There is no doubt that India is home to several top-quality educational institutions
. A masters in business administration at the Indian Institute of Management (IIM) is surely an experience of a lifetime. IIM, XLRI, IIT and the BITS Pilani have produced some of the smartest people the world has ever seen. Students at India’s top 20 high schools will give top-notch students in the U.S. or U.K. a serious run for their money. But, here is the fundamental problem. India’s tier-1 and tier-2 institutions educate a miniscule percentage of the population. Of course, more IIMs and IITs will help, but the key to providing education to India’s large population is to improve the teaching quality at the tier-3 schools and beyond. “The core of the issue is that there is a large gap between what is required and what is available in the education sector. The supply-demand gap has to be bridged and this is paramount,” says Cyrus Driver, director at Helix investments, an India-focused private equity firm that has invested in this space.
While the tier-1 institutions can continue to enhance the top layer, creating managers, entrepreneurs and innovators, the rest of the pack must focus on reaching out to the mass, providing useful skills and making people employable.
Learn to coexist
According to research done by The Parthenon Group, a management consulting firm with a strong focus in the education sector, 61 per cent of the variance in income between countries is explained by the level of tertiary education enrollment. The current numbers in India are staggering. Only 12 per cent of Indians in the 18 years to 25 years age group are currently enrolled in some form of post-secondary education. Karan Khemka, partner at Parthenon’s India office says, “In the next four years, we need to graduate at least eight million more students out of higher education programs in India in order to maintain the current rate of growth. And, this presents a huge opportunity for the private sector.” But it’s just not education. The key here is employability. “We need to ensure that these college graduates are employable and earn a much higher income than they do currently,” he adds.
“Education is a high-involvement purchase. Three or four batches of students have to graduate successfully and the word will spread. Brands cannot be built just by spending money on advertising.” -Cyrus Driver
Driver goes a step further. “We definitely need to rope in the private sector. The proof is indisputable.” Be it banking or telecommunication, welcoming the private sector entrepreneur has not only enhanced quality of the sector but also brought in new ideas and services. “And opening up the education sector will transform India,” feels Driver.
Public and private educational institutions can coexist. If public sector banks like State Bank of India and Indian Bank reinvented themselves while competing with the private sector, Driver feels, “there is no reason why the same cannot happen in the education sector.” The end-consumer will just learn to extract quality out of all these institutions.
The story so far
The NIIT story is well known today. What started in 1981 as a computer-training institute is today an education behemoth with its footprint across schooling, higher education, skills and vocational training. Vijay Thadani, the founder and chief executive, proved that private sector could make a huge difference in imparting skills to make people employable. Thadani foresaw the IT revolution and opted for a franchise model as a strategy to scale up. Currently, over five lakh people enroll in computer training programs at NIIT centers across the country and the key element that aided their success was that they helped their students find jobs. Today, they have expanded across the board to focus on skill development across sectors including banking, finance and insurance and serve over 12 million students. They recently launched the NIIT University, a not-for-profit arm of NIIT in Neemrana, Rajasthan offering B.Tech and M.Tech programs in computer science and biotechnology related fields.
Thadani’s strategy to expand into several verticals was the benchmark for many other education entrepreneurs.
The IIM-educated Satya Narayanan founded Career Launcher in 1995 to offer test-preparation training for CAT, GRE and several other entrance tests. But, very soon he realised mainstream education was the way to scale up. Today, Career Launcher runs pre-schools (under the brand name Ananda), K-12 schools (Indus World Schools) and even a business school (Indus World School of Business).
The story of Educomp is no different. Founded in 1994 as a company that setup computer labs in schools, today, they have diversified into every sub-sector within the space, raking in over Rs 637 crore in revenues in 2008-2009.
What interests the investors?
The supply-demand gap is an important factor that drives investment here. Driver says, “The Indian education space is definitely among the top five investment themes around the world.”
Unsurprisingly, the education space has seen a massive increase in investment. This sector has surely attracted the attention of private equity and venture capital firms. For instance, a research report from Venture Intelligence, a research services company that focuses on the private equity and venture capital space, says that in the education sector there were ten private equity investments worth U.S.$ 123 million in 2009, as against just a single private equity investment of U.S.$ 3.7 million in 2005.
Besides, this sector is quality driven. “And whether its supplemental or mainstream education, parents and students are willing to pay a premium for quality,” feels Driver.
Helix invested in MT Educare (then known as Mahesh Tutorials) a company that offers branded tuition services to the K-12 segment. MT Educare’s growth has been due to its ability to attract great teachers. “Since the founders were teachers, they rewarded teachers well. Every teacher at MT Educare receives stock options and there is a sense of ownership,” adds Driver. Quality of the curriculum coupled with top-quality teaching will lay the foundation for robust growth.
What is attracting entrepreneurs?
There is no doubt we are going to see large-scale entrepreneurial activity in this sector. And, all this even before the sector opens up from regulatory and land-acquisition hurdles. Gautam Puri, vice-chairman, Career Launcher, says, “Every sector does have regulatory challenges that have to be overcome. For us, the bigger challenge was land acquisition and creating the infrastructure for our schools and colleges. Regulatory approvals, hiring quality teachers and creating content are all part of the game, but, our biggest challenge was setting up the infrastructure.”
So, what is attracting entrepreneurs and investors to this sector? There is a supply demand gap that is waiting to be filled. “In almost every category there is an opportunity. If you take business schools, less than five percent of the 2500 business schools in the country offer good quality education. In addition to establishing more schools and colleges, the quality has to drastically improve and this presents an opportunity,” says Puri.
Khemka says, “Revenue predictability, negative working capital and favourable pricing are some of the key factors that make it a very attractive sector.” Most institutions collect fees from students annually or semi-annually, while costs are incurred over a period of time. Students also enroll in multi-year programs, so it definitely does make it easier for managers to plan ahead in terms of revenues.
Irina Kholkina, senior associate, The Parthenon Group says, “The primary factor entrepreneurs need to keep in mind is that the product you are offering is the curriculum and the teacher. So, if this means paying teachers better, it has to be done.” Says Driver, “Education is a high-involvement purchase. Three or four batches of students have to graduate successfully and the word will spread. Brands cannot be built just by spending money on advertising.”
While the regulatory environment for mainstream K-12 and higher education is not very straightforward as schools and colleges have to be managed by not-for-profit trusts, the rules are a lot softer on supplemental education institutions. Of course, the entrepreneurs are working around the system by creating separate entities for managing education services and owning real estate, and the trust avails these services. Says Khemka, “Once this structure becomes less complex and open it will make things a lot easier. Today, this structure is hush-hush and entrepreneurs need to carefully manage their regulatory challenges.”
Need of the hour
The Congress government is making the right moves. The Right To Education (RTE) Act and the foreign investment reforms (which, incidentally, the experts believe will not make a difference to higher education) seem to be a few steps taken in the right direction. In fact, the foreign investment reforms indicate that the government is ready and willing to open up the sector. Khemka says, “We do not think the FDI reform is going to help the cause of higher education. Quality-wise the reform is definitely not going to help. Moreover, in most other countries that have tried this, less than 1 per cent of the students graduate from foreign universities.” But, these are still very early stages and the intent of the government is what makes it more exciting.
The more pressing issues that need to be addressed are on the rules and regulations. According to the research report from Venture Intelligence, one of the basic issues that entrepreneurs face is the lack of clarity on what is allowed and what is not allowed in terms of regulations. But, what is evident is that, if these challenges are overcome, the sector offers tremendous scope for growth. Everything from K-12 schools, higher education, e-Learning, vocational education, skill development and supplemental tuitions is ripe for growth and is attracting tremendous attention from investors.
The IITs and the IIMs are important elements in the Indian education scenario. But, there is a need for large-scale institutions that can provide employable skills to the larger percentage of India’s population. To draw a leaf out of India’s automotive sector in the early 1980s, at that point of time India did not need a Mercedes or a BMW. It needed a mass-market product like the Maruti 800 that was good, reliable, useful and cost-effective. The education sector today is no different. It needs mass-market education that imparts useful skills to a large percentage of the population.