Pricing PPPs in Education

Presentation by EnP Manuel L. Javier

Coverage of the 30 Minute Talk

The Why, objective and questions to be addressed

Some guide questions on costing and pricing methods

Explanation on the four approaches for workshop 1 on Costing and Pricing related to PPPs in education.

Think about your own institution’s pricing strategies and practices that have worked well.

Why price PPPs in education?

“focus less on programs and more on public value.”

If private sector provision is found to be the more cost effective option, then the public sector may choose to engage in a public-private partnership, sharing in the costs, benefits, and risks of the project with the private sector.

MAIN OBJECTIVE

In response to the request of

the DepED, we are to identify a range

of costs/ subsidies per student, price

ranges and financing for

Senior High School.  Costs are what an institution spends to educate a student, and

prices are what institutions charge students.

GUIDE QUESTIONS

COSTS IN EDUCATIONAL PROGRAMS & SERVICES

School charges varies by type, nature and structure of curriculum, geographic location, etc….

What do these total school/college costs include? Compensation packages, MOOE and overhead costs, facilities operating costs, administrative costs…taxes, inflation, etc?

Can we really compare costs of public and private sector provisions?

Is there a standardized method for estimating these costs?

Questions How do private institutions chose to ‘price’ their

educational services?

Can graduating Grade 10 public school students afford these prices?

What are the costs of operating a high school or a college first year course?

What are the key components of the costs? When making a projection, what are the cost

parameters used? What is considered “fixed” costs? “variable costs”?

“direct costs”? “indirect costs?

Questions

What does it cost to operate a Senior High School ?

Survival mode?

Breakeven?

Adequate with reasonable with ROI?

Its direct and indirect costs component?

10%?

Its fixed and variable costs?

4 APPROACHES TO DETERMINE PRICE

Pricing PPPs in Education: Approaches

“Back-of-the envelope” method

ESC flat grant to selected private schools

Using total school fees (tuition + misc fees) as a proxy for pricing

Cost-based approach: pricing from the bottom up

1. Back-of-the Envelope

Approach

‘BACK OF THE ENVELOP” APPROACH TO ESTIMATING COSTS

BOTE = quick calculations; estimates using approximate numbers, instead of exact numbers

BOTE is a rough estimate… more than a guess but less than an accurate calculation…

Its defining characteristic is the use of simplified assumptions.

‘BACK OF THE ENVELOP” APPROACH TO ESTIMATING COSTS

BOTE = quick calculations; estimates using approximate numbers, instead of exact numbers

Assuming you use your current resources and facilities, what price would you charge per student, per year?

What price would you charge to ensure that your competitor does not get the students (otherwise they will likely go to the other college)?

…BREAKOUT EXERCISE…

2. ESC flat grant to selected private schools

Expanded GASTPE R.A.8545 (amending R.A. 6728)

Current Subsidy:NCR : P 10,000Elsewhere: P 6,500

the annual subsidy per grantee increased

Fixed annual tuition subsidy through four years of high school

In contracting forms of partnerships, the government procures education or education-related services of a defined quantity and quality from private providers at an agreed price for a specific period of time.

21%14%

13%7%

ESC Grantee Public School Student

0

2000

4000

6000

8000

100005343

9048COMPARISON OF COST PER STUDENT

in 2008Am

ount

in P

esos

The ESC Program is a lower cost alternative to direct provision of secondary education by the government.

WB, ESC-Phil Study 2009

BUT, CAN WE BE SURE THAT THE COST PER STUDENT OF PUBLIC AND PRIVATE SCHOOLS ARE COMPARABLE? ARE THE COST STRUCTURE THE SAME?

Co-payment in Proportion to School FeesThe total amount of “copayment” by ESC grantees but does not include other costs incurred by private school students such as the costs of, for example, school uniforms, text-books, class projects, meals, and commuting costs.

wide regional variations in grantee copayment

ESC-participating schools have to make any financial sacrifice, this comes in the form of the delay between the start of classes and the day when DepED finally pays the school its ESC grant allocation.SUPPORT VALUE = VALUE OF GRANT + SCHOOL FEES

ESC GRANTS & SCHOOL FEES

On average, tuition fees in private schools exceed the value of the ESC grant.

In general, ESC grantees pay for school fees in excess of the tuition subsidy.

The average support value of the ESC grant is 0.67

―Support value = value of grant/school fees

• On average, schools receive Php 1.18 Million per year from DepED due to the ESC program

WB Study on ESC Phil 2009

Breakout Guide Questions

• Based on the following:– The current ESC grant– How much DepEd spends if it does it on its own

(remember that is a 2008 number; adjust for inflation)

– Your estimates of providing Grades 11-12 (assume no significant lab investments)

• How much would you charge per student for Grade 11 and Grade 12?

3. Using total school fees (TSF)(tuition + misc fees)

as a proxy for pricing

Factors Affecting Tuition and Other Fees2010 Revised Manual of Regulations

for Private Schools in Private Education

Cost of quality education?Perception? Reputation?Inflation…?Family’s financial capacity?Socio-economic?Politico-legal…?

Tuition Miscellaneous Fees Library Computer Lab Science Lab Registration Guidance Medical and Dental Insurance Testing materials Programs and Activities Testing Fee Reservation Fees Guidance Medical and Dental Insurance Testing materials Programs and Activities Testing Fee Reservation Fees Other Income Printing of Certificates First Communion Graduation Fee Energy fee Developmental Cost Energy Cost

NCR schools charged the highest fees at an average of Php 23,856 per year.

From the point of view of the private schools that participate in the ESC, there are two indicators of per-grantee costs :

(1)a normative cost per student (does not take into account inflation)

(2) the level of tuition and other fees charged (real costs taking into account inflation and other factors)

Tuition and other fees — provide a proxy measure of the per capita costs of private schools.

Setting Price Based on TSF

• Preparation:– Get your current school fees (freshman, AB: tuition and

miscellaneous)– Estimate your range of possible tuition increases for next year– Assume you would likely use your college faculty for 11-12– Assume you won’t have new investments in labs etc.

• Think about how you would price Grades11-12:– Same as Grade 10?– As a premium to Grade 10?– Same as 1Y College?– [HEIs] What price would you charge to “make sure” the public school

students go to your HEI?

• Develop a range of prices based on the scenarios above

4. COST-BASE APPROACH: PRICING FROM THE BOTTOM

UP

The principle in cost-based pricing

• That prices are based on costs plus an add-on profit percentage.

• Costing calculations are based on the marginal costs that an operator would incur if it were to build similar network elements in the current situation.

ISSUES ON COSTING• How to allocate properly fixed costs to programs?• How are the direct costs computed? What are the

component costs to be included?• How do schools and colleges account for overhead

costs (like buildings, depreciation, administration, maintenance, and support services? registrar costs? additional library hour costs?

• How are cross subsidization of products, i.e., programs, other cross-over and transfers accounted for?

Activity-based costing is helpful in allocating the proper overhead costs in higher education environment.

Various CostsDirect Capital Costs Direct Maintenance Costs Direct Operating Costs

•Design costs• Land and other development

costs (lease, purchase, etc)• Raw materials• Payment to external actors

(financial, legal, engineering, etc.)

• Equipment• Payments for procurement

(project development, documentation, etc.)

• Raw materials• Tools/Equipment• Labor (wages/salaries)• Capital • Improvements/upgrade to

facilities or expansions

• Teacher salaries• Other employees (wages,

entitlements, superannuation, insurance, training, annual/sick leave, travel, etc.)

• Insurance• Building services (water,

electricity, furniture, etc.)

Indirect Capital Costs Indirect Operating Costs

• Corporate overheads (running costs)

• Non core IT and equipment employees

• Facilities management• Employees not directly involved

(ex. HR)

• Partial use of plants/equipment• Partial use of administrative

buildings• Depreciation

Sample of Statement of Expenditures

TOTAL EXPENSES

1,945,568.16

1.00

Instructional, Academic and Administrative

1,517,010.89

0.78

Salaries and wages 1,247,550.00 0.82 0.64

Employees Benefits 142,715.69 0.09 0.07

SSS Premium 74,090.20 0.05 0.04

Pag-ibig Premium 14,100.00 0.01 0.01

Philhealth 12,637.50 0.01 0.01

Faculty and staff development 25,917.50 0.02 0.01

Maintenance and school operations

162,507.61

0.08

Depreciation 43,682.94 0.02

Repairs and Maintenance 20,452.75 0.01

Communications 26,752.94 0.01

Light and water 63,571.43 0.03

Janitorial expenses 8,047.55 0.00

General

266,049.66

0.14 School and office supplies 25,291.85 0.01

Transportation 21,334.00 0.01

Taxes and licenses 500.00 0.00

fees and Dues 5,000.00 0.00

Representation and Entertainment 13,891.00 0.01

Miscellaneous 84,784.05 0.04

Others 115,248.76 0.06

NET BALANCE (DEFICIT) 9,676.44

MAJOR EXPENDITURE CATEGORIES

Instruction, Academic and Administrative

Maintenance and School Operations

General

…for every peso

.78

.08

.14

Based on historical financial analysis, you might find the percentage allocation share of each of the program categories: 60% instructional support; 10% academic support; 15% student support; and 15% institutional support. Independent operations are self-liquidating activities.

RECASTING INCOME STATEMENT TO PROGRAM BUDGET

60%

10%

15%

15%

Admission process

Section capacity

Gross demand

Enrolled students

Curricula

Drop out rates

Tuition and government

support

Teaching structure

Educational support

resources & services

Institutional administration

Admin structure

Faculty salary structure

Gross income

Faculty costs

Admin costs

Support invest &

costs

Instit’l admin costs

Faculty size

Teaching

demand

Each set of goals, strategies and actions affect operational and investment costs which can be evaluated in this flow chart. Thus selecting the sustainable and academically acceptable strategies.

ACADEMIC PROGRAMSAcademic variables vs. cost structure

Student population

K+12 CURRICULUM

Changes in each set of goals, strategies and actions in the K+12 reform affect operational and investment costs.

SERVICE STANDARDS UNIT COST PARAMETERS IN 2012 PRICES

Source: MEDIUM TERM SPENDING PLAN FOR BASIC EDUCATION, 2012-2017: ENROLLMENT PROJECTIONS AND COST SIMULATIONS UNDER ALTERNATIVE SCENARIOS by Rosario G. Manasan, 14 April 2012

Pure Public Provision

Public with HEIs Provision

Generally higher in budget requirement except for SY 2018’19

Generally lower in budget requirement except for SY 2018’19

Direct social costs are costs of education other than tuition fees, such as books, writing supplies, and other instructional expenses

Operating costs refer to educational production spending per student based on cost and enrollment.

Disclosed operating costs by these private tertiary institutions will not correspond to the genuine institutional cost for maintaining such institutions.The reliance on enrollment school fees without the attendant non-tuition direct private costs could result in severe underestimation of total private costs of private institutions.

Private/Public Unit Cost Ratios

SIMULATING COSTS OF PROVIDING EDUCATION BASED ON SERVICE STANDARDS

AND USING UNIT COST PARAMENTS

SERVICE STANDARDS1.0 Class Size (Number of Students in a Section) 402.0 Student Station in square meter 1.43.0 Section to Classroom Ratio 14.0 Full-time Equivalent (FTE) Teacher per Section 1.755.0 Teacher to Teaching Assistant Staff Ratio 56.0 Number of Section to Laboratory Support Ratio 37.0 Student to Seat (Armchair) Ratio 1

UNIT COST PARAMETERS (ANNUAL)1.0 FTE Teacher Average Salary and Benefits 320,320 2.0 Teaching Assistant Average Salary and Benefits 218,400 3.0 Instructional Materials support per student 720 4.0 Academic Administration Support per student 2,038 5.0 Capital & Improvement Costs per classroom 12,000 6.0 Student Seat/Armchair Cost Support 800 7.0 Institutional Support per Section 30,000 8.0 Lab Equipment Improvement Support 36,000 9.0 Academic Administration Compensation Package 582,400

Resource & Budgetary Implicationsof Additional 100 Students

Resource & Budgetary Implicationsof 270 Students

1 2 3 4 5 6 7 80

5000

10000

15000

20000

25000

30000 27,930

26,006 24,081

22,798 22,127

21,831

21,535

21,515

Tuition as Price and Number of Sections

Number of Sections

Tuiti

on in

Pes

os

Enrollment Size

50 80 100 150 225 240 280 300

Guide Questions

Questions

• Given the different costs, what adjustments would you make to your various price estimates so far?

T hank you !mljavier819@yahoo.com09167178134

EXTRA SLIDES

Mechanisms for pricing

…”that price should not be too far from current levels (e.g., PhP 10,000 on the average nationwide) but with top up for good performance. Otherwise, it be too difficult to explain to the difference to legislators and the general public.” (Sec. Bro. Armin Luistro)

Tiered pricing to focus on two aspects: (1) geographical location of school ( to take into account differences in cost of school operations ); (2) income of grantees. (Dr. V. Fabella)

Tiered pricing will require means testing. Need to look at existing targeting mechanisms (eg. National Household Targeting System for the CCT). Number of tiers/brackets for administrative ease….

Mechanisms for pricing

With regards to existing ESC grantees in Grades 7-10, at the very least continue to receive the same grants as now (thus, the new scheme will have a hold harmless provision that will apply to these existing ESC grantees).

With regards to other pricing considerations, FV noted that inflation plus pricing does not work given existing government budgeting rules. With regards to PFI, while this is being done for infra PPP right now, the private sector expressed interest in having an arrangement like it for private school expansion.