The KHDA is hindering rather than helping Dubai’s education sector

A few weeks ago, GEMS contacted parents to inform them that Westminster School would be closing in June 2014, citing the current fee restrictions in place and the resulting inability of the school to “offer a high quality education at this level that we see as our duty to provide”. This decision has led to the predictable outbreak of nonsense and economic illiteracy in the local media and on the various comment boards. All the familiar tropes are on display: GEMS are once again being portrayed as heartless and immoral racketeers; private education is decried for its emphasis on profit; the government is called upon to ‘do something’; and so on. In general the discourse is not much above the level of ‘It’s not fair’ and, to quote The Simpsons, ‘won’t someone think of the children?’

As the economics writer and blogger Tim Worstall has put it, a great deal of economics can be summed up in two phrases: ‘Incentives matter’; and ‘There is no such thing as a free lunch’. What we have in the current Dubai education market is a situation where the current regulatory framework put in place by the KHDA has created a flawed incentive structure; and where there are fundamental contradictions between the different desires and expectations of many parents.

Simply put, a number of parents seem to want high-quality education; low fee-structures; high levels of regulation; and lots of school choice. The problem of course is that there is a tradeoff between all of these goals, for until someone discovers the magic money fairy (let me know if you do) the old adage of ‘you get what you pay for’ is going to apply in the long-run. In addition, high levels of regulation will both reduce the number of new schools in the market, and will also increase the costs of education, due to the resources schools have to devote to compliance and box-ticking. This is not to say that regulation is not required or that we should have a wholly unregulated education sector, but simply to point out that there is a trade-off here. As I said above: there’s no free lunches.

What I find quite incredible is that hardly any comment on this issue has focused on the root cause of the problem: the frankly bizarre and counter-productive decision by the KHDA to limit fee increases based on their inspection results. In the case of Westminster School, its ‘acceptable’ inspection rating meant it was only allowed to increase fees by three percent. To quote Mohammed Darwish, Chief of Regulations and Compliance Commission (RCC) at KHDA: “The school applied for an exceptional fee increase. However as exceptional fee increases are only granted to schools rated ‘Good’ and above, the school did not qualify.”

There are a number of issues with this policy, not least regarding the inspection process itself: inspection results are not fool-proof and the process of classifying schools into four groups is inexact. There is always a margin for error in any testing or inspection process, as well as an assumption that inspectors know precisely what parents want from the school; which may not always be the case. Beyond these narrow issues, this restriction discourages investment in the sector as any new investor will be deterred by price controls of this kind. It also puts schools outside the ‘premium’ band in a fiscal strait-jacket and increases the likelihood that lower-cost schools may close. In addition, it means that schools are incentivized to put up their fees as much as possible when they are permitted to by inspection results, as they do not know when they will necessarily be able to do so again. New schools will also set fees as high as possible from the outset given this uncertainty.

There have of course been the usual online comments decrying the provision of for-profit education: “This is a decision motivated by nothing more than profit margins. Why close a school rated as acceptable?”; “The reasons given for the closure simply to not add up. GEMS has put profit margins ahead of the welfare of the children at Westminster School. Thanks for the pre-Christmas slap in the face GEMS!”; ““This is a stark reminder of the ground realities of how business houses operate in Dubai. 100% spot-profit-oriented. Every unit which is deemed non-productive in the pure financial sense is treated like the lame horse that must be shot dead instead of keeping it alive and treating it back to health.” And so on.

What these complaints fail to recognize is that it was profit that provided the incentive to build, set-up and operate these schools in the first place. In addition, profit accrues if you create a service that other value and want to avail of. GEMS is a private company: it exists for the purposes of making a profits. It is therefore bizarre logic to expect them to simply maintain a loss-making division, especially when the regulatory structure means that it cannot realistically be turned around. When it comes to education, there is often a strange prejudice against the concept of profit, despite the fact that the profit principle has generally served us pretty well in many fields of human endeavour and that there are numerous for-profit schools that operate at an extremely high standard. To those who say that education is somehow too important to be profit-led, I would argue that surely the production and distribution of food are even more important, and would they therefore propose the nationalization of these sectors? (Quick hint: they’ve tried this in various countries over the years – it doesn’t work very well.)

If parents resent the profit principle to such an extent, then the logical step is for them to create their own non-profit establishment. Of course, just as a start, this will require them to raise and risk the investment capital; spend the time liaising with the relevant government departments to obtain the required permissions and permits; obtain the land for the school; plan and oversee the construction; create the systems and procedures; and put a management team in place. The fact that this is an extremely rare occurrence would seem to indicate that the profit motive plays a pretty vital role in ensuring that new schools start and that existing schools stay operating. For those who believe that the removal of the profit-principle would magically improve matters, I would point you in the direction of the UAE’s public education sector’s well-documented difficulties, with the majority of Dubai’s Emirati children now being sent to private schools by their parents.

Some parents and columnists have tried to argue that GEMS should keep the school running at a loss by using the profits from the other schools in the GEMS network: one columnist described this as ‘taking one for the team’. As well as not addressing the root problem (the KHDA’s fee policy), this approach also fails to take into account that this relies on other parents in the GEMS group effectively subsiding those at Westminster. It also leads us to the obvious question: what happens the next time another school tips into loss-making territory due to the fee cap? Should GEMS continue to run that school at a loss as well by having parents at other schools subsidise that establishment as well?

Ultimately, the closure of Westminster School is the product of a flawed regulatory structure. The KHDA’s attempt at top-down fee controls is counter-productive policy. If we want more competition and school choice in the Dubai educational sector, the KHDA needs to make it easier to establish new schools and guarantee autonomy over fees. In attempting a short-term fix over rising fee levels, they have undermined the long-term development of the sector and the viability of budget or mid-market options. If the KHDA still wishes to ensure some safeguards for parents, then perhaps a minimum notice period for fee increases could be established which strikes a balance between the needs of parents and those of school operators.

The KHDA can still play a valuable role in improving parent choice and school standards in Dubai, provided it moves away from attempts to micro-manage the sector and instead seeks to make the market work more efficiently. One of the most effective ways of doing this is by improving the information that is available, something it has already started by publishing the school inspection reports online. It could, for example, do the same with examination league tables for the various international exam boards, so that parents can then easily compare different schools in terms of their exam results in recent years, as well as seeing if a school is improving its results or not year-on-year. Such an approach would certainly be more productive than the current policy.

I don’t know where to start

I recently stumbled across this article about the education sector from late November. The idiocy-per-word ratio is impressively high.

Over the past decade, the private sector, which consists primarily of for-profit schools, has grown dramatically to accommodate the large number of expatriates.

During the boom years the expatriate population surged rapidly and the number of private schools also increased. However, due to the time required to set up a new school, there was obviously a time lag between the surge in demand and the adjustment of supply following additional private sector investment. This has resulted in a shortage of school availability and rising fees.

Now, essentially for the first time, the expanding private school market is coming under the oversight of government education authorities, particularly in Abu Dhabi and Dubai, in an attempt to ensure uniform standards of quality.

I’ve previously blogged on the issues surrounding such government ‘oversight’. What caught my attention in this sentence is the use of the word ‘uniform’ instead of ‘minimal’. In the private provision of any good or service you are going to have variations in quality and this usually correlates with the price that you are willing to pay. For example, I know that a Kia will not be as good a car as a Mercedes, but I may still purchase the former because I know what I can afford and will thus decide on my best option. Unfortunately such common sense is rarely applied to the education sector, where for some reason the aim is for ‘uniform’ provision where the government decides what is best for you. Trying to make the market uniform will either make schooling unaffordable for many people; reduce standards to the lowest common denominator; or combine both outcomes in a messy ‘third way’.   Introducing ‘minimal’ standards would be more understandable, but again, one must also carefully consider the possibility that such regulation could increase the cost of schooling and thus make it unaffordable for some people.

“The main problem is there isn’t a public option for expatriate children,” says Dr Natasha Ridge, a researcher at the Dubai School of Government.

Hmmm. I’m not so sure about that Natasha. Given the well-documented issues with the public sector schools, I’m not sure how many expatriates would want to utilise that option even if it existed.

“The biggest issue is quality,” she adds, pointing out that wealthier families can send their children to better schools.

Good Lord! Wealthy people can afford higher-quality goods and services? What madness is this?

The Government must ensure private schools “do not take advantage of a captive market”, she insists.

Given what is involved in establishing or enlarging a school, supply is going to be inflexible in the short term.  When there is a dramatic upsurge in demand such as has occured in the UAE in recent years due to rapid population growth, this is going to result in significant price increases. The only reason that there would be a ‘captive market’ in the long term would be if there were barriers to entry in the private education market which restricted new supply. If onerous regulatory or legal obstacles to establishing new schools do not exist, then new competition will move into the market. Government intervention cannot magically solve this fundamental issue, and is more likely to just create more problems.

The Knowledge and Human Development Authority (KHDA), the government body that regulates schools in Dubai, introduced wide-ranging school inspections for the first time last year, pegging fee increases to performance, and painting a grim picture of private education in the emirate.

Such regulatory interference is more likely to discourage further private investment into the educational sector, which will result in less competition in the long run, which helps no-one. Would you start a business when there was a risk that the government would dictate what price you could charge and whether you could increase it if required?

The KHDA’s involvement is also likely to have an unintended consequence: the prospect of future restrictions on fee changes means that whenever the option of increasing fees is available to a school, they will do so to the maximum extent possible due to the uncertainty about their future freedom of action.

KHDA inspection reports revealed a range of problems, from the use of corporal punishment in schools – a violation of UAE law – to poor provision in key subjects such as maths, science, English and Arabic. Only four schools were ranked as outstanding and more than half were judged to be merely meeting minimum standards.

The situation in Abu Dhabi may be worse: there are still some 70 private schools in the capital, catering for low-income communities, which operate out of villas.

The key phrase here is “low-income communities”; what precisely did they expect? Gilded palaces of learning?

Adec first pledged to shut these schools in September last year, but the challenge of finding alternatives for their pupils has made the process a lengthy and difficult one.

Funny that. The fact is that they are evidently the best option available within the budgetary constraints of the parents.  If you shut the schools down you are not magically going to have world-renowned schools offering to take these pupils at the same fee levels as the villa schools.

Despite the “grim picture of private education” though, it appears that it is still better than some options:

In Dubai, half the school-age Emirati population are now educated privately because many parents have lost faith in government schools. In Abu Dhabi, the figure is 40 per cent.

“We have seen a migration of students from public to private,” says Dr Abdulla al Karam, director general of the KHDA. “Now we have half of the nationals in the private schools. The worry is unless major steps are taken to reform the public education system in Dubai then this migration will continue to happen.”

So it seems that despite Natasha’s observations above, many of those who have got a “public option” have voted with their feet. Given this, the question that springs to mind is what on earth the KHDA is doing fiddling about with the private sector? It’s like Robert Mugabe giving a lecture on agricultural efficiency.

Most parents in the UAE also believe they are overpaying for education. A recent YouGov poll found that 88 per cent of parents with children in private schools and nurseries thought fees were excessive.

“It would be a lot less in the UK,” says Gerome Atkin, a Briton who works in construction. He pays Dh28,000 a year to send his daughter to a nursery four days a week.

“It seems like a lot of money, really, for very little. In general the school fees over here are quite ludicrous anyway. What surprises me, especially with the recession and everything else, is that fees have not gone down; in fact, they are putting them up.

“So people who are out here … are possibly being given less money due to the recession … but the price of Dubai in general is still skyrocketing. It just makes it very hard.”

Yes Gerome, it would be a lot less in the UK. However, a significant proportion of your income in the UK would be going to the government as tax so you’re not comparing like with like. As for the “price of Dubai still skyrocketing”, I can only imagine that you haven’t noticed the drastic fall in rents over the last 12 months.

With regard to the continuing rise in school fees, there are a number of factors to consider. First of all, education and healthcare tend not to be particularly cyclical sectors; the demand for schooling in the UAE has not dropped anywhere near as much as that for cars, for example. Furthermore, the recession does not mean that the operating costs of the schools have decreased: teachers tend to enjoy higher than average job security which means that their salaries have not fallen in line with the general labour market. This is compounded by the fact that most teachers here are expatriates and hired from overseas, with all the added expenditure that entails. Most schools also went into this academic year with real uncertainty over the number of pupils they would actually have, due to the potential for expatriate relocations over the summer. As a result they could not simply assume that there would be fewer students and embark on a round of radical cost-cutting. Finally, some of the schools and school groups had previously launched expansion programs in response to the high levels of demand. Just because the demand for these new projects has reduced does not mean that the costs go away. The original plan would have been for these costs to have been borne by new students, but with this no longer possible they will be reflected in increased school fees elsewhere.

“I’m from the government and I’m here to help…”

On the immensely long list of things that irritate me, unnecessary government intrusion into education ranks pretty high. So imagine my annoyance this week at this.

Extreme interference from external agencies that affected the school’s independence has resulted in the resignation of the headmaster.Carlo Ferrario of the Dubai College sent an email to the students’ parents on Sunday informing them that he had submitted the resignation to the Board of Governors, effective at the end of the current academic year.

And this:

Education Minister Humaid Mohammed Al Qatami has affirmed that there is a vision to nationalise private schools in the UAE.He intends to raise the issue at a meeting with the heads of private schools next month. The affirmation came in response to queries at the second ordinary session of the Federal National Council (FNC) on Tuesday. The Minister of State for FNC Affairs, Dr. Anwar Gargash, was present.

It is not private sector education in the UAE that requires the KHDA’s urgent attention, and Dubai College certainly does not need any input or oversight in this regard, as their A-Level results demonstrate. The KHDA clearly suffers from the delusion that they are better equipped to make decisions than both parents and school management. It is an act of regulatory arrogance to dictate fee rate changes to schools and parents.

What makes this entire episode even more galling is that it is not as if the KHDA can justify its interference by pointing to an effective public educational system in the UAE. The public schools do not compare well to Dubai College. Don’t take my word for it, look at the opinions voiced at the Dubai School of Government and the Abu Dhabi Education Council. Oh, and also the World Bank.

According to statistics compiled by the World Bank for its Knowledge Economy Index, which measures the ability of countries to generate and adopt knowledge, the UAE ranks 77th out of 132 countries in education despite having a Dh7 billion (US$1.9bn) education budget.*

And the speaker of the house at the Federal National Council and CEO of Mashreq Bank:

Abdul Aziz Al Ghurair, speaker of the house at the Federal National Council and CEO of Mashreq told delegates that the challenge would not be to fill 100 million jobs, but to find 100 million employable candidates to fill the positions.

“Most college graduates we see are not fit for international standards and we have had to lower our standards and give them a year’s worth of training to make sure they are fit for the jobs we have.”

As you can see, I am hardly voicing controversial sentiments here.

So please KHDA et al., let the private schools get on with what they’re doing and leave their regulation up to the people with the most incentive to care: the parents. You will then be free to devote your energies and resources where they are really needed.

(*It might be simpler to just scrap the public school system altogether and give the parents vouchers as in Sweden. Let the parents choose what their priorities are rather than arguing about it amongst ourselves. Dh 7 billion as a budget – does anyone out there know how many UAE Nationals of school age there are?)