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DISCUSSION PAPER

The Businessof Education

A Look at Kenya's PrivateEducation Sector

Yannis Kar sJacob van Lutsenbs

INTERNAJtALflAE

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IFC Discussion Papers

No. 1 Private Business in Developing Countries: Improved Prospects. Guy P. Pfeffermann

No. 2 Debt-Equity Swaps and Foreign Direct Investment in Latin America. Joel Bergsmanand Wayne Edisis

No. 3 Prospects for the Business Sector in Developing Countries. Economics Department, IFC

No. 4 Strengthening Health Services in Developing Countries through the Private Sector.Charles C. Griffin

No. 5 The Development Contribution of IFC Operations. Economics Department, IFC

No. 6 Trends in Private Investment in Thirty Developing Countries. Guy P. Pfeffermannand Andrea Madarassy

No. 7 Automotive Industry Trends and Prospects for Investment in Developing Countries.Yannis Karmokolias

No. 8 Exporting to Industrial Countries: Prospects for Businesses in Developing Countries.Economics Department, IFC

No. 9 African Entrepreneurs-Pioneers of Development. Keith Marsden

No. 10 Privatizing Telecommunications Systems: Business Opportunities in Developing Countries.William W. Ambrose, Paul R. Hennemeyer, andJean-Paul Chapon

No. 11 Trends in Private Investment in Developing Countries, 1990-91 edition. Guy P. Pfeffermannand Andrea Madarassy

No. 12 Financing Corporate Growth in the Developing World. Economics Department, IFC

No. 13 Venture Capital: Lessons from the Developed World for the Developing Markets. Silvia B. Sagariwith Gabriela Guidotti

No. 14 Trends in Private Investment in Developing Countries, 1992 edition. Guy P. Pfeffermannand Andrea Madarassy

No. 15 Private Sector Electricity in Developing Countries: Supply and Demand. Jack D. Glen

No. 16 Trends in Private Investment in Developing Countries 1993: Statistics for 1970-91.Guy P. Pfeffermann and Andrea Madarassy

No. 17 How Firms in Developing Countries Manage Risk. Jack D. Glen

No. 18 Coping with Capitalism: The New Polish Entrepreneurs. Bohdan Wyznikiewicz, Brian Pinto,and Maciej Grabowski

No. 19 Intellectual Property Protection, Foreign Direct Investment, and Technology Transfer.Edwin Mansfield

No. 20 Trends in Private Investment in Developing Countries 1994: Statisticsfor 1970-92. Robert Millerand Mariusz Sumlinski

(Continued on the inside back cover.)

INTERNATIONALFINANCE

_ __._*_J CORPORATION

DISCUSSION PAPER NUMBER 32

The Businessof Education

A Look at Kenya's PrivateEducation Sector

Yannis KarmokoliasJacob van Lutsenburg Maas

The World BankWashington, D.C.

Copyright © 1997The World Bank and

International Finance Corporation1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of AmericaFirst printing September 1997

The International Finance Corporation (IFC), an affiliate of the World Bank, promotes the economicdevelopment of its member countries through investment in the private sector. It is the world's largestmultilateral organization providing financial assistance directly in the form of loans and equity to privateenterprises in developing countries.

To present the results of research with the least possible delay, the typescript of this paper has not beenprepared in accordance with the procedures appropriate to formal printed texts, and the IFC and the WorldBank accept no responsibility for errors. The findings, interpretations, and conclusions expressed in thispaper are entirely those of the authors and should not be attributed in any manner to the IFC or the WorldBank or to members of their Board of Executive Directors or the countries they represent. The World Bankdoes not guarantee the accuracy of the data included in this publication and accepts no responsibilitywhatsoever for any consequence of their use. Some sources cited in this paper may be informal documentsthat are not readily available.

The material in this publication is copyrighted. Requests for permission to reproduce portions of it should besent to the Office of the Publisher, at the address shown in the copyright notice above. The World Bankencourages dissemination of its work and will normally give permission promptly and, when the reproductionis for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is grantedthrough the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923,U.SA

ISSN (IFC Discussion Papers): 1012-8069ISBN 0-8213-4056-5

Yannis Karmokolias is senior economist in the Economics Department of the IFC. Jacob van LutsenburgMaas is lead specialist in education in the IFC.

Library of Congress Cataloging-in-Publication Data

Kannokolias, Yannis, 1946-The business of education : a look at Kenya's private education

sector / Yannis Karmokolias, Jacob van Lutsenburg Maas.p. cm.-(Discussion paper / IFC, International Finance

Corporation ; no. 32)Includes bibliographical references (p. ).ISBN 0-8213-4056-51. Private schools-Kenya-Finance. 2. Educational assistance-

Kenya. 3. Educational surveys-Kenya. 4. International FinanceCorporation. I. Maas,Jacob van Lutsenburg, 1940- . II. Title.III. Series: Discussion paper (International Finance Corporation)no. 32.LB2826.6.K4K37 1997371.2'06'096762-dc2l 97-29361

CIP

Contents

Foreword ....................................................... vAbstract .. viiAcknowledgments ...................................................... ixExecutive Summary ...................................................... xiI. Background ...................................................... 1

Rationale for the Study ....................................................... 1

Sources of Data ...................................................... 2II. Kenya's Education Market ...................................................... 3

Demand for Private Schools ....................................................... 3Characteristics of Private Schools Surveyed ....................................................... 7Socioeconomic Characteristics of Private Schools .............................................. 10The Supply Response of the Private Education Industry .................... ................. 13Profitability ...................................................... 15Market Opportunities ...................................................... 16

III. Constraints Facing Private Schools in Kenya ...................................................... 17IV. Conclusions and Implications ...................................................... 19

Implications for Financial Institutions ...................................................... 19Implications for Government Policies and Role .................................................. 19Implications for the World Bank Group ...................................................... 20

Annex 1 Private Academic Schools, 1996 Operating Costs . .......................................... 25Annex 2 Private Technical Schools, 1996 Operating Costs . ........................................... 26Annex 3 Private Vocational Schools, 1996 Operating Costs . ......................................... 27Annex 4 Fee Structure of Kenya School of Professional Studies (SPS), 1996 .. 29

iii

Foreword

This Discussion Paper focuses on private education in Kenya. Over the years,demand for education at all levels has greatly outpaced supply, a gap that has beenreduced by private schools catering to the needs of a wide range of socioeconomic groups.This gap will widen firther unless the private sector's role is expanded, but privateeducational institutions face a number of serious constraints primarily stemming from lackof adequate finance and, in many cases, limited management skills. The Paper focuses onconditions under which private financial institutions and IFC might play a useful role in thesector.

Guy PfeffermannDirector, Economics Department

& Economic Adviser of the Corporation

v

Abstract

This case study surveys the educational services provided by the private sector inKenya, identifies the major issues and discusses a possible role for the World Bank Group,especially IFC.

The demand for all types of education at all levels has greatly outpaced thecapacity of the public school system. This has allowed "edupreneurs" to provide academicand vocational education, catering to many socioeconomic segments of the population.Although enrollment in private schools has been increasing rapidly, the supply-demand gapcontinues to grow. Many private schools wish to expand, but faced prohibitiveconstraints, primarily related to scarcity of financial resources and inadequate managementskills. Development institutions, including IFC, can help alleviate these constraints,provided that they are ready to comprehensively address the particular issues faced byprivate educational institutions.

vii

Acknowledgments

The authors gratefully ackcnowledge the valuable information provided bynumerous school officials in Kenya who participated in the survey and the business planexercise; the cooperation of the Africa Project Development Facility, and of the IFC andWorld Bank missions in Kenya, especially that of Messrs. J. Kamunge and A. Deolalikar,consultants; the significant contribution of Narinder Kaur Whitehead and Karen Chan,who excelled in carrying out the school survey and the business plans, respectively; thesupport of Uday Wagle, Manager, CAFD1 in IFC; and the guidance and encouragementprovided by George Psacharopoulos, Senior Advisor, Human Development Department inthe World Bank, from the conceptual phase of the study through the final report.

ix

Executive Summary

The involvement of the International Finance Corporation (IFC) with privateschools has been recent and, so far, limited. In view of the great need for education inLDCs and the significant impact of education on development and poverty alleviation, IFChas started looking more closely at this sector in order to define an appropriate strategy insupport of its developmental objectives.

To contribute to this effort, the Economics Department of IFC, with support fromthe Sub-Saharan Africa Department, Division 1 (CAFD1), and in collaboration with theWorld Bank, recently undertook a preliminary study of Kenya's private sector educationsystem with the objectives to: (i) increase IFC's knowledge in this area; (ii) identify themajor issues facing the sector's operations and growth potential; (iii) suggest a possiblerole for the World Bank Group, especially IFC, in alleviating some of these issues; and (iv)use the study as a pilot for a follow-up broader study of private education in severaldeveloping countries.

Major findings of the study are summarized in the following paragraphs.

Effective demand for schooling substantially exceeds supply. If present trendscontinue, the gap will certainly widen because of population growth, and theGovernment's fiscal difficulties and civil service inefficiency, which prevent the publicsector from providing the quality of education demanded.

Private schools can help bridge the gap between supply and demand. The numberof private schools and enrollment have been rising rapidly. There are now over 600private schools in Kenya, including twelve universities and numerous secondary and post-secondary vocational and technical schools.

In spite of this rapid growth, there still is unmet demand, evidenced by long lists ofstudents waiting for admission to private schools and the almost universal desire of theseschools to expand.

Private schools cater to students of a wide range of income classes in both urbanand rural areas. Female enrollment in private schools is quite high and many of thevocational schools are owned and operated by women.

With respect to academic quality, private schools range from low to high,depending, in part, on the schools' resources and on the ability-to-pay of their clients. Inrecent years, indications are that on national examinations the best performing secondaryschools have consistently been private.

Practically all private schools surveyed finance operating costs out of student fees.Capital costs have been financed through various means, e.g. own resources (includingpersonal loans from extended family and friends), internal cash generation and, in a fewcases, short-term loans from financial institutions. Community or parochial schools have

xi

also received grants from within and outside Kenya. Many of these schools are nowlooking to expand but are faced with a shortage of adequate facilities available for lease,high real estate prices, and scarce and expensive credit.

As with all businesses, management of private schools ranges from the successfulto the not-likely-to-survive. Some of the private schools in our survey apply soundmanagement practices:

* Effective cost control and low receivables through prepayment of fees.

* Strategic partnering, e.g., with highly respected, mostly foreign, educationaland occupational agencies which set and mark examinations and certifygraduates.

* Niche market focus, especially in the vocational area.

* Economies of scale by spreading fixed costs across a large number of units.

* Gradual expansion to ensure debt servicing capacity.

3 Reducing the cost of expansion and the related debt-burden through rentingpremises or use of quasi-equity and internal cash generation.

Other private schools have weak management and even some of the better-runschools face several important issues:

? Limited managerial and financial skills, for which academic or teacherqualifications are not a substitute.

* Limited availability of funds.

* Prohibitive credit terms-interest rates of 30-35 percent (20-25 percent in realterms) and no medium- or long-term loans.

* Many school administrators do not know how to prepare elementary financialstatements nor do they have credit histories with which to demonstratecapacity to meet debt-service obligations.

* Private schools operate in a rather imperfect environment. For example, thesupply of appropriate buildings and equipment (e.g. computers) for leasing isalmost non-existent and the overall legal and institutional framework is, at best,cumbersome.

* Widespread poverty and limited employment opportunities which increase thedivergence between a family's ability and manifest willingness to pay foreducation.

xii

Many of the constraints faced by schools translate into risks for both the borrowerand the financial institutions which may consider investing in private education institutions.IFC in particular, could face any of the following:

* In view of the relative scarcity of funds and the large number of schoolswishing to expand, IFC/AEF could be deluged with loan applications. Thesewould be costly to process and could adversely affect IFC's image if themajority were to be rejected either on merit or because of sector over-exposure.

* Most probably, the least risky would be the high-fee schools with sophisticatedmanagement, catering to Kenya's relatively rich, elite class. Should IFC investin such schools, to the exclusion of those catering to the low and middleincome classes, IFC would again be subject to criticism.

* Should an IFC-funded school fail, it would be pragmatically difficult and,perhaps, politically incorrect for IFC to repossess its assets and risk theaccusation of "denying children their education."

In spite of these issues, or it might be argued because of these issues, there couldbe a role for both the World Bank and IFC to support the improvement of the educationalsystem. The former would intervene in the area of government policy and in improvingpublic education systems whereas IFC would be involved in supporting private schoolsand other commercial operations related to education.

If IFC were to become more involved in education, it would probably need todeviate from traditional practice and tailor its activities to the peculiarities of the educationsector. In Kenya, for example, IFC involvement would necessitate technical assistance,perhaps in collaboration with the World Bank and other institutions or NGOs, to improvethe management of private schools. IFC has already sponsored similar training programswith small and medium enterprises elsewhere.

Another issue relates to the small size of most schools, each one too small for IFCfinancing. It might be appropriate to address this issue by establishing lines of creditthrough financial institutions dedicated to education-related projects. It may be necessary,however, to provide technical assistance to some of these institutions, to enhance theircapability to deal with private school investments. A related option may be to sponsorventure capital funds to invest in the equity of education-related start-up businesses.

IFC could investigate possible involvement not only with education projects butalso at businesses providing ancillary services, e.g. leasing, textbook publishing,construction of school facilities, student loan programs, and computer learning centers.

The study demonstrated that the private sector is already making a significantcontribution in providing educational services to Kenya's people, although its potential ismuch greater. IFC might help tlhe private sector realize this potential. However, this is anew area for IFC and caution is appropriate.

xiii

I. Background

From antiquity until about one century ago, almost all education was provided byprivate organizations or individuals and paid for by the recipients. Education provided bythe state is a recent phenomenon. It came about for various reasons: partly because ofgrowing beliefs regarding equal opportunity, with education perceived as promotingegalitarianism; partly because education was expected to improve a person's character;and, partly because there was a rising recognition of education's significant contribution tonationalism as well as to economic growth and development. Many governments adoptedthe notion that education was too important to be left to the private sector. It wasthought that the private sector would cater primarily to the well-to-do, whereas educationwas viewed as a "right" of every citizen that only the government could provideadequately and equitably.

The World Bank, recognizing the importance of education, has, since 1962, beensupporting efforts by borrowing countries to improve the educational services provided bythe public sector. However, the demand for education of all types and at all levels hasbeen growing so rapidly that almost no state, rich or poor, can provide it to the degreethat students and their families want. In many countries, public education systems havesuffered in recent decades from severe fiscal constraints and loss of internal efficiency,creating opportunities for the private sector. Where states insist, on political grounds, thateducation remain the state's exclusive responsibility, the result is an impasse. Suchpolicies have led either to rationing of school admittances, usually favoring the well-to-do,or to mass education with diluted resources, resulting in poor quality. Other statestolerate the existence of private schools but at the same time maintain policies that maketheir operation less than optimal.

Rationale for the Study

World Bank Group lending to privately-owned schools has been very limited inscale. In the 1970's the World Bank made loans to the Republic of Korea, which in turnon-lent some of the loan proceeds to private Korean universities. Since 1994, IFC hasmade three loans to private schools. The first investment was in Uganda, to support theexpansion of a primary/secondary academy catering to upper income levels. In Pakistan, itentailed the expansion, modernization and curriculum improvement of a school system inseveral cities catering to middle- and low-income families. The expansion of a primaryschool to secondary level was recently approved in Kenya. These investments havetriggered a still modest but rapidly increasing flow of requests for further support ofprivate schools at all levels, in various countries. The Bank and IFC recognize thepotential contribution of private education to development, but also realize that these arerelatively uncharted waters for many, including IFC. For this reason, IFC's Econornicsdepartment, with support from CAFD 1 and the Africa Region of the Bank, undertook apreliminary study of Kenya's private education sector with the objective to: (i) increaseIFC's knowledge of this sector; (ii) identify the major issues facing the sector's operationsand growth potential; (iii) identify ways to promote private investment in education; (iv)

suggest a possible role for the World Bank Group, especially IFC, to alleviate some ofthese issues; and (v) serve as a pilot for a follow-up, broader study of private education inseveral developing countries.

Sources of Data

The study serves as an exploratory or pilot exercise. There was no model tofollow, only very modest budget resources were available, and all field work had to becompleted in a two-month time period in mid-1996. The study used existing informationwhere available, but also developed two sets of new data. First, a questionnaire survey ofabout 50 private academic and vocational schools was undertaken, spanning all levels ofeducation. Second, preliminary business plans were prepared in collaboration with theowners of six private schools or colleges. The questionnaire survey sought to obtain ageneral understanding of the nature of the supply of privately owned schools and colleges,the resources being applied by such institutions, the demand and characteristics of theirclientele, and the issues owners faced in their operations. Because of time constraints, themajority of the schools surveyed are located in or near Nairobi. Thus, it is very much a"convenience" and not a random sample. In terms of tuition levels, the survey covers therange, except for the very small and very inexpensive nursery schools for which it wasdifficult to contact the proper officials. Also, several of the prestigious, high-tuitionschools chose not to participate in the survey. While the survey generated usefulinformation on a broad scale, the initiation of the six business plans afforded anopportunity to look through the eyes, so to speak, of six school owners with respect to:(i) their growth potential and the relevant constraints they face; and (ii) their capabilities inmanaging growth and generating or obtaining the necessary finance. Institutionsparticipating in the business planning exercise included: a university, a secretarial college,a diverse group of six schools covering the range from a nursery to a technical instituteunder single ownership, two primary schools with kindergartens, and a nursery school.The findings of the survey and the six business plans were complemented by data from theprivately published "Kenya Education Directory, 1996/97 edition," public expenditurereviews (PERs), the 1994 Second Welfare Monitoring Survey [WMS-2] of a sample ofover 10,000 households from all regions of Kenya, and other sources. The WMS-2 dataprovide key insights into the behavior of households as investors in the human capital oftheir members.

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II. Kenya's Education Market

Kenya's school enrollment indicators have been somewhat above average for Sub-Saharan Africa as a whole. Growth in enrollments at all levels surged through the 1960sand 1970s, encouraged partly by the abolition of public school fees and the provision offree milk in primary grades. Alsio, enrollments in harambee or community schools, whosegrowth was never restricted by the central government, grew rapidly during this period.Growth slowed and then reversed in the 1980s, with the gross primary enrollment ratefalling from 115 percent in 1980 to 91 percent in 1993. Gross enrollment rates insecondary schools continued to rise from 20 percent in 1980 to 29 percent in 1990, beforedeclining to 25 percent by 1993. Meanwhile, enrollment rates in higher education grewfrom less than 1 percent in 1970 to about 3 percent in recent years.'

Data on the number and enrollment of private schools is incomplete andconflicting. The privately published Kenya Education Directory, 1996/97 lists about 280private primary and 300 private general secondary schools. Depending on average schoolsize, these numbers would suggest that only a very modest 2 percent of primary and 11percent of secondary school students are in private schools. However, no directory islikely to be able to list all private schools in the country. Furthermore, WMS2 data showthat households report sending 35 percent of their children to private schools at theprimary level and 32 percent at the secondary level. By comparison, about 14 percent ofTanzania's secondary school students are in private schools, where over 50 new privateschools opened last year.

Demand for Private Schools

Our survey showed that ithe demand for private education has been increasing at alllevels and for all types of education, academic, technical and vocational. Furthermore,supply has not kept up with demand. These conclusions are based on three indicators:

* A significant increase in the number of private schools and in studentenrollments in such schools.

* The existence of long and growing waiting lists of students hoping for anopening in a private school or schools of their choice.

* The nearly universal idesire of private schools to expand their operations tomeet owners' assessed growth in demand.

Our survey showed that enrollments in private schools have accelerateddramatically since the 1980s, while they have stagnated in public schools. For the schoolsincluded in the survey, enrollment of male students increased by over 900 percent between1980 and 1996 and of female students by nearly 600 percent (Table 1).

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Unmet demand for private schools is evidenced by long waiting lists of studentsthat have met the schools' admission criteria but for whom there was no room in theschool (Table 2). Many schools require a deposit to keep students on the waiting list.Still, over 2,000 students were on waiting lists for the 29 schools in our survey thatprovided relevant data. The existence of excess demand is further corroborated throughconversations with parents. They stated that it has become much more competitive anddifficult to enroll their younger children in private schools, than it had been for their olderchildren.

Table 1 Growth in Private School Student Enrollment,* 1980-96

Year Female Male

1980 975 5271985 1,396 7871990 2,757 1,8531996 5,615 4,845

%change 1980-1996 576 919

* Includes academic and vocational schools in the questionnaire survey. Technical schoolsexcluded because of unavailability of historical data.Source: Private School Survey, August 1996.

Ninety percent of the schools in the survey indicated plans or at least desire toexpand in response to growing demand. The survey does not reveal the accuracy of themarket assessment on which such plans are based. Nonetheless, this indicator, togetherwith growth in enrollment and the size of waiting lists, reveals sizeable excess demand foreducational services that parents believe can best be addressed through private schools.

The following factors account for some of the growth in demand:

- Population Growth. Kenya's population is now growing at about 2.7 percentp.a. Although lower than the staggering 3.9 percent of a few years earlier, itstill generates a rapidly increasing student-age population.

* Fiscal Constraints Faced by the Public Sector. Recent reviews indicate thatpublic expenditures on education, recurrent and investment, have fallen in realterms since 1989, even though the education share, as a percentage ofGovernment outlays across all sectors, has actually been increasing. A recentstudy found that "the Government contribution to the financing of secondaryeducation per student has declined in real terms by 10 percent over the pastfive years" (Karani). Only in post-secondary education is the establishment ofnew Government-owned institutions still taking place today. Recurrentexpenditures absorb most Government revenue, leaving very few resources toinvest in expanding public schools.

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Table 2 Number of Students on Waiting Lists to Enroll in Private Schools, 1996

# on # on onAcademic Schools waiting % of waiting % of waiting % of

list Enrollment Technical Schools list Enrollment Vocational Schools list Enrollment

Arya Girls Secondary 30 35 Wote Training Institute 0 0 Nairobi North Polytechnic 20 7Brookhouse School 0 0 Universal College "yes" n.a. Nanyuki Commercial College 0 0Cavina School 50 70 Technical Institute 50 13 Kenya Industrial Training Centre 0 0Kianda School 420 74 Kenya Institute of Freight 103 65 Skyways Travel Services Institute n.a. n.a.

ForwardersLoret-o Convent. 25 16 Oshwal College n.a. n.a. Kimlca Girls Techniral Tring 200 222

CentreMara Road Nursery 40 42 Kenya School of Export & n.a. n.a. Kibondeni College 350 219

ImportMateri Girls Centre 600 313 Nairobi College 0 0 Ridgeway Academy of Arts 100 116

l Premiere Academy 180 113 Kenya School of 100 8 Valley Secretary College 12 8Professional

StudiesRavals Secondary School n.a. n.a. Virginia Slims College 14 54St. Hannah's Preparatory n.a. n.a.St. Lucie Kiriri Girls 50 25Serare School 0 0 _

Source: Private School Survey, August 1996.

* Better Image of Private Schools. Although some of Kenya's public schoolsare excellent, the highest individual scores on Kenya's school examinationshave, in recent years, been attained by private school students. Equallyimportant is the perception among parents and students that, with someexceptions, private schools provided better quality education and are moreefficiently managed than public schools. In addition, some widely publicizedincidents of rape, violence and pregnancy among public school students haveheightened public perceptions of inadequate attention given to proper behaviorand morals in public schools.

* Public Schools Are BecomingMore Expensive for Parents. As public schoolsand universities see their per-pupil subsidies cut back due to Governmentbudget constraints, they are left with little option but to generate their ownincome through raising fees, especially for recurrent cost financing. As Table 3shows, parents now pay for about two-thirds of the cost of public secondaryschools, while the Government finances only about one-third. Also, the costsborne by parents of public and private secondary schools have become verysimilar.

Table 3 Financing of Secondary Education by Main Source, 1994

Contributions Per All StudentsStudent (US$) (US$ Million)

Public Schools Parents 182 102Government 100 56Other 3 1.7Total 286 159

Private Schools Parents 190 12Other 4 0.3Total 194 12

Grand Total 171Source: Prof. Karani, et. al., Table ii.

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Unit costs in public secondary schools are, on average, nearly twice those ofprivate secondary schools"' (Table 4).

Table 4 Cost of Secondary Education, 1994

Number of Enrollment Unit Cost Total CostSchools ('OOOs) (US$) (US$ million)

Public Schools Day 709 155 198 31Boarding 1,063 232 352 82Day / Boarding 779 170 335 57All 3 types 2,551 557 304 170

Private Schools Day 79 17 93 1.6Boarding 110 26 234 6Day/ Boarding 87 19 151 2.7All 3 types 283 62 170 11

Total 2,834 620 294 182Source: Prof. F. Karani, et. al., Table L

Although monetary costs are expensive for middle and low-income families,opportunity cost of time is the major cost in education. This is especially important in ruralareas where children contribute labor to household welfare. If public school efficiencydeteriorates to the point where time in school is wasted, the corresponding opportunitycost may prompt parents to look to private schools for better use of their children'svaluable time or take them out of school altogether.

Indications are that strong demand for privately owned schools and colleges willcontinue, even if the financial cost to parents is slightly higher than at public schools.None of the factors mentioned above appears likely to change significantly in the next fewyears.

Characteristics of Private Schools Surveyed

Some of the principal operating characteristics vary between academic, technicaland vocational schools as shown in the brief description for each type of school below.

Private Academic Schools. Twenty academic schools were included in the survey,primarily in the Nairobi area. Even though the first private schools date from the earlypart of the century, more than half of those surveyed started operations after 1980.Enrollment growth for male students rose by nearly 900 percent between 1980 and 1996,and for female students by over 500 percent during the same period (Table 5). Themajority (62 percent) of the schools are co-educational, while 27 percent are all-femaleand another 11 percent all-male.

Annual operating costs of academic private schools, presented in Annex 1, vary agreat deal, both in total and on a per student basis. Based on survey data, total operatingcosts range from US$26,520 to US$649,943 per school while costs per student vary from

-7 -

US$120 to US$3,250, (exchange rate: Ksh 55 = US$1.00). Teacher and administrativesalaries constitute the largest single cost item for all schools. Three out of four academicschools surveyed are classified as "for-profit" while the remainder are classified as "non-profit" or tax-exempt. Many of the latter are affiliated with religious or ethnic communityorganizations. However, all religious and community schools accept students of all racesand religions. It is worth noting that while some of the most expensive schools pay notaxes, some of the lowest cost schools are tax-paying even though they tend to bepatronized by lower income groups.

Table 5 Enrollment Growth in a Sample of Academic Private Schools, 1980-96

Year Female Male

1980 898 4671985 1,312 6271990 2,507 1,6231996 4,567 4,173

%change 1980-1996 509 894Source: Private School Survey, August 1996.

Private academic school fees range from US$55 to US$1,818 per term. Schools inthe survey are classified in Table 6 below according to the fees they charge per term. Thisdistribution is skewed toward the high end because many of the low-cost schools,especially in the rural areas, were not included in the survey because of this study's budgetand time constraints.

Table 6 Sample Private Academic Schools and Universities by Fee Category

Highest Cost Medium Cost Lowest Cost700 to 1850/term (US$) 180 to 300/term (US$) 50 to 150/term (US$)

Aga Khan Academy Kianda School Arya Boys Secondary

Arboretum School Loreto Convent (Msongari) Arya Girls Secondary

Brookhouse Senior School Loreto Convent (Valley Road) Mara Road Nursery

Cavina School Materi Girls Centre Ravals Secondary School

Daystar University Pindolia Academy St. Mary's Academy

Nairobi Academy Serare School

Premiere Academy St. Hannah's Preparatory

St. Lucie Kiriri Girls

Source: Private School Survey, August 1996.

Private Technical Schools. Eight technical schools were included in the survey, alllocated in Nairobi. The oldest and largest, with over 10,000 students, was established in1967 and the newest in 1992. About 14,000 students are enrolled in these technical

- 8 -

schools, including 600 students from neighboring countries. The schools offer programsin business studies including accounting and finance, secretarial skills, computer classes,library science, legal studies, and shipping and transport management. Many of theirgraduates take examinations administered by examining bodies in the United Kingdom orelsewhere, which in essence validate the competence of the students in their respectivefields of study.

Overall annual operating costs of the technical schools vary from US$42 toUS$665 per student, as shown in Annex 2. The variation is not simply between schools,but also within schools, depending on the type of course being pursued. Annex 4 showsan example (Kenya School of Professional Studies) of how diverse the courses are: law,accounting, computing, supplies management, marketing, and secretarial.

Student fees vary from US$146 to US$900 per term. An additional considerableexpense to the student is the cost of examination fees required to receive certification frombodies such as the Kenya Accountants and Secretaries National Examination Board, theKenya Library Association or tlhe United Kingdom Chartered Institute of Marketing.Kenyan associations typically charge from US$187 to US$727 per examination while theUnited Kingdom Accounting exams cost US$600 to US$800 per examination. Althoughcourse and examination fees appear high in relation to Kenya's per capita income, andconstitute the main reason for dropping out, waiting lists numbering in the hundredssuggest that demand is very high. The high costs result in the majority of technical schoolstudents coming from mostly middle- and high-income families.

Private Vocational Schools. Eleven vocational schools located in and aroundNairobi were included in the survey. Enrollments have increased spectacularly since 1980,particularly for female students, a reflection of the demand by women, many of themrecently urbanized, to be able to generate incomes in their new environment. The numberof female students in these schools has risen by over 1,300 percent while that of malestudents by over 110 percent (Table 7).

Table 7 Total Enrollment of Students in Vocational School, 1980-96

Year Female Male

1980 77 601985 84 1601990 250 2301996 1,048 672

%change 1980-1996 1,361 112

Source: Private School Survey, August 1996.

Vocational schools offer courses in catering, hairdressing, dressmaking, air travelservices, food management for cafeterias, secretarial, carpentry, and machining. Operatingcosts, as shown in Annex 3, vaiy from US$100 to US$869 per student per term. Thevariation depends in part on the course. Fees range from under US$100 to US$900 per

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program which are of varying duration. Most students are in low and middle incomefamilies.

Private Universities. There are three accredited private universities and anothernine are registered with the Government's Commission of Higher Education, compared tofive state-owned universities. Although enrollments in the private sector have beengrowing rapidly, to about 4,500 in 1994, enrollments at the state universities are far morenumerous, at about 43,000. In addition, there are about 450 private institutes, colleges,academies and schools, compared to 37 public institutions, called either "institutes oftechnology" or "technical institutes" operating in various parts of the technical, vocationalor career training field, usually at a post-secondary level (another 600 and some "youthpolytechnics" tend to operate more at the post-primary level.)

Socioeconomic Characteristics of Private Schools

In their insightful comparative study of Kenya and Tanzania in 1980, John Knightand Richard Sabot found that "It might be expected that the greater importance of privateschools in Kenya would produce greater inequality of access to secondary places. This,however, overlooks the role played by the size of the system. Kenya's "failure" to curbexpansion [of non-Government schools] contributed to a more equal distribution ofsecondary schooling."ff Knight and Sabot's survey work went on to find that it was "thegreater importance of the fee-charging private sector" in Kenyan education in 1980 whichgave the system its size by providing "easier access for the children of the poor anduneducated there than in Tanzania."n'

Fourteen years later, the WMS-2 of 1994 found that private schools cater tofamilies of all income levels, not merely the well-off, as Table 8 below clearly shows.Especially in rural areas, among the youth who attend secondary school, the percentageattending private schools is actually higher among the poor than among the wealthy.There are possibly quite different reasons for this important finding on the greatertendency of the rural poor to patronize private schools. One is the ability of privateschools, as a whole, to adapt their service lines to all pocketbook sizes, even small ones.The second explanation is the fact that children from higher income families are moresuccessful in accessing the more space-constrained, selective and prestigious government-subsidized public schools, which are often boarding schools, thus crowding out the lessaffluent.

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Table 8 Private School Share of Total Secondary School Enrollments byIncome Quintiles, Rural and Urban, 1994

Income Quintile No. in Private Secondary No. in All Secondary %Schools Schools

Rural Areas

1 12,107 33,407 362 21,309 65,295 333 28,495 95,318 304 30,259 115,540 265 31,6071 122,907 26

Urban Areas

1 7,059 14,751 482 9,446 24,705 383 10,321 28,872 364 12,061 31,484 385 21,839 46,226 47

Source: Second Welfare Monitoring Survey [WMS-2], Central Bureau of Statistics, Kenya.

According to a Ministry of Education study" mean per student costs in publicsecondary schools amount to US$300 p.a., compared to a mean of only US$190 in privatesecondary schools. Thus, many private schools are significantly less costly to operate thanthe average public school. School costs are met by a combination of fees charged toparents, subsidies provided by Government (to public schools), and by grants frombenefactors. Table 9, based on WMS2 data, shows that while in urban areas privateschools charge higher fees than public schools, the reverse is true in rural areas, whereprivate schools are able to operate while charging lower fees than public schools.

Table 9 Average Secondary School Fees (Ksh)

School Type Urban RuralPublic 6,184 6,622

Private 8,741 5,830

Source: WMS2, 1994.

It is sometimes argued that many of the lowest-cost private schools provide a verylow-quality education and, consequently, poor parents are defrauded by such disreputableschools. This argument deserves careful attention. The large cost-cum-quality differencesamong schools reflect market segmentation due to large differences in householdpurchasing power and preferences. It even occurs to some extent within the state schoolsector. Nonetheless, a strong case can be made that a wide quality-price range is efficientand responsive to the variety of'felt needs. First, of the private school ownersinterviewed, most reported that their students' average scores on national examinationswere equal to or better than the national average. Second, students attending low-cost

schools are at least getting some secondary education which they would otherwise bedenied, given the binding space constraint in the government sector. Attendance in lowcost, low quality private schools is a result of free choice. Consequently, there is no apriori reason to believe that consumers are not making a rational benefit/cost/riskcalculation when they decide to enroll and re-enroll their children or themselves in suchschools, given that they have the public school option available to them. It makes littlesense to deny lower income groups such choices, simply because educational standards insome inexpensive schools have lower quality standards than more expensive schoolspatronized by higher-income groups.

The question has been posed of how can the poor afford school costs, especiallywhen Kenya's GNP per capita has declined from US$450 in 1980 to US$260 in 1995.The answer lies primarily in two factors. First, Kenyan households have more realdisposable income for education than conventionally assumed. In terms of purchasingpower parity, Kenya's 1994 GNP per capita was US$1,310-five times the figureestimated in traditional national income accounts."1 Secondly, disposable income in Kenyais not devoted to nearly as many uses as in industrialized societies. Many large butstandard household expenditure items are not found in most Kenyan households, such as:home mortgages, insurance, income tax, loan payments, utility payments, etc. The sum ofthese is significant, so that disposable income for food, clothing, education and health isrelatively substantial.

The 1994 WMS2 survey into the affordability of education expenses providesinsights for the average household. The survey reported the national per capita annualincome as Ksh 27,403, or US$ 498 with an annual per capita expenditure of Ksh 21,961,or US$ 399. Meanwhile, at the household level, mean expenditure was Ksh 88,717, orUS$ 1,613. It also reports that while food accounted for 59 percent of expenditure, healthand education took only 5 and 3 percent respectively. Table 10 shows the annualhousehold expenditures for the various levels of education for those households whichactually had at least one child enrolled in school.

Table 10 Household Expenditure per Enrolled Child, by Level of Education, 1994

Level Nationwide US$ Nairobi US$

Pre-primary 11 46Primary 16 70Secondary 184 270Vocational 139 197University 410 657

Source: WMS II, Basic Report, 1996, Table 4.11.

The average expenditure of only US$16 per enrolled primary school child appearsaffordable. However, at US$184, the expense of sending a child to secondary school islikely to prove burdensome for the average family, although much of that expense will payfor the cost of boarding rather than classroom instruction. Thus, the cost of daysecondary school is significantly less than this, and therefore affordable.

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The Supply Response of the Private Education Industry

The rapid rise in enrollments in all types of private schools indicates that supplyhas increased rapidly to respond to the rise in demand for education. The surveyquestionnaires and the initial business plans prepared for this study indicate how some,though not all, private owners are proving innovative and adaptive in responding to thegrowing demand for education.

The Key Role of Financial Management. The business plans and surveyinterviews revealed a wide range of managerial innovation and skill in operating within theexisting market for education services in Kenya. Some examples of good financialmanagement include the following:

* Virtually all owners insist on prepayment of fees at the start of each term, thusminimizing accounts receivable. Some schools apply late payment penalties tostrengthen payment discipline and protect school income.

* Some schools have established installment payment plans for parents who wishthem, but a fee is added to the installment, again, to protect school income.

- To protect the school against damages, some schools require the payment of"caution money" when a student is enrolled initially. Since this deposit is onlyreturned when the student graduates, it becomes a source of quasi-equityduring the student's enrollment.

- Many technical and vocational schools lease rather than buy space. In somecases, they do so to keep down their debt levels and save on debt servicingcosts but in other cases, they cannot find adequate facilities at affordable pricesor cannot obtain the necessary financing.

* Virtually all private schools started small. Thus, costs resulting from theinevitable errors which were made while developing the business model, didnot spell financial disaster.

* Over time, some school owners achieved economies of scale by spreading theirfixed costs over a greater number of students or by operating a set of schools,including nursery, primary, secondary and technical schools.

* Several owners insure against inflation risk and monetary instability. Even ahairdressing school warned prospective students that fees are subject to changeaccording to the dollar: shilling exchange rate at the time of registration.

Strategic Partnerships. Rather than attempting to create internal capacities in allareas, many private schools successfully establish partnerships with independent outsidebodies, at least for certain strategic functions.

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* For example, since the credibility of the final examination certificate is soimportant to the client and to employers, most private schools which lackadequate recognition collaborate with highly respected, mostly foreign,educational and occupational agencies which set and mark examinations andcertify the graduates.

* On the other hand, conditions are apparently not ripe yet for partnerships todevelop in other areas which would seem appropriate for this managementstrategy. For example, even though many Kenyan parents have a strongpreference for boarding schools, we did not hear of schools partnering orcontracting with companies to provide boarding services for the school.Rather, the prevailing practice is for boarding to be managed by the school.

Resource Management. Most private schools in the study controlled operatingexpenses through measures such as maintaining economical class sizes. However, in othercases staffing ratios were set at unsustainable levels, threatening the solvency of theoperation. In general, however, private owners respond to consumer preferences.Examples abound.

- While public primary and secondary general schools are required to adhere to astandard national curriculum, which has come in for heavy criticism,f someprivate academic schools are responding to parental demand for alternativecurricula and examinations, including some which are set and marked abroad,and which command wide recognition.

- Other private schools advertise strict discipline and structured learning whichmany parents seek.

- The vocational and technical schools surveyed offer a wide variety of coursesin every field from crafts to information technology. Some of them couldprobably take in students with training vouchers, financed by the current IDACredit for the training of micro-entrepreneurs, in the Jua Kali or informalsector.

* In terms of cost and quality, different private schools can be found in allsegments of the market-from the highest quality and most expensive, to theworst and cheapest-responding to the demands of varying pocketbooks.

Adopting Technologies to Obtain a Competitive Edge. Some private owners seemto be responding to competitive pressures by providing superior value for money. Asidefrom the cost management already mentioned, private owners are keen to adopt newertechnologies, both for instructional purposes and in institutional management.

Product Differentiation and Related Pricing Practices. The higher average costand fee levels and the extraordinary range of costs and fees in academic schools, comparedto the technical and vocational schools (Annexes 2 and 3), appear to reflect supplierdecisions to adjust products and prices to serve a highly segmented market. So, on the

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one hand, some schools provide a premium service, for which higher income householdspay a premium price. At the other end of the spectrum, other schools provide a lessereducational product, at a lower lprice, which is at least competitive with what is on offer inthe public sector, and is possibly more cost-effective, to judge from the data onenrollments by income quintile.

Private School Financing Practices. Operating costs are generally met throughstudent fee income, except for some religious and community schools which also receivegrant subsidies. Capital expenditures are financed from student fees, owners' andextended family savings, grants, or caution money held as quasi-equity. Some institutions,e.g., vocational schools and Daystar University which has undergone significant growthover the last few years, have financed capital expenditures through donations from withinand outside Kenya.

Profitability

Profitability is as important in education as in any other industry in the privatesector. After all, profits are the very basis of sustainability. Without them, private schoolswould slide into bankruptcy and be of no value to their clients.

While it was not possible to perform financial audits within the scope of this study,it appears that most of the schools in the business planning exercise and most of thosesurveyed have undergone successful expansion. Four out of the six preliminary businessplans prepared under the study showed high internal rates of return. However, it was notpossible to verify all of the assumptions under which these projections were made so thatthese preliminary results may not be accurate. It appeared that some of the schools in thesurvey were not managed optimally so that, should the demand for education ease up, theywould find it difficult to survive.

Some schools experienced high operating margins simply by exploitingcharacteristics of school operations which provide natural profit "drivers".

* Zero accounts receivable and zero inventories-due to prepayment of fees.

* Steady and predictable business volume, given that upon entering a school, e.g.at primary level, students normally move stepwise up the cycle, making thesupply of complementary inputs very predictable for several years.

* Some school owners enhance the predictability of revenue volume by verticallyintegrating a nursery, primary or secondary school so that student intake into ahigher cycle is assured by graduates from the lower cycle.

A recent study of Kenyan schools suggests that while public secondary schools onaverage operate with a 6 percent deficit per annum, private secondary schools average a13 percent "surplus" annually.""

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Market Opportunities

The newest market opportunities for school owners appear to lie in two quitedistinct areas.

* Deteriorating quality in the previously up-market public sector schools anduniversities is creating openings at the smaller, high end of the market for thosewho can afford high fees.

* At the lower end of the market, total demand for private education may begreater than at the high end. Even though student fees are lower, the volume isso much greater that potential total revenues may be greater than at the highend. In view of the Government's fiscal difficulty many children in this marketsegment have no access to school, while those who do, have to cope withdeteriorating quality of education. An important risk in this market segment isthe downward pressure on disposable incomes from the stagnant economy.This can easily result in high drop-out rates as parents can no longer afford topay school fees. Nonetheless, this segment is worth exploring because it couldpresent opportunities for efficient, volume-and-growth-oriented "edupreneurs".

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III. Constraints Facing Private Schools in Kenya

Although there are forces underpinning the evident growth of privately owned andoperated schools and universities in Kenya, there are also several factors constraining evengreater growth.

* Poverty is a constraintfor manyfamilies. Low incomes limit the overallavailability of domestic resources for private as well as public education.

* LimitedFinancialMManagementSkills. Although some ofthe school ownerswho participated in the study showed keen financial management skills, manyothers are having to learn these skills on the job, since most private schoolowners were trained as educators. The lack of these skills becomes a moreacute constraint when relatively small schools wish to expand or try toreposition themselves into a different market niche and need to raise financingoutside the organization, as well as manage a larger operation in a morecompetitive environment.

* Limited Access to Commercial InvestmentFunds. Kenya's domestic creditmarkets and institutions have suffered in recent years from considerableuncertainty, brought about by macroeconomic mismanagement and politicalinterference. Commercial interest rates have been 25 to 30 percent. For themost part, only short-term credit is available, making it difficult for schools toundertake long-term investments. Furthermore, domestic financial institutionswhich do make loans have institutional restrictions on lending to schools.

* Limited Access to Foreign Exchange. Most private school revenues are inlocal currency. In unstable economic conditions, as often prevail in Kenya,borrowing in foreign exchange entails considerable risk. In the case of theIFC-project in Pakistan the foreign exchange risk was mitigated through aswap mechanism which, in essence, allowed the borrower to deposit the dollaramount of the IFC-loan with the Central Bank and receive an equivalent loanin local currency. The borrower would repay the IFC loan by convertingrupees to dollars at a fixed exchange rate, guaranteed by the Central Bank, forwhich the borrower pays a fee. Swaps and other hedging mechanisms arebecoming increasingly common and could provide an answer to educationinvestments faced with foreign exchange or interest rate risks.

* Physical Constraints. While physical accommodations can be modest, the bulkof instruction requires physical premises reasonably hospitable to educationalpursuits. The recent prolonged recession in Kenya has left a dearth of vacantproperties. New construction is needed either for direct ownership or leasingby schools and colleges. At the same time, real estate in and near Nairobi hasbecome expensive, particularly for sites which would be appropriate forlocating educational facilities. For example, Oshwal College was establishedrecently and rents all its facilities near the center of Nairobi. Rent accounts for

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about 20 percent of its total operating expenses. Like many other schools,Oshwal is looking to build its own facilities outside the city but is constrainedby the lack of affordable finance. Most technical schools surveyed alsoindicated that they wish to expand but cannot because of the scarcity of properfacilities for rent, the associated high cost of renting and the unavailability offinance to construct their own facilities.

* Lack of Access to the Leasing Industry. Firms which lack capital or debtcapacity could benefit from leasing but the leasing industry in Kenya has, thusfar, not played a significant role in developing Kenya's private educationsector.

* Lack of Student Loan Schemes. Private banks, working with the owners ofprivate education institutions, have not yet found a way to manage studentcredit risk to acceptable levels and government-financed student loans are notavailable to students attending private institutions.

* Cumbersome Legal and Institutional Framework. Although the government isnot against private schools, many schools reported that obtaining the necessarylicenses or permits is an arduous and expensive process, especially inexpanding or establishing a new institution.

- Security. Crime in Nairobi has increased over the years and private schoolshave not been spared. Theft of equipment and robberies of students on andnear school premises have necessitated additional expenses to hire securityservices, replace equipment and in many instances curtail school hours toensure that students leave before dark.

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IV. Conclusions and Implications

Private schools can be both profitable and provide good education to students ofall income levels, including the poor. They accomplish this by: (i) responding to theboom in demand for education; (ii) differentiating the product and pricing it according tothe clients' ability to pay; and (iii) achieving a higher degree of efficiency than publicschools. Private and public school systems in Kenya have not been able to satisfy thedemand for education. The private sector is willing to expand but faces severalconstraints, primarily stemming from the scarcity of finance and limited skills of"edupreneurs" to manage the expansion and operation of schools as modem businesses.

Implications for Financial Institutions

The study showed that in some cases privately-owned, for-profit education mightbe "bankable." Yet, Kenya's financial sector has had minimal involvement in education.Commercial lending institutions should consider schools, colleges, universities, technicalinstitutes, learning centers and related institutions, as they do other types of businesses.That is, they should regard thern as potential business opportunities and apply the samefinancial and business management tests that apply to other investment proposals. As theynormally do, they need to analyze and forecast revenues and expenses, examine costcontrols and risk management, clearly understand the specific market and its opportunitiesfor profit as well as loss, and assess creditworthiness. However, education, like any otherbusiness sector, has its own special characteristics which need to be understood before anyappraisal is complete and an up or down decision can be made in confidence.

In some industrialized countries, most notably the United States, the financialsector has come to realize the potential of education as a business. In Kenya, andprobably in many other countries, most banks are reluctant to consider educationalinstitutions for project financing.

Implications for Government Policies and Role

Investors require a stable environment before they invest in projects with longpayback periods. The government can improve the investment climate by adopting soundmonetary and fiscal policies, and a stable rule of law.

As a generality, Kenyan Government practice and policy toward private educationhave been positive. This policy yields distinct advantages for the country andGovernment. The increased availability of places in private schools not only satisfiesparental aspirations, it automatically reduces the government's current and projected fiscalburdens. Indeed, since most private schools pay taxes, they actually increase Governmentrevenues.

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The Government should actively promote the following:

* Strengthen the enforcement of laws protecting property, leaseholder, lesseeand lender's security rights. Enforcement of property rights allows propertyowners to use that property as collateral when borrowing capital to expand orimprove their facilities. Thus, it greatly reduces the cost of transactions.

* Disseminate basic statistics on operation of the sector so that both educatorsand parents can make better-informed decisions.

* Remove disincentives from attending private schools, such as an educationlevy.

* Finance means-tested bursaries or scholarships so the poor can send more oftheir children through upper primary and secondary school and beyond, as faras their talents can take them.

Should the Government borrow funds from IDA or even IBRD and on-lend themto private schools or universities? There is precedent for this approach in Korea. Someobjections might be raised to this option, however well-intended. First, it may be difficultfor the Government to deal with the political fallout from including some schools but notothers in such a scheme, since selectivity is inevitable. It may be wiser to leave thesechoices to other, less political bodies. Secondly, use of IDA/IBRD funds may lower thefinancing terms but will invariably raise transaction costs to the ultimate borrower. Notonly Bank project preparation and appraisal take considerable time, but, more importantly,Bank procurement guidelines may significantly increase the number of hurdles, steps,clearances, approvals, etc., designed to safeguard the proper use of these funds. Privatelenders, as well as IFC, have less complicated procedures. Furthermore, IFC normallyrequires the sponsor to put up at least a third of the project funding from internal sources,thus reducing the temptation to the borrower to neglect or misuse the investment.

Implications for the World Bank Group

IFC's mandate is to promote development by promoting private sector activities indeveloping countries. Education generates substantial developmental impact and IFCshould seek out appropriate opportunities to support private sector education. Thisshould in no way be interpreted to mean that IFC should support unprofitable educationprojects. If they are not profitable, they will not operate for long and will not generate anydevelopment impact. It may be argued, however, that given the importance of educationand the weakness of the private education sector in countries like Kenya, IFC shouldassume a pro-active stance in helping establish the conditions which will help"edupreneurs" minimize risks and increase the probability of being profitable.

The risks or constraints facing "edupreneurs" in Kenya have been described earlierand are summarized here: insufficient expertise to handle increased financial andmanagement requirements associated with expanded operations; limited access to credit,

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especially long tern; high interest rates; and reluctance of financial institutions to lend toschools.

There are also risks or constraints for IFC. In view of the relative scarcity ofresources, combined with the potentially enormous number of schools wishing and able toexpand, IFC could quickly be deluged with loan applications. These would be costly toscreen and could adversely affect IFC's image if the vast majority were to be rejectedeither because of lack of technical/financial merit or because of IFC's over-exposure.There may be ways for IFC to pre-empt this risk, for example, by involving local banksand providing them with lines of credit for on-lending in various subsectors of education.

Should a school-borrower of an IFC loan fail, it could be politically difficult forIFC to repossess its assets and risk the accusation of "denying children their education".

These risks are real and cannot be easily overcome. IFC will have to deal withthem in an innovative manner, as it has done when complex situations have demandedinnovative solutions. IFC could play an effective role in promoting education indeveloping countries but the specific actions would need to be tailored to the peculiaritiesof the educational sector. Before becoming more heavily involved in education IFCshould seek to investigate the feasibility as well as the appropriateness of:

- Exploring the potential for viable educational projects. IFC should be careful inselecting the projects it will invest in because of the demonstration effect onother financial institutions whether lending for education makes good businesssense.

- Playing a catalytic role in attracting investment funds to educational projects.As IFC normally does, it should try to mobilize resources, e.g., throughsyndication or by sponsoring venture capital funds to invest in the equity ofeducation-related start-up businesses.

* Providing technical assistance, perhaps in collaboration with the World Bankand other institutions or NGOs, to improve the management of private schools.IFC has already sponsored such programs for small and medium enterprises inBosnia and in the West Bank and Gaza, that provided management training forsmall entrepreneurs. "[n this area, the Economic Development Institute (theWorld Bank's traininig arm) should investigate the possibility of enlarging itsscope from providing training to public sector officials to private schoolowners and managers.

* Establishing lines of credit through financial institutions dedicated toeducation-related projects. In Kenya, it may be necessary to provide technicalassistance to some of these institutions to enhance their capability to deal withprivate school investments.

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* Supporting not only schools but also businesses providing ancillary services,e.g. leasing, textbook publishing, construction of school facilities, student loanprograms, and computer learning centers.

A Coordinated Bank Group Strategy. In spite of these risks or issues-and onemight argue because of them-there is indeed a role for both the World Bank and IFC tosupport the improvement of the educational system. More conservative commercialinstitutions are likely to remain on the sidelines until these two institutions give leadershipthrough a coordinated strategy. The Bank should intervene in the area of governmentpolicy, both with respect to the issues raised as well as with respect to the curriculaoffered (an area that needs a lot of attention but outside the scope of this study). TheBank could also have a significant part in providing training to borrowers and to lendinginstitutions that might cooperate with IFC.

The study demonstrated that the private sector is already making a significantcontribution in providing educational services to Kenya's people, although its potentialcontribution is much greater. IFC might be able to help the private sector realize thispotential. However, this is a new area for IFC and caution is appropriate. Investing inprojects that subsequently fail or do not serve the educational needs of their clients, willsend the wrong signals to the public, to financial institutions and to policy makers. At thesame time, IFC can play a catalytic role in supporting education. The study suggestedsome ways in which IFC can implement this role. These need to be examined in greaterdetail and ultimately each individual project has to be judged on its merits.

This preliminary study raised some issues related to Kenya's private schools.There is a need for further investigation of these issues, for example, of the specific rolethat the financial sector could have in education or of the types of schools or ancillaryservices that could be supported by IFC.

The study dealt only with Kenya. Undoubtedly, while some of the findings arereplicable in other countries, others may not be. There is great variability among LDCswith respect to attitudes toward education and with respect to the breadth of the privateeducation system. At the same time, there is a wealth of experience in both developed anddeveloping countries which needs to be documented and tailored to serve the needs of IFCand its client countries.

Endnotes

"A Statistical Profile of Education in Sub-Saharan Africa in the 1980s" and "A Statistical Profile ofEducation in Sub-Saharan Africa, 1990-1993," Tables A-7, A-8, and A-9; Association for theDevelopment of African Education, IIEP. Paris, 1994 and 1995, respectively.

Prof. F. Karani, et. al., "Access, Quality and Equity in Secondary Education," consultant report forthe Kenya Ministry of Education/World Bank, December 1995.

John B. Knight and Richard H. Sabot, Education. Productivity and Inequality: The East AfricanNatural Experiment 1990, Oxford University Press for the World Bank, page 33.

Iv lbid., p. 48.

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Prof. F. Karani, et. al., 'Access, Quality and Equity in Secondary Education," consultant report forthe Kenya Ministry of Education/World Bank, December 1995.

n World Bank, World Development Report 1996."' A recent World Bankl mission to Kenya reports that "...a revision of the curriculum [is] perhaps the

single most important step in improving education."v' Prof. F. Karani, et. al., "Access, Quality and Equity in Secondary Education," consultant report for

the Kenya Ministry of Education/World Bank, December 1995.

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Annex 1

PRIVATE ACADEMIC SCHOOLS, 1996 OPERATING COSTS(U.S. dollars)

School Teacher Admin. Other Insurance Utilities Supplies Financial Taxes Other Rent Total $ S/StudentSalary Salary Salary

Cavina School 204,327 44,727 23,563 18,181 14,182 3,636 3,636 21,818 20,909 24,873 379,852 643

Brookhouse School 283,636 113,272 21,818 23,636 14,545 54,545 29,090 109,090 311 649,943 3,250

Kianda School 155,020 29,462 25,883 2,818 14,400 11,500 0 39,769 6,363 285,215 501

Serare School 53,450 24,673 43,674 5,927 6,454 36,036 8,938 9,186 37,260 0 225,598 755

St. Hannah's 50,909 18,182 1,818 21,818 95,454 38,182 1,400 1,764 55,236 1,364 286,127 409Preparatory

Arya Girls' 69,091 4,545 3,636 8,636 182 8,182 4,545 98,817 412Secondary School

s Mara Road Nursery 7,272 3,636 2,181 2,454 2,691 654 218 4,727 2,727 26,560 277

St. Lucie Kiriri Girls 60,358 7,045 9,429 7,255 2,367 80,636 0 167,090 831Secondary School

Materi Girls' Center 70,349 9,207 17,456 2,909 36,364 90,909 182 13,091 61,818 0 302,285 474

Ravals Secondary 25,454 9,090 727 690 5,454 1,091 5,454 47,860 120

Premiere Academy 545,454 40,000 50,182

Daystar University 2,828,000 2,175

Source: Private School Survey, August 1996.

Annex 2

PRIVATE TECHICAL SCHOOLS, 1996 OPERATING COSTS(U.S. dollars)

School Teacher Admin. Other Insurance Utilities Supplies Financial Taxes Other Rent Total S $/Student No. ofSalary Salary Salary Students

Wote Training Institute 8,727 5,454 5,236 984 1,092 1,820 0 1,156 327 7,418 32,214 66 488

Universal College No financial information provided

Technical Institute 38,181 36,363 2,454 2,182 79,180 132 599

Kenya Institute of 1,309 1,309 655 655 2,636 2,182 150 1,818 12,727 23,441 47 498Shipping Management

Oshwall College 272,727 90,909 36,364 109,09 509,09 665 7651 1

Kenya School of 2,873 20,073 5,673 764 518 4,836 4,445 4,363 9,382 52,928 398 132Exports and Imports

a Nairobi College 5,091 4,363 1,636 1,091 1,454 545 6,611 20,791 172 120

Kenya School of 54,545 42 1,300Accountancy

Kenya School of 171,010 52,786 19,909 10,909 90,909 16,363 4,545 1,818 218,18 589,43 473 1,240Professional Studies 2 1

TECHNICAL SCHOOLS, GROSS AND NET INCOME, 1990-96

School 1990 Gross $ 1990 Net $ 1994 Gross $ 1994 Net $ 1995 Gross $ 1995 Net $ 1996 Gross $ 1996 Net S

Kenya School of Exports/Imports 24,727 50,000 65,454Nairobi College 4,527 4,018 2,200Oshwal College 163,636 272,727 472,727Wote Training Institute 10,181 21,818 545 32,727 909Kenya School of 107,799 11,834 363,577 15,363 560,317 61,516 415,472Professional Studies

Source: Private School Survey, August 1996.

Annex 3Page 1 of 2

PRIVATE VOCATIONAL SCHOOLS, 1996 OPERATING COSTS(U.S. dollars)

School Teacher Admin. Other Insurance Utilities Supplies Financial Taxes Other Rent Total $ $/StudentSalary Salary Salary

Nairobi North 12,218 3,273 3,818 727 14,545 5,455 364 727 909 1,455 43,491 145Polytechnic

Nanyuki Commercial 2,116 764 145 873 3,898 100College

Kenya Industrial 2,909 5,454 4,364 164 229 136 873 14,129 202Training Centre

Skyways Travel Services 1,309 22,545 545 5,454 10,182 40,036 200Institute

Kimlea Girls' Tech. 7,938 6,489 436 472 1,964 2,142 1,091 20,532 228Training Centre

Kibondeni College 16,669 4,758 53 1,896 1,545 545 3,273 28,739 180

Ridgeway Academy 7,273 2,182 1,818 182 273 909 727 182 8,727 22,273 259of Arts

Valley Secretarial College 23,636 4,545 1,818 698 4,109 16,018 27,272 2,073 5,127 0 85,296 567

Virginia Slims' College 8,291 3,055 1,964 636 1,182 5,091 455 327 727 0 21,728 869

Annex 3Page 2 of 2

VOCATIONAL ScHoOLS, GRoss AND NET INCOME, 1990-96

School 199 Gross S 199 Net S 1994 Gross S 994 Net S 199S GrosS 199S Net S 1996 GrossS 1996 Net S

Kenya Industrial Training Center 13,091 3,273 13,964 3,491 13,309 2,291 15,272 2,545Kibondeni College 6,509 12,988 18,050 11,818Kimlea Girls' Technical 2,099 5,740Nairobi North Polytechnic 73,309 12,909Ridgeway Academy of Arts 27,273 5,454 34,545 7,272 40,000 10,909 63,636 21,818Valley Secretarial 69,509 509 91,309 3,836 94,927 4,745Virginia Slims Catering 10,545 782 22,727 1,545 23,272 1,400 23,636 1,964

Source: Private School Survey, August 1996.

OD

Annex 4

FEE STRUCTURE OF KENYA SCHOOL OF PROFESSIONAL STUDIES (SPS), 1996

Fees Per SemesterCourse (Ksh.) (US$)

Kenya Accountancy Technicians CertificateFull time 11,000 200

Kenya Accountancy Technicians CertificatePart-time 6,500 118

Certified Public Accountants (CPA) 11,000 200Certified Public Secretaries (CPS)

Single subject 5,000 91

CPA/CPSPart-time section 1-6 6,500 118Single subject 3,000 55

Marketing (CIM) Part-TimeCertificate 12,000 218Diploma 14,000 255Certificate day class 14,000 255

Supplies ManagementCertificate (Kenya Nat'l Exam Council), full-time 8,000 145Diploma part-time 9,000 164

Secretarial 3,000 55(per month)

Legal StudiesCertificate 14,000 255Diploma 17,000 309LLB (UK) degree 50,000 909

Library and Information ScienceCertificate 8,000 145Diploma 9,000 164Single-subject 2,000 36

IDPM (Computer Department)Foundation 11,000 200Diploma, part 1 11,000 200Higher diploma, parts 2, 3, and 4 42,000 764

Source: School of Professional Studies Catalogue, 1995/96.

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IFC Discussion Papers (continued)

No. 21 Radical Reform in the Automotive Industry: Policies in Emerging Markets. Peter O'Brienand Yannis Karmokolias

No. 22 Debt or Equity? How Firms in Developing Countries Choose. Jack Glen and Brian Pinto

No. 23 Financing Private Infrastructure Projects: Emerging Trends from IFC's Experience. Gary Bondand Laurence Carter

No. 24 An Introduction to the Mlicrostructure of Emerging Markets. Jack Glen

No. 25 Trends in Private Investment in Developing Countries 1995: Statistics for 1980-93. Jack D. Glenand Mariusz A. Sumlinski

No. 26 Dividend Policy and Behavior in Emerging Markets: To Pay or Not to Pay. Jack D. Glen,Yannis Karmokolias, Robert R. Miller, and Sanjay Shah

No. 27 Intellectual Property Protection, Direct Investment, and Technology Transfer: Germany, Japan,and the United States. Edwin Mansfield

No. 28 Trends in Private Investment in Developing Countries: Statistics for 1970-94. Frederick Z.Jaspersen, Anthony H. Aylward, and Mariusz A. Sumlinski

No. 29 InternationalJoint Ventures in Developing Countries: Happy Marriages? Robert R. Miller,Jack D. Glen, Frederick Z. Jaspersen, and Yannis Karmokolias

No. 30 Cost Benefit Analysis of Private Sector Environmental Investments: A Case Study of the KundaCement Factory. Yannis Karmokolias

No. 31 Trends in Private Investment in Developing Countries: Statistics for 1 970-1 995. LawrenceBouton and Mariusz A. Sumlinski

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