To profit or not to profit

Fiona Millar's picture
 7
Last month I was invited to speak at a conference of housing professionals on the subject “To Profit or Not To Profit”.  The government is now trying to entice private sector providers into the social housing sector and I was asked to give a perspective on this issue from the education sector’s point of view. It was a good opportunity to think through some of the arguments and look at the evidence on the 'for profit' question. Apologies of the length of this post - it is about half the length of my final speech.

The government is making the case with both sectors that past policy has failed to deliver. The new emerging line is that only private providers can improve quality, supply (in a time of austerity), more diversity of provision and responsiveness to consumers.

The main difference is that this is being done overtly in housing, with plans for statutory regulation. In education the process is taking place by stealth with the mass conversion of maintained schools to academy status being the main staging post along the way.  These new schools are simply governed by a contract with the Secretary of State, they are not obliged to abide by School Teachers Pay and Conditions which in the longer term will make schools a much more attractive option to private providers.

Does this matter? Some would argue that it is just a logical next step. After all we have had profit making providers of services in schools for the last 25 years since Local  Management of Schools was introduced.

Many heads and governing bodies use a range of providers from both not for profit and private sectors to meet school improvement and wider aims. But overall this has been managed within a “not for profit” governance model with public rather than private interest at its heart. 

 Moreover private hasn’t always meant better. Some academies now buy back services from local authorities because they provide better value for money and there have been low points in the outsourcing of some services. Remember the private contractors who moved into the school meals service, took advantage of the abolition of basic nutritional standards and fed a generation of children turkey twizzlers?

Regulations were brought back but now the champion of healthy school meals Jamie Oliver finds himself fighting the same battles over again with academies that are exempt from regulations that cover maintained schools.

There have also been problems with some governing bodies getting short changed while trying to manage complex contracts for services like photocopying and ICT.

We don’t yet have any state funded schools run expressly for profit and only a handful of local authorities or governing bodies have chosen to subcontract full day to day management to a private company. Schools run expressly for profit would be a fundamental change but the current Secretary of State says he has no problem with this and there are plenty of plenty of the edu companies hovering in the wings.

I believe some of the fundamental arguments in favour of for profit schools need to be challenged.

The first is about QUALITY.

The assertion that a profit motive will lead to improved performance and higher standards is not borne out by the evidence. Similar arguments have been used and dis-proved when it comes to independent state schools and we are now seeing that ‘independence’ is not a golden bullet.

In the few cases, like Turin Grove School in North London, where school management has been outsourced here, it hasn’t been wholly successful. The school was closed in 2010 and re-opened as an academy under a different sponsor. In the countries where profit making is used more routinely– Sweden and America - there is a very mixed picture.  Neither country performs particularly well in international league tables. Sweden’s performance has slipped relative to other countries and their system has become more segregated. So much so that the Swedish government has now introduced new regulation to include all schools including free and for profits.

A recent study by the US National Education Policy Center showed a significant proportion of for profit schools failing to reach national standards, being closed down and their charters being transferred to other providers

The second argument is about the RIGHT TO FAIL.

It goes something like this; liberalisation shouldn’t just allow competition but also permit failure, forcing some providers out of business and allow others to expand. This maybe acceptable for the corner shop but children aren’t like tins of baked beans or loaves of bread. They have a right, especially if they come from chaotic or disadvantaged backgrounds, NOT to be enrolled in institutions that may be subject to serial takeovers and management reorganisation with all the disruption that entails. Surely it is far better to prevent failure in the first place?

Then there are the PERVERSE INCENTIVES/UNINTENDED CONSEQUENCES.

Supporters of profit making schools are often frank about their motives  i.e financial return rather than altruism.  The ability to make a profit will encourage capital investment, they say, thereby reducing the burden on the state at a time of austerity.

Refreshingly honest but what happens when desire to make money outweighs the public or community interest? There are already stories emerging about private companies in the employment sector indulging in unethical and possibly fraudulent behaviour linked to a desire to make money.

In schools profit would almost certainly be linked to results. So they would be even more incentivised than they are at the moment to admit and retain the children most likely to succeed and to avoid or lose those most likely to fail, who may also be the most expensive to teach because they need wider range of services. Very often this will be a child with particular needs or from the most challenging family.

In the US Charter schools (which are not all for profit) there is a new phenomenon known as  “dregs sifting”, the opposite of cream skimming as the essay by Adam Swift and Harry Brighouse in this publication explains. Some charters pick of the most motivated and aspirant working class families leaving the rest to the public schools (which incidentally perform just as well according to national research).

Moreover schools have a wide range of other roles beyond simply delivering high test and exam results. How do you put a financial value on social cohesion, inclusion, child well being, provision of other services to the local community? And if they don’t have financial value how quickly do they go by the board as part of profit driven cost cutting?

Private providers are also heavily sold as a means to EMPOWERING PARENTS.

It is claimed that they would need to be more responsive to their consumers, in the same way that fee-paying schools are said to be. However most fee-paying schools are charities, so not for profit

There are already examples of for profit chains of private schools where parents have revolted because too high a proportion of the fee income was being siphoned off into hands of directors rather than ploughed back into the schools.

To be really viable private providers want and need chains of schools – these may not necessarily be in the same geographic areas.

As we are already seeing in the health service, costly procurement processes favour large, possibly multi-national corporations, at the expense of smaller locally based suppliers.

So one of the perverse consequences here might be that the introduction of private providers will in fact remove schools from their local communities, making it harder for parents to influence, seek redress or hold schools to account

Where once you could take you banner to the town hall, in the “for profit” future you might have to take it to Dubai, New York or Stockholm.

The counter argument is that parents would just take their children out of schools if they weren’t providing a good enough service, thereby holding schools to account. But parents don’t always act as rational consumers in this way. It is disruptive to move children around serially, especially if they are happy or have good friends.  

 Finally there is the not inconsequential issue of ACCOUNTABILITY AND TRANSPARENCY

There is already enough obfuscation about the funding of academies and free schools. They are exempt charities, so not obliged to file an annual return to the Charity Commission and even though academies are covered by FOI, the government often uses commercial confidentiality to block release of information about them. Performance tables show revenue and expenditure per pupil for maintained schools but not for independent state schools so again it is hard for parents to judge efficiency and hold to account. Once public services are fully outsourced it becomes much harder to “follow the public pound’ and judge value for money.

The English schools market always been diverse with many more different ‘types’ of school than exist in most countries But in spite of all these different types of schools there is little room for real diversity of provision.All non-fee paying/state schools, even so called “free” schools, are held tightly accountable by league tables and Ofsted via an increasingly narrow range of indicators. Real freedom to innovate is mythical.

The public sector isn’t perfect. There is much to celebrate, although we rarely hear about the many examples of excellence in the media, but (as in the private sector) there are also pockets of poor management, inefficiency, complacent performance and in some cases lack of responsiveness to the local community.  But creating yet more diversity of provision by the introduction of profit making schools isn’t the answer. The countries that have consistently good outcomes for pupils – and by that I mean equity and high standards – don’t have for profit schools.

Instead they build autonomy and a degree of diversity into strong locally accountable governance structure and a “middle tier’ that is usually municipal.  So rather than pursue more diversity by creating schools in which the public interest is so clearly threatened by private gain, we should be focussing on a clear and effective regulatory framework that can:


  1. spot and prevent failure rather than acting when it is too late

  2. ensure schools are held to account

  3. ensure  that the public interest trumps financial incentives

  4. safeguard the interests of pupils and the wider community.



It isn’t necessary to introduce a profit motive to do this.  There isn't enough evidence that for profit leads to better schools. The risks to inclusion, social cohesion, to the wider role schools play in society and to accountability and transparency in our public services are too great.

 
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Comments

Henry Stewart's picture
Tue, 03/07/2012 - 19:53

Very good points, Fiona. The odd thing about the advocates of for-profit companies as the inevitable producers of better services is that they ignore the huge amount of evidence to the contrary. The list of disasters as public services were turned over to private providers is long: Take PFIs, tube privatisation, the railways, building societies moving from mutual to private status.

In my school we were forced (by the Labour government) to privatise our IT support as a condition of taking part in Building Schools for the Future. The contract was awarded to a large public company (RM plc), whose performance has been abismal. And, as with most involvement of for-profit firms, it is very difficult to get out of. Even as penalties rose above 50% of the monthly fees, the contract (carefully negotiated by highly paid lawyers) proved impossible to break.

I talked recently with a consultant who had just left a major for-profit provider and would never employ them or similar firms. He saw their aim is to provide just enough to meet the terms of the contract, while keeping costs to the minimum possible.

I speak as somebody who runs a for-profit company and know there is good practice in the private sector too. But for our schools give me people dedicated to public service over those focused on profit any day.

Rebecca Hanson's picture
Tue, 03/07/2012 - 22:09

It's also worth pointing out the extent to which Gove and co. have misrepresented the theory of free markets in education.

You can see Ricky at it in this thread
http://www.localschoolsnetwork.org.uk/2012/04/an-equitable-education-sys...
see the post 10/04/12 11:46pm.

E.G. West would not have supported anything they've suggested. They have never made a coherent argument for any of this. They've misquoted and misrepresented the evidence to make it look like they have. I suppose they thought they could get away with misquoting Eddie because they knew he was dead. To bad for them that Eddie left his estate under to Newcastle University where my dad set up a research centre to further the exploration of what he ACTUALLY believed.

Janet Downs's picture
Wed, 04/07/2012 - 08:16

The Centre for Educational Research and Innovation undertook a major review of research into market mechanisms in education. The authors admitted that little was known about the long-term effects of introducing such market forces but warned, “Compared with government aims when market mechanisms are introduced in education and the fierce tone of the political as well as the academic debate on these issues, the effects as reported in empirical research are modest to say the least."

See FAQs above: Do market forces in education increase achievement and efficiency?

Rebecca Hanson's picture
Wed, 04/07/2012 - 09:26

One important aspect of this area of analysis is that has been demonstrated that in emerging markets in education (where the state does not have a duty of care to all including the most vulnerable) free market strategies do improve achievement and efficiency as has been demonstrating by those working at the E.G. West research centre. http://www.amazon.co.uk/The-Beautiful-Tree-Educating-Themselves/dp/19339...

To understand why this is the case it is important to look a level deeper to the driving forces of economic efficiency and student progress.

If we look first at economic efficiency it becomes rapidly obvious that in a complete system of education (i.e. one with a duty of care for all) there are huge efficiency gains to be made through coherent local planning.

The biggest problem with Gove's reforms was not that they involved market forces, it was that they neglected the need for there to be coherent local planning. Therefore they were always going to be disastrous.

The key think about including market forces in a system is the understanding that they can only be beneficial if you plan carefully for their likely pitfalls, structure the system appropriately and ensure there is intelligent and effective regulation of it. As the planning for and analysis of such systems is done the evidence base should be established whereby which it can be assessed whether there is a case for the introduction of market forces or not.


Market forces are barely relevant at all for student progress - unless it is coherently argued that they will lead to substantial efficiency gains which will be invested in school, which has never been done. What we actually need to do to drive improvement in student progress is to deal effectively and efficiently with unacceptable practice while protecting professional freedom and once we recognise this the limiting factors on students progress become very obvious: they are the quality of the regulator and the assessment system. Instead of addressing these issues by ensuring Ofsted adhere to the standards of other regulators, Gove has led a very serious decline in the standards of practice of an already weak regulator. He has completely ignored the possibilities for increasing professional freedom through appropriate reform to assessment up to the age of 14 and he as faffed around with the curriculum and all policy in a way which has prevented the market from developing systems which would lead to improvement. Finally he has shut down our state systems whereby we offer teachers professional development, further deprofessionalising them.


The same analysis does not hold for emerging systems of education for two reasons.
The first is that the communities which establish schools become educated about the process of running schools through having been involved in creating it and they are usually able to have substantial effective custodianship of the economic efficiency and the standards at that school.

The second is that you are not dealing with overcapacity and a duty to all so the benefits of local planning diminish.

Janet Downs's picture
Wed, 04/07/2012 - 09:05

If profit is including in the market mechanisms then this increases the risk of putting shareholders before customers (horrible word to use in connection with education). Profit-making school provider, Cognita, was accused of "milking" one of its London schools for profit. In Sweden, profit-making schools have been criticised for making money from the taxpayer and some of the profit-maximising chains, such as Kunskapskollan* and John Bauer**, have been accused of running their schools with a "franchising concept similar to that of MacDonald’s."

http://www.llakes.org/wp-content/uploads/2010/09/Wiborg-online.pdf

In Chile, students took to the streets last week protesting about illegal profits being made by university officials. Their rallying cry was, "Chao, lucro!" (goodbye profits!).

http://www.theatlantic.com/international/archive/2012/07/free-tuition-an...

*Kunskapskollan sponsors the Learning Schools Trust which in turn sponsors three English academies. The Managing Director of Kunskapsskolan UK, Steve Bolingbroke, was employed by RM (See Henry’s post above) in a “wide range of education businesses” including data collection and analysis before joining Kunskapsskolan UK.

http://www.kunskapsskolan.com/sitescontact/unitedkingdom.4.52155b18128a8...

**"In October 2008, 90% of the John Bauer concern was sold to the Danish investment company Axcel. The Axcel Company was a venture capital company and had no experience in education. Involved in the business of selling and buying businesses, they showed particular interest in home styling and dog food."

http://www.llakes.org/wp-content/uploads/2010/09/Wiborg-online.pdf

Emma Bishton's picture
Sun, 08/07/2012 - 10:05

Thanks Fiona I found this post useful. As you say, conversion to 'for-profit' is by stealth in education. What I find striking is how all these arguments also apply to some of the organisations who are nominally not-for-profit and who have been granted huge power in the academy and free school explosion. I for one find it hard to see their motivation in any but business terms.

Janet Downs's picture
Mon, 09/07/2012 - 12:23

Emma - many of these non-for-profits have trading arms which sell services to their academies. The National Audit Office 2010 was concerned about a conflict of interest when sponsors put pressure on their academies to purchase services from the sponsor - NAO feared that this might not be good value for money (see FAQs above). This also applies to academy chains which insist that they provide their academies with all the services they require. These often go beyond what LAs used to provide. Local Management of Schools meant that all schools had considerable control over their budgets - the LA provided back-room administrative and legal backup but could not insist that schools bought particular resources (eg teaching materials) or such things as in-service training from them. Neither could they dictate teaching methods or promote a particular ethos - these were left to individual heads and governing bodies.

John Burn, OBE, ex-Academy principal, cautioned against against academy chains in his evidence to the Education Bill Select Committee. He warned that academies in federations could lose significant control over their budgets which could result in schools receiving services which they did not want and did not represent good value: “At present, there appears no restriction upon those Federations imposing services of their own choosing and paying for them from the unilateral top-slicing of their schools’ funds."

http://www.publications.parliament.uk/pa/cm201011/cmpublic/education/mem...

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