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Private Enterprise & Public Education

On Tuesday in the Wall Street Journal, I noted that McGraw-Hill's recent $2.5 billion sale of its education publishing unit to private equity firm Apollo Global Management elicited only yawns. That same lack of interest greets the tens of billions that are routinely spent on everything from writing utensils to professional development in education. In 2008, schools and systems spent $22 billion on transportation; $20 billion on food services, and even $1 billion on pencils.

Yet, while these transactions draw little response, heated cries of "privatization" welcome relatively modest for-profit providers seeking to offer tutoring or charter school options to kids trapped in lousy schools. This shows up in federal legislation banning for-profit ventures from competing in the U.S. Department of Education's "Investing in Innovation Fund" and restricting their participation in the $3 billion federal School Improvement Grant (SIG) program. When the New York charter school cap was lifted a couple years back, the ritual pound of flesh offered to the unions was an agreement to ban for-profit charters. Most recently, in the case of the "parent trigger," the reform-minded advocacy group Parent Revolution has pushed for legislation that prohibits parents from partnering with for-profit charter school operators.

It can be easy to overlook how unusual this state of affairs really is. John Bailey, executive director of Digital Learning Now, explains that in areas like health care, clean energy, and space exploration, "Policymakers do not ask whether they should engage for-profit companies, but how they should." For example, he notes, NASA set aside $6 billion to support private ventures competing to design and operate spacecraft. SpaceX built its "Dragon" capsule, capable of transporting humans and cargo into space, for $800 million--less than a tenth of the $10 billion NASA had spent trying to build its own model.

Critics charge that for-profits are distracted by investors' demands while public systems can focus solely on the needs of children. Yet the vast majority of K-12 spending goes to employee benefits and salaries, with limited evidence that these funds are being spent in ways that best serve students. In 2009, the most recent year for which data are available, K-12 spent $418.5 billion on compensation, including $105.7 billion on employee benefits. Employee unions have routinely defended generous retirement plans, seniority-driven pay, and rigid work rules, whether or not those serve students. School boards and superintendents have accepted crippling benefit obligations and dubious policies in order to placate employees and interest groups.

The watchful eye of investors can lend for-profits a healthful discipline around performance and productivity. The prospect of returns means that promising profit-seeking ventures can offer terrific employees lucrative long-term opportunities and that they can tap vast sums through the private equity markets. For-profits have a relentless, selfish imperative to seek out and adopt cost-efficiencies where district and nonprofit managers will typically move more gingerly (school systems are typically loathe to trim even a single job if they can avoid it.) The pressure to grow revenue means that for-profits have cause to expand rapidly. Finally, a focus on the bottom line means for-profits are inclined to move nimbly and reallocate resources when circumstances warrant. Meanwhile, critics generally ignore the fact that for-profits are tax-paying ventures--their taxes help underwrite public school systems.

Nonprofits, on the other hand, have little incentive to become "early adopters" of cost-saving tools and techniques. After all, such shifts are disruptive. They upset relationships with vendors and familiar routines for staff. Absent the push of profit-seeking investors, school systems and nonprofits tend to move much more slowly and hesitantly. Even enormously successful nonprofit ventures, like Teach for America and the KIPP Academies, tend to grow far more slowly and show much less interest in squeezing their cost structures than comparable for-profit ventures.

Of course, the record of private ventures in education, as elsewhere, is mixed. I've zero inclination to romanticize for-profit education, which certainly contains its share of sleazebags and charlatans. The incentive to cut costs can translate into a willingness to cut corners. The urge to grow can lead to deceptive marketing. These are legitimate concerns that demand transparency, oversight, and sensible regulation.

The same cool detachment which greeted McGraw-Hill's billion dollar deal ought to be the norm for the full range of much smaller ventures in the sprawling, expansive world of schooling. Indeed, in that world, students will be well-served if educators, parents, and policymakers recognize that public systems, nonprofits, and for-profits all have vital roles to play.

Unfortunately, my experience is that these issues get far less attention than they deserve. Happily, over the past year or two, we've been able to get some smart folks engaged with AEI to help illuminate some of the issues and deepen some of our thinking. Over the past twelve months, we've released a series of working papers in which a number of terrific authors take a careful look at the relationship between private enterprise and public education. Four papers, in particular, deserve a careful look.

The aforementioned John Bailey, formerly an appointee at the U.S. Department of Education and the U.S. Department of Commerce, notes in "Odd man out: How government supports private sector innovation, except in education" that policymakers are comfortable with for-profits playing a substantial role in other sensitive public policy domains like health care or clean energy, but not in education. He argues that this is bad for education and offers some thoughts on how we might start to approach these issues differently.

Michael Horn, executive director of Innosight Institute, has elegantly explored the problem with policymakers and reformers viewing nonprofits as "good" and for-profits as "evil." In "Beyond good and evil: Understanding the role of for-profits in education through the theories of disruptive innovation," he argues, "Government should not discriminate between for-profits and nonprofits as a matter of blanket policy" but should focus on whether providers are serving children and the community well, and respecting the law.

My AEI colleague Andrew Kelly explores public opinion towards for-profits in "More than meets the eye: The politics of for-profits in education." Andrew notes that policymakers and the public are comfortable with for-profit companies providing "peripheral" or supplemental services, but not with for-profits running public schools. And, in "Unequal access: Hidden barriers to achieving both quality and profit in early care and education," Todd Grindal, currently at the Harvard Graduate School of Education and formerly an executive director of a Montessori preschool, examines why the pre-K sector has proven more hospitable to for-profits than K-12 or higher education, and what it's meant for the sector.

If you're interested, also keep an eye out for the edited volume, Private Enterprise & Public Education, which Michael Horn and I will be publishing with Teachers College Press in the spring. You can find more information about the project here.

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The opinions expressed in Rick Hess Straight Up are strictly those of the author(s) and do not reflect the opinions or endorsement of Editorial Projects in Education, or any of its publications.

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