Facilitating Innovative Growth of Low Cost Private Schools: Experimental Evidence from Pakistan

Most interventions to improve education in developing countries require spending significant amounts of money on improving the quality of the inputs to the education system. While this is often a useful approach, in countries with weak governments and low tax collection, little resources are available to invest in schools. In these settings, such as in Pakistan, private schools have provided an alternative to the low quality public schools, and parents are willing to pay for the improved quality, and so even in many remote rural areas, parents can pick from sending their child to the public school or one of several private schools in the village. This variety of schools has prompted us to study education markets instead of the inputs to the production of learning, applying theories from studying Small and Medium Enterprises (SMEs) to private schools. Instead of going to schools and telling them which inputs they should focus on, we tend to ask them what prevents them from expanding in quality and quantity.
Over the past decade, our research team led by Tahir Andrabi (Pomona College), Jishnu Das (World Bank), and Asim Ijaz Khwaja (Harvard University) has studied the education markets in Pakistan. Despite the tremendous growth in the low cost private school (LCPS) sector (rising from 3,300 schools in 1983 to over 70,000 in 2011) and relatively better quality than the public sector (LCPS are 1.5 years ahead in learning outcomes relative to government schools), there is also evidence of substantial untapped innovation potential in this sector. The team has gathered both primary data and implemented randomized controlled trials (RCTs) that reveal constraints to growth and quality improvement for LCPS. Two factors that contribute to this innovation constraint are the lack of financing (a financial market failure) and access to affordable educational support services (ESS) (an input market failure), which together create a very challenging context for school owners.
The current project is a RCT that seeks to explain how alleviating these constraints one at a time or simultaneously would affect learning outcomes, enrolment and school profitability. The randomized component means that schools are randomly allocated to either receiving offers of a loan product or an equity product to alleviate financial constraints, and/or receive access to buying ESS such as teacher training, improved curricula or student testing services. The controlled component of the trial means that some - randomly chosen - schools do not get any of these treatments, which allows us to compare the treatment outcomes with the counterfactual.
The two financial products were developed together with one of Pakistan's largest microfinance banks. The equity product represents an innovation in the type of financial product offered to SMEs, and it is particularly relevant to LCPS since its revenue-contingent interest rate (if the school earns more, it will pay a higher interest rate) effectively shifts some of the risk of an investment over to the bank, and LCPS tend to have to make more lumpy investments than other SMEs. Our theory is that a less risky financial product would allow schools to take on more risky investments, such as investments in quality-improving ESS services. Our earlier studies have shown that schools are, under most circumstances, more prone to undertake capacity-improving investments such as buying more chairs when they get access to finance, perhaps because the school owner can more accurately predict and advertise the result from buying new chairs than from buying teacher training services. This results in a stagnant quality development of learning outcomes, which are already very poor in rural Pakistan. In conclusion, the present study will broaden the knowledge about what policy makers and providers of financial and ESS products can do to facilitate the improvement of learning outcomes in challenging rural contexts where LCPS are present.

An objective of this project is to develop scaled markets for financing and education support services (ESS) products tailored to low cost private schools (LCPS) in rural areas. Despite significant growth in the last several decades, LCPSs still do not have regular access to finance, perhaps because schools are generally not considered sources of potential income for banks; are not viewed as sustainable businesses by finance and ESS providers; do not 'look' like regular microfinance clients or; present perceived high barriers to entry for providers, partly because the LCPS are spread out in rural areas, remote from bank offices. Thus, one type of beneficiary in the commercial private sector are LCPS, which will benefit from the development of financial and ESS products designed to alleviate their growth and quality improvement constraints.
A second category of beneficiaries, also in the private sector, are financial institutions, which will find out whether an equity product tailored to SMEs will have profitability in the LCPS sector. Moreover, ESS firms will benefit from proof of concept of expanding their services to the rural LCPS sector.
Third, the general public in the Punjabi region will directly benefit from improved understanding of how to improve learning outcomes for the children in the area through creating markets to support LCPS. While in many contexts, educational research would need to focus on government systems or on large non-state providers in order to reach a large number of schoolchildren in a potential scale-up of findings, the Pakistani context is different. This is because 1 in 3 primary school pupils in the Punjab province attend one of the many small private schools. This research focuses on the interaction between a large number of these LCPS and a few large-scale providers of financial and education support services, which implies that there is potential for scale-up to reach up to 1/3 of the pupils in the region.
Policymakers in Punjab and in Pakistan more generally will benefit from learning which constraints LCPS face that prevent them from improving learning outcomes. Moreover, policymakers will also learn which policies can be adopted to support LCPS, in terms of market making, e.g. by establishing fairs such as those we have invented for educational support services. Indirectly, policymakers in similar regions all over the world, facing a strong LCPS presence in the educational market, will benefit from the findings of this study.
The best assessment of impact on the LCPS sector's access to finance is whether finance institutions change the products they offer-either by beginning to offer loans to low cost private schools or changing their product design if they have already begun offering such a product-and expand into new markets. Similarly, we can assess our impact on ESS providers by looking at the amount of business they are conducting with LCPS and their own expansion into new markets. Before our intervention all of these providers had no ongoing sales to low cost schools, so seeing any growth in this portfolio would be a success. During our stakeholder workshops we will collect data on both of these outcomes to see how microfinance and ESS providers market has or has not changed to include low cost schools.