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

Lead Research Organisation: Harvard University
Department Name: Kennedy School of Government

Abstract

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.

Planned Impact

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.

Publications

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Description Thus far we have successfully created financial products tailored for low cost private schools (LCPS) in partnership with a local microfinance institution, and have discovered a clear demand for loan products in this market. Schools have low delinquency rates, and we have observed high take-up rates of products. We are still in the analysis stage, so are not yet in a position to comment on the social impact of financing. On the educational support service (ESS) side we have seen high take-up of ESS products from one provider in particular who has brand name recognition, and have observed different providers taking different approaches to meeting the needs of the LCPS market.

This study had the following key findings:
1. There is a demand and need for education financing: 36.5% of all schools visited expressed the need for a financial loan (the current rate of lending to the education sector in Pakistan is less than 4%).
2. It is profitable to lend to low cost private schools: the microfinance bank in the parent study had an IRR of 29% across all rounds of disbursed loans.
3. There is a demand and need for educational products and services that cater to the low cost school market: schools that attended ESS melas had a 27% take up rate of ESS products.
4. LCPS appear to be willing to pay for ESS products that are affordable and relevant for them.
5. The demand for-and lack of supply of-affordable services suggests there is room for a market maker to help providers tailor products and services to the low cost school market and connect them with interested schools.
6. Money is fungible - school owners appear to view their household, school, and business accounts all as one set of pooled incomes and expenses. Our new survey data collected this reporting period should allow us more comprehensively analyze research findings on school owners using this comprehensive spending, expense, and characteristics profile.

Between November 2019 and January 2020 we revisited all 900 schools in our sample and completed a post-endline round of data collection. The post-endline survey covered not only school related matters but also the school owner's household and other business activities. In late-spring of 2020 we completed data cleaning of this new data and are currently working on the data analysis. While we are still exploring results and mechanisms, preliminary analysis seems to suggest that financing may have helped certain schools prevent closure. In addition to school-level analysis, we are also exploring whether financing had an impact on other aspects of the school owner's life, such as their household spending behaviour and any other businesses they may have.
Exploitation Route Given the interest in the customized loan product, our microfinance partner is planning to scale the product to other areas in Pakistan beyond our study sample. Other banks in Pakistan have expressed interest in expanding to the low cost school market also, in addition to wanting to learn from us about our experience in education financing.

Given that this project found that there is a need for a market-maker, a subset of this team is looking to enhance the impact of this study by testing a mechanism that allows a larger number of schools across the country to access the products and services they need in an affordable and sustainable manner. This mechanism is a digital education marketplace platform to test whether success in connecting schools to suppliers in the physical space can be transferred into the virtual space.
Sectors Education,Financial Services, and Management Consultancy

 
Description Based on the findings from this study, the Center for Economic Research in Pakistan built a digital education marketplace platform as a quicker, cheaper and more sustainable mechanism of aggregating low cost schools and connecting them to the resources they need to improve education quality. The idea is for this to be a hub where schools and suppliers can easily come together, reducing search and customer acquisition costs. Aggregating schools onto one platform will also create a bigger market, 'crowding in' additional suppliers and spurring innovation to meet the needs of an expanding school market. 20 suppliers of Education support services and 3 financial lending institutions have already joined this platform, as have over 2000 low cost schools. A subset of this team is now in the process of testing the feasibility and efficacy of this digital market-making mechanism as benchmarked against the findings from this study.
First Year Of Impact 2020
Sector Education,Financial Services, and Management Consultancy
Impact Types Economic

 
Description Private Enterprise Development in Low-Income Countries
Amount £306,753 (GBP)
Organisation Centre for Economic Policy Research 
Sector Charity/Non Profit
Country United Kingdom
Start 03/2016 
End 02/2018
 
Description Research on Improving Systems of Education (a component of this award supports this study)
Amount £4,200,000 (GBP)
Organisation Oxford Policy Management 
Sector Private
Country United Kingdom
Start 04/2016 
End 05/2022
 
Title MISchool - a school management software product for low cost rural schools 
Description In the process of conducting this study we realized that most rural low cost private schools still rely on old, manual methods of data management like book-keeping in physical registers. These methods are cumbersome, inefficient, and very difficult to glean older data from. As a result, our team worked with a number of these schools to design a school management software that can function on any device available to school owners and teachers (including tablets, desktops and cell phones), that is very easy to use, and that can help schools manage and monitor large amounts of data easily, including data on student enrollment and attendance, teacher attendance, fee collection, student academic performance, and even has the capacity to facilitate communication with parents using text messaging. 
Type Of Technology Software 
Year Produced 2018 
Impact This product is still being tested with an initial cohort of schools, but early results suggest that schools find it easy to use and are highly appreciative of it. We expect to be able to make this product available to a large number of schools, at cost. We anticipate that it will positively impact school management, making data collection and management processes easier and quicker, freeing up school administrators' time to do other work, and helping teachers and administrators track and analyze student and school performance. 
 
Description EdNovate Pakistan 2017 
Form Of Engagement Activity Participation in an activity, workshop or similar
Part Of Official Scheme? No
Geographic Reach National
Primary Audience Policymakers/politicians
Results and Impact In July 2017, we hosted a conference called Ednovate Pakistan, a dialogue to foster evidence-based innovation in education. The event brought together a diverse range of stakeholders in education - researchers, policymakers, education sector professionals, education support service providers, and finance sector experts. The conference showcased our research and our partners, and provided a platform to discuss the opportunities and challenges of innovating in the Education space.
Year(s) Of Engagement Activity 2017