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Should for-profit providers of education services be excluded from the schools market? A review of theory and evidence

Opponents of the idea that schools could be owned and operated by businesses for profit often claim that such can only come at the expense of quality. Until relatively recently, there's been little rigourous evidence to help settle this question, but now that there is, it's clear that there’s no basis for this claim, and therefore for excluding commercial operators. Here I provide a brief review of the evidence on this question as it has emerged in recent years, concluding with some thoughts on what systems might have to gain from liberalising their market entry requirements in this regard.

In the US, the most noteworthy study of the for-profit effect has been undertaken by Hill and Welsh, who used school-level data to compare for-profit and non-profit charter schools in Michigan. A four year panel of data was constructed (2001-02 to 2004-05) , with all Michigan charter schools which had students taking either the required 4th and/or the 8th grade state level math exam, referred to as MEAP scores (Michigan Educational Assessment program), included in the analysis. A random effects model was employed, controlling for student and district characteristics. The results were published as ‘For-profit versus not-for-profit charter schools: an examination of Michigan test scores’ (Education Economics, 2008), with the authors concluding that they could find no evidence to suggest that the type of ownership of a charter school (profit or not‐for‐profit) affects the delivery of education services either way.

In the same year, Chumacero and Paredes published a study, analysing Chilean voucher reform (‘Should For-Profit Schools Be Banned?’ (MPRA Paper 15099, University of Munich, 2008). In respect of standardised test performance at 4th grade, they showed that pupils in for-profit voucher schools scored 3-15 points higher than their peers in government schools. While non-profit schools performed higher than for-profits on this study, their findings were sufficient to show fears of the profit motive in Chilean education to be unwarranted.

In 2010, Peterson and Chingos’ study of the Philadelphia School Reform Commission’s intervention 2002-08 considering the relative impacts of for-profit and non-profit management on student achievement (Program on Education Policy and Governance Working Papers Series PEPG 09-02 (Harvard University, 2010). Their research took individual test score data in maths and reading from 2001 and 2002 and then tracked student performance annually to 2008 in order to estimate the relative impacts of the different management frameworks. The study encompassed all 30 elementary and middle schools contracted out to for-profit EMOs, and all 16 contracted out to not-for-profits, in addition to the 71 schools remaining under regular school district management. The impact of not-for-profit management, when compared with regular school district management, was negative in respect of both maths and reading, and more markedly so in maths (albeit statistically significant in only the first year after the intervention began). The impact of for-profit management, on the other hand, was generally positive, though only in maths was it deemed statistically significant. In comparing the relative performance of for-profit and not-for-profit EMOs however, Peterson and Chingos commented as follows:

‘The differential impact of for-profit and non-profit management is especially sizable. Using the estimates given above, students in schools under for-profit management gained between 70 per cent and greater than a full year’s worth of learning in math more each year than they would have had the schools been under non-profit management. All of these differences are statistically significant. In reading, students learned approximately two-thirds of a year more in a for-profit school than they would have had the school been under non-profit management. All but one of the differences are statistically significant’ (p. 4).

Later in the same year, Gabriel Sahlgren provided an even more comprehensive school-level data-set, this time comprising all Swedish schools with at least 15 9th-grade students on roll between 2005 and 2009 (‘Schooling for money: Swedish education reform and the role of the profit motive’ (IEA, 2010). The data-set amounted to 6,935 observations (1,543 schools) and included 725,195 students out of a total of 737,788 graduating in that period, excluding only Special schools and those that do not conform to the standard grading practice.

Sahlgren set out to test the ‘deterioration thesis’ – that is, that the profit motive steadily compromises educational standards over time. Having coded the schools according to ownership structure, straight statistical-profiling showed significant differences in the performance of for-profit, not-for-profit and municipal schools. For-profit independent schools did better than municipal schools and not-for-profit independent schools did better than for-profit schools. In the regressions however, controlling for a wide range of demographic, socio-economic and other contextual factors that influence grades, post-reform for-profit and non-profit independent schools emerged showing more similar positive effects on the average school GPA, raising it by 5.61 points and 6.16 points respectively. (A dummy variable was included to control for the influence of the more exclusive independent schools established prior to the 1992 reforms.)

Applying further controls for (regional) municipality variables, non-profit independent schools raise the average GPA by 5.74 points, whereas the for-profit schools raise it by 4.50 points (p. 18). The impact of the for-profit independent schools was strongest where there were high numbers of pupils from low socio-economic backgrounds, increasing the average school GPA by 11.64 points, compared with non-profits’ 4.39 points (p. 19). For-profit schools were further shown to be beneficial for students from all backgrounds, with the largest effect for students from low-educated families. (Note that this contrasts with the findings of the more widely publicised study of the overall Free School effect by Böhlmark and Lindahl which found the positive effect for pupils with low-educated parents or an immigrant background to be ‘insignificant’ (Böhlmark, A. and Lindahl, M. ‘The Impact of School Choice on Pupil Achievement, Segregation and Costs: Swedish Evidence’, IZA Discussion Paper No. 2786 (Bonn: Institute for the Study of Labor, 2007). Accordingly, Sahlgren concludes, the performance of for-profit independent schools should serve as a guideline for municipal schools regarding minimum acceptable levels of student achievement (p. 20).

In a subsequent study, appended to a later version of the 2010 paper, Sahlgren addresses the problem of endogeneity – that even after controlling for these variables it might still be the case that pupils in Free Schools may be more, or less, able, motivated, etc. than those in municipal schools. Citing a study by Tegle (Tegle, S. ‘Påverkar förekomst av friskolor betygen i grundskolan? – En statistisk analys av samtliga elever i årskurs 9 år 2006’ (Stockholm: Svenskt Näringsliv, 2010), which suggests that not taking this into account would be to significantly underestimate the positive effect of Free Schools generally, Sahlgren explains that he initially decided not to apply controls addressing this phenomenon so as to err on side of caution in testing the deterioration thesis (p. 24). After employing Instrumental-Variable models explicitly designed to deal with endogeneity, the influence of both for-profit and non-profit Free Schools was found to be much stronger, increasing the GPA by 33.74 and 33.86 points respectively and representing an increase of 16.3% in comparison with municipal schools (p. 25).

In summary, not only did Sahlgren’s results overturn the deterioration thesis, but they also strongly suggest that, taking endogeneity into account, for-profit and non-profit schools are equally good at raising standards. This finding was further supported in Böhlmark and Lindahl (2015). The authors performed a series of regressions of changes in the share of students in for-profit, non-profit and general-profile independent schools on changes in overall educational achievement. they concluded that ‘the independent school type and whether they are for or non-profit does not appear to matter much for the overall effect on students in both public and independent schools’ (p. 40).

The evidence, then, provides more than enough reason to question why the default position is to exclude for-profit providers of education services from the schools market.

But the case for liberalising market entry requirements in this regard does not rest there. There are also the important questions of incentives to expand and of efficiency. Profit-making schools have stronger incentives to expand and, with scale, tend to do so without discriminating with respect to the profile of customer they are prepared to serve. A recently published report looking at the performance of for-profit charter schools in Florida (Singleton 2016) established that for-profit charters belonging to a network were more inclined to expand to areas of deprivation than not-for-profits belonging to a network. The same study, looking at test scores relative to per pupil expenditure, found public and independent non-profit and for-profits do equally well – while for-profit network charters outcompete them all. Among charter schools belonging to a network, for-profits spend over 10% less per pupil (around $800), but expenses on student instruction are not being cut.

These findings bear out those submitted by Elacqua (2009, 2011) on what he refers to as ‘franchise voucher schools’. In the first the author finds that for fourth and eighth grade pupils, for-profit franchise voucher schools consistently outperform those in independent for-profit, municipal, and Protestant schools. This effect is muted in the second study, which does not distinguish between for-profit and not-for-profit franchise voucher schools. Most interestingly though, franchises with more schools outperformed those with fewer schools with an effect of up to 0.20 SD compared to municipal and independent schools. ­As Sahlgren (2013: 49) explains, ‘this could be because franchises exploit economies of scale (Chubb 2001) and facilitate sharing of information between schools (McMeekin 2003). Alternatively, good schools are simply more likely to scale up, which should be the case in a competitive market.’

Finally, for-profit schools increase competition more than non-profit schools. The academic research on international test scores shows unequivocally that competition raises countries’ performances. The strongest paper finds that this competition benefits pupils in state schools just as much as pupils in free schools, and that competition also/further drives down costs (Hanushek & Woessmans 2010). So for-profit schools can help us produce higher competition, which in turn produces better outcomes for everyone.

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