanaging isksof schools, olleges, niversities, r training n-stitutions, he most common ype of investment hus far forIFC in this sector.Therefore, hey willhave to be adapted nvaryingdegrees or use in other typesof educationor trainingprojects, uch as student inancing gencies,extbookpublish-ers, testingagencies, nd on-the-job raining. Educationaln-stitutions hat are nonprofitwillneed o demonstrate capacityto operate in a businesslikemanner and to maintain regular surpluses o qualify or supporton IFC'smarket-basederms.

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1. Brief Description of Project2. Historical Background

a. Founders and current sponsors. Briefly dentify anddescribethe person(s) or entity(ies)who or which havemade the major contributions or at risk equity invest-ments in the institution.b. Brief history of the organization.c. Role, position, and contribution in education system.

3. Legal and Regulatory Environmenta. Presentlegalstructure; significant ecent changes, if any.b. Licenses,permits, accreditation,and trade registrationsheld.c. The institution's property rights, for example, easehold,

freehold,sale and lease back, squatter's rights.d. Partnerships-national or international.e. The regulatorycontext-including regulation ofcurriculum, eacher qualifications,health and safety,andenvironmental factors.f: Relevant tax regulations.g. Financial reporting regulations.h. For existing entities,copies of annual financialstatements and external audit reports for latestyears are required as part of IFC's appraisalprocess.4. Financial Structure

a. Present capital structure, including ratio of debt toequity,and any legal constraints.b. Access o credit sources for operations and capital(comparisonswith other industries).c. Routine revenue sources-student fees, other parental24


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contributions, local or nationalgovernment subsidies,school bursaries,charities, state or private loans, stateor privatevouchers.Are there any foreign exchangerevenues?d. Other sourcesof finance-property rents, endowments,sale of noneducational services,donations, etc.e. Capital costs.f. Recurrent costs, ncluding teacher salaries, extbooks.g. Price: Pricing strategies.Position in the market.h. Use of intra-institutional cross-subsidies mongprograms or cost centers.i. Proportions of costs spent on teachersand technology.j. Profits and surpluses;how allocated.k. Foreign exchangerisk and exposure:How much andhow will they be managed?1. Liability and hazard insurance.5. Student Costs, Fees,and Finance

a. Overall capital cost per student place.b. Overalloperating cost per student place.c. Annual student fees (including taxes) that are chargedto parents: broken down by fee category.d. Ratio of tuition fees to indicators of local wealth, forexample,GNP per capita to gauge their affordability.e. Availability nd scaleof scholarships,vouchers,etc., andtheir award criteria.f. Student and familyaccess o loans to cover theirfunding gaps.g. Socioeconomic omposition of student body,benchmarked to other major institutions.

6. EducationalEfficacy-Inputs, Efficiency, nd Outputsa. Describe the curriculum followed.

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b. Overall per student space accommodationin square meters.c. Asset-to-sales atio (asset-turnover atio).d. Staff development programs.e. Use of information technologyand innovative eachingmethods, including distance learning.f. Outcomes and goals: Describe the hierarchy of educa-tional outcomes that the institution strives o produce,including skills,character,and other types for whichthere is appreciablemarket demand.g. Student success-comparisons with benchmark publicand private institutions in educational value-added.h. Describe the concluding or external examinations thatthe final-yearstudents take and their influence onstudent and teacher incentives.i. Labor market outcomes: Occupational destinations ofgraduates; ob search time.

7. Marketsa. Ability to compete in factor markets, for example,recruiting quality staff.b. Ability to compete in product markets: Indicators ofdemand, for example, ratio of applications to entryplaces.c. Profileof target market segmentand rationale or choice.d. Assessmentof competitors, including the state sector.e. Effectsof institution on state sector and vice versa.f. Validity, ationallyand internationally, f certificates nddiplomas issued.

8. Marketing and Socialand Community Outreacha. Marketing strategiesand channels.

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b. Socialoutreach, including charitableactivities,enhancing brand image in the local community andmarket.c. Curricula-targeting or market niches (appropriateness,assessmentof impacton different socioeconomicgroups).9. Investment Requirements, Project Cost, Financing, andReturn

a. Ten-year nrollmentprojections,detailedby grade,class,or leveland major program.b. Ten-yearpro forma financialprojections:Profit and lossstatement, balance sheet, cash flowstatement.c. Internal rate of return.d. Description of project by main component.e. Estimate of total project cost, broken down into land,construction, installed equipment, and workingcapital, indicating foreign exchangecomponent.f. Proposed financial structure of venture, indicatingexpected sourcesand terms of equity and debtfinancing.g. Type of IFC support-loan, equity,guarantee, or riskmanagement facility, ncluding amounts.

10. Collateral and Securitizationa. For debt financing, what immovableassetscan beofferred as collateralor security?b. What portion of tuition revenues, f any, can be pledgedas collateral,or securitized and sold for cash?

11. Management Issuesa. Leadership nd managementexperience f principal and27


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administrators.b. Management structureof school or university,balancingbusiness and financial management,accountingand academicmanagementskills.12. Timetable for Project Preparation and Completion

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The GlobalEducation ndustry:Lessons rom PrivateEducation n Developing Countries

James N. TooleyChanges in private education now underway in the developing worldcould have a dramatic impact on the lives of millions worldwide.Drawing on examples rom Argentina, Brazil,Colombia, India, Indo-nesia,Peru, Romania, Russia,South Africa,Zimbabwe,and other coun-tries, the author givesa snapshot of private education that may surprisemany readers: contrary to expectations, the private education sector islarge n the countries studied, it is innovative,and it is not the exclusivedomain of the wealthy. ProfessorTooley challenges he conventionalwisdom that private education in developing countries fosters greatersocial and economic inequality; he points out that such education of-ten provides creative social responsibilityprograms, subsidizedplaces,and student loan programs.The author identifies he factors that impede or facilitate the develop-ment of the private education sector in various countries, focusing inparticular on the regulatoryregime hat may impinge upon private edu-cation.Finally,he considers the ways in which the existenceof an innovativeprivate education sector could influence education policy as practicedby international agencies nd national governments.He concludeswitha modest proposal for how for-profiteducation enterprisescould playan important role in promoting equitable development.James N. Tooley is professor of education policy at the UniversityofNewcastle,Newcastleupon Tyne, United Kingdom. Copublished withthe Institute of Economic Affairs. SBN 0-255-36475-X.

The volume s availableat the WorldBank Infoshop, elephone,1-800-645-7247; ax, 1-703-661-1501; or e-mail,[email protected].


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Investment Opportunities in Private Educationin Developing Countries

In June 1999, the International Finance Corporation sponsoreda conference, Investment Opportunities in Private Education inDeveloping Countries,in Washington, D.C.Some 150 private education investors and providers, mostly fromdeveloping countries, met with IFC and World Bank staff toconsider the potential for private education investment and IFC'srole in providing capital for new ventures.Specific topics for discussion were:O the role of private education in developing countriese criteria for assessing investments in private schools anduniversities* financial structuring of private school projects* opportunities for developing private student financingprograms* investments in distance educatione potential of public/private partnerships in education* related educational investments such as textbooks andtesting.Speakers and moderators at the conference were drawn primarilyfrom educational entrepreneurs in developing countries.

The volume based on the proceedings rom the conferenceis now available at the World Bank Infoshop, telephone,1-800-645-7247; ax, 1-703-661-1501; or e-mail,[email protected].


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nvestng I,jPcaucation

DEVELOPINGCOUNTRIESPrivate education in developing countriesis an important complement to publiceducation. The International FinanceCorporation, which finances only privateinstitutions and private enterprise, hasrecently begun to support private educationalinstitutions and suppliers of services nrecognition of the benefits of privateeducation to students and communities.IFC's strategy is to acquire critical knowledge by learning lessons fromactual experience.By analyzingwhich private investments work andwhich do not, the Corporation expects to identify the main risks ofsuch investments and find ways to mitigate them. As IFC increases hepace and range of new education investments, it will actively dissemi-nate its findings, particularly to those in the investment communitywho hesitate to enter this frontier $ector n developing countries.Investing in Private Education in Developing Countriesplaces IFC'swork in private education in the context of its relationship with theWorld Bank, explains ts investment strategy, defines its role ineducation investment, describes specific IFC-supported schools inAfrica and Latin America, and outlines the information necessaryfor sponsors seeking IFC consideration of their projects.

, _ ^ International Finance Corporation2121 Pennsylvania Avenue, N.W

_:114flU Washington, D.C. 20433202-473-7711

Part of the World Bank Group www.ifc.org

cfi-bm-1999-investing in private education in developing countries

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