November 20, 2011

A Decade of Opportunity - The Coming Expansion of the Private-School Market in the GCC

The rapidly growing private-school market in the GCC presents a significant opportunity, yet sophisticated investors are reluctant to take action; Booz & Company highlights the need for transparency and consistency.

Private-school enrolment is expected to skyrocket in the Gulf Cooperation Council (GCC) countries in the next decade, but governments and investors must overcome several key challenges in order to capitalise on the opportunities this will present.

Chief among these challenges is an immature operating environment, characterised by a lack of transparency and consistency regarding regulations in the sector. In addition, constraints on financing new schools in the region, fragmented ownership structures that offer few economies of scale and a lack of information for parents regarding school quality have all inhibited the growth of the private-school market thus far.

“Specific measures can address these challenges,” says Chadi N. Moujaes, a partner with Booz & Company. “Governments should clarify the regulatory environment, ensuring that rules are stable and consistently enforced. Streamlining the most problematic regulatory issues, such as those regarding property ownership, would attract more education players to the market. Regulators may also reconsider tuition freezes in a way that balances consumer protection with operators’ need to access funds, and, in addition, governments can raise awareness about market opportunities with more proactive communication to operators and investors, explaining the scope of projected growth in the region’s private-school landscape.”

Seizing the Opportunity

With US$5.2 billion in annual tuition, the GCC private-school market is one of the world’s largest. Approximately 1.36 million students, the majority of which are expatriates, are enrolled in roughly 4,400 private schools throughout the region; however, this represents only a fraction of the GCC’s overall education system, which has around 6.3 million students in 35,000 schools. Private education represents about 14 per cent of the GCC’s US$36 billion education market.

Three factors will likely increase the scope of private education in the coming years. Demographic shifts will increase the number of students—and thus schools—in the region. Parents’ desire for higher-quality education will increase the share of private education in the overall landscape. And their greater willingness to pay will increase the potential revenue pool. Booz & Company predicts the GCC K–12 private-school market will grow to between $11 billion and $17 billion by 2020 and enrolment will reach roughly 2.6 million.

Investors seeking to enter the market will need to have a keen understanding of its dynamics. To that end, Booz & Company recently conducted a survey of more than 1,000 parents in the GCC to understand what is most important to them in choosing a private school. National and expatriate parents agreed on the most critical factors: quality of teachers, curriculum, reputation, environment for children and the preservation of culture.

National parents expressed a clear preference for gender segregation; 80 per cent indicated that their children currently attend schools without mixed classes, and 91 per cent report having considered such institutions. They also demonstrate a preference for international, English-language curricula, with 53 per cent preferring ‘Western-style’ curricula (UK, US, or International Baccalaureate). Currently, only 35 per cent of parents have their children in such schools, which suggests a significant potential market opportunity. The challenge is for operators to determine whether this gap is due to a simple lack of supply, or some other aspect of the market, such as cultural factors, in which case they will have to modify their offerings to satisfy consumer preferences.

Although the overall market fundamentals are promising, some parents remain apprehensive about private education and may be more difficult to persuade. Booz & Company’s research shows that 34 per cent of parents whose children currently attend public schools indicated that free public education was sufficient; others cited co-educational facilities or classes as a barrier to private education, or inconsistency with their families’ cultural or religious values. Nonetheless, 25 per cent of public-school parents reported that they could be enticed by a product offering that was in line with their values

Overcoming Obstacles

A number of challenges must be addressed if the market is to achieve its potential. The shortage of qualified teachers is one obstacle in the way of growth. Leila Hoteit, a principal with Booz & Company says that this is the first challenge to the private-school universe in the GCC. “The global education sector is currently facing a worldwide shortage of talent, resulting in significant competition for well-qualified educators, particularly in international and Western curricula schools. This competition is likely to intensify in the coming years, due to the expansion of ‘international’ school offerings globally. GCC operators may not be able to match the lifestyle-related prerequisites available to expatriate teachers in competing markets, forcing them to either increase salaries or hire less-qualified individuals.”

Land ownership is another challenge: Most GCC jurisdictions restrict foreign land ownership, requiring prospective private-school operators to go through the relevant private-sector regulator. This complex and time-consuming process is off-putting to many. Conversely, in jurisdictions that do allow foreign land ownership, investors have indicated that the price of inflation has made land prohibitively expensive, undermining the feasibility of new ventures.

It is also difficult for investors to find financing in a relatively immature market. Because many investors cannot own land, they cannot take out mortgages against it—meaning they must have sufficient free cash flow to fund construction on a 100 per cent equity basis, or sufficiently strong balance sheets to secure loans against other assets. Exit options for education investors are limited; the lack of active institutional investors and scarce access to debt further limit exit options.

The lack of public information about school quality is another problem. Many jurisdictions do not publish inspection results or other performance indicators, often because they want to ensure that systems are mature and operators are ready before taking this step. This restriction effectively leaves education consumers unable to differentiate between high-quality schools and low-quality offerings, inhibiting overall competition by allowing substandard operators to survive.

Last but by no means least, opaque regulations pose a challenge to be overcome, as many of the operating challenges facing private schools in the region are driven or compounded by a perceived opaque regulatory regime. “In general, these organisations make their regulations, policies and procedures available to the education community,” said Moujaes. “But there is a notable perception among operators and investors that regulations are not applied of enforced consistently. Sophisticated investors outside of the GCC express a very low tolerance for regulatory risk—a subject that has come up repeatedly in our interviews.”

One of the biggest regulatory concerns for outside investors is the issue of tuition freezes. In most of the region, operators can set school fees as they see fit when they open a  school, but must get approval from education regulators to raise tuition after that point. Current and prospective private-school investors have indicated that their inability to raise tuition revenue in line with cost increases has a significant negative effect on their interest.

Moving the Industry Forward

Each of the key stakeholders in the GCC education system has a significant role to play in overcoming these obstacles and realizing the education and market potential of the region’s private schools.

First, regulators must provide some clarity surrounding property ownership requirements and zoning. Education authorities should improve their coordination with urban planning agencies to ensure sufficient quantity, location and size of plots for education use early in the master planning process to avoid the relegation of schools to inconvenient locations.

Governments should also consider the need to balance consumer needs with operators’ right to increase revenue. Although government regulation of tuition fees originated to protect consumers in a market where they had few choices, those policies may now be limiting consumers’ choices by keeping investors from opening new schools.  The first step for regulators will be to institute full transparency of tuition fee regulation—regulations that should seek to maintain consumer protection while still encouraging investment.

In addition to regulatory reforms, governments can proactively attract investors and operators to the market. They should make active efforts—through conference participation, marketing campaigns and direct engagement—to engage investors from both overseas and at home.

Disseminating market information at a more active level can help, as many operators considering entry into the market have scant data with which to assemble business plans. Making this information public would help investors to reduce their risk profile, and would facilitate their evaluation and decision-making process. Governments should also make school-performance data available in order to enhance competition in the marketplace, but it is essential for regulators to build the ratings’ credibility with operators before publishing results.

Another element of support that governments can provide is to increase the supply of national teachers by establishing new kinds of teacher-training programs. Recent initiatives—such as exchanges with advanced education systems aimed at spreading knowledge and increasing the teaching capabilities of nationals—are a good first step but do not have sufficient scale to satisfy market needs.

Finally, governments can take steps to reduce the capital burden on investors by facilitating access to debt capital. For example, governments can work with financial institutions to increase access to debt financing for private-school operators, to eliminate the burden of 100 per cent equity financing, particularly for new developments.

Other measures will fall to investors and operators. First, operators must engage with regulators to directly communicate their needs and challenges. Although the lack of market information has caused frustration to some potential entrants, Booz & Company’s research indicates that governments are, in many cases, not actively refusing to disclose necessary data. Rather, they do not know that operators need it. The flow of information is a two-way street.

Furthermore, given the extremely fragmented nature of the current market, operators should consider consolidation strategies. Consolidation offers potential synergies that would be reasonably straightforward to identify and capture, allowing for increased earnings and higher-quality services.

Next, operators should choose between two strategic models; a comprehensive approach in which they diversify their service offerings across multiple curricula and price points, or one which involves specialisation, in which they focus their offerings on a narrower price point and a single curriculum. This approach allows the operator to build deeper capabilities in its market segment, concentrating marketing efforts and preventing brand dilution.

Finally, operators should develop educational value propositions that resonate most directly with regional parental needs.

Hoteit concluded; “Although the GCC’s private school market may seem daunting to outsiders, more direct involvement in the market will show that governments are increasingly open to addressing its challenges, and in fact are transitioning from a strict regulator role to one more akin to a business partner. Sufficient communication—in both directions—will help create an environment in which all stakeholders can thrive.”

Investors will generate enticing returns, governments will develop more efficient workforces, and, perhaps most important, the region’s students will receive the education they need to thrive in a more competitive global market.

Click here to download the pdf report by Booz & Company.