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.