January 31, 1996

Potential for Profit Lures Businesses to Education

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    Despite the collapse last week in Hartford, Conn., of the nation's largest experiment in private management of public schools, there are increasing signs, from the growth of new businesses to rising stock performance, that public education is becoming an enticing market for private businesses.

    A recent study estimates that for-profit companies now take in $30 billion of the $340 billion that the United States spends each year on preschool to high school education.

    That figure includes for-profit companies that run schools; offer classroom instruction or tutoring; sell textbooks, software or new technology; design curriculums; provide consulting services, or fill other niches.

    Thus, while Education Alternatives Inc. was losing its high-profile contract to run the schools of Hartford, Newark's school district, now operated by the state of New Jersey, signed a $1.25 million contract last week with Sylvan Learning Systems of Columbia, Md., to run the remedial education program at three local high schools through June 1997.

    Experts say that might be a more revealing situation than Hartford's.

    "When you look at the raw numbers, this is a very big industry with enormous potential for growth," said Michael R. Sandler, chief executive officer of Eduventures Inc. of Boston, which consults and invests in companies involved in education. "Education has reached the point where the status quo is no longer acceptable."

    How much growth will occur will depend, experts say, largely on the push and pull of two opposing forces.

    The first, coming out of a changing political climate, consists of new demands for leaner, more innovative education approaches, like charter schools, which can be operated by private businesses.

    The second is the open resistance by many unions to ventures with private companies, and skepticism by some educators.

    Still, a recent study for the National School Boards Association found that more than 60 percent of school boards were considering or had considered hiring a private company to run a district or part of one. The vast majority were interested only in private contracts for support services like food, transportation and maintenance.

    According to the same study, only a third of the districts who hired private companies for cost savings said they had actually saved money.

    The private companies providing services to districts include Ombudsman Education Services, which works with at-risk students in nine states; Marriott International Inc., which has approximately 300 contracts for food services in primary and secondary schools, and Sylvan, which began with independent learning centers but now also has centers in 60 schools.

    The best accounting of the size of the for-profit education market comes from The Education Industry Directory, published this year by Sandler and John M. McLauglin, editor of a publication called The Education Industry Report.

    The directory says education is a $600 billion enterprise nationwide, 8.9 percent of the gross domestic product; it is larger than defense spending and second only to health care. Of the money for education, $307.5 billion is spent on kindergarten through 12th-grade education and $30 billion on preschool education.

    The directory also says private businesses account for $81 billion of the money spent on education.

    More than half of that is for training and development programs for the employees of businesses and public institutions. Leaving that out entirely -- although some for-profit companies do training and development in schools -- leaves about $30 billion. The largest chunk of that is $15 billion for educational products like textbooks, computers and software. An additional $10.5 billion is spent on for-profit preschools and child-care centers.

    Also growing rapidly -- and not included in the $81 billion total -- is the number of school districts that contract with private companies for services like maintenance, food services and security.

    There are no reliable figures on how much the industry has grown because so much of it, such as educational software or for-profit preschools, is the result of changes in technology and society that have virtually created new fields.

    The widely publicized ventures in running districts or public schools, like Education Alternatives or the Edison Project of Christopher Whittle, remain a tiny part of the overall market, but one with large potential for growth as parents demand greater choice within public education, experts say.

    There are other signs of business interest in schools. McLaughlin's Education Industry Report has begun rating the performance of 25 publicly traded education companies in what it calls its Education Industry Index.

    It says the stock price of the 25 companies rose last year by 65.47 percent, compared with 39.9 percent for the NASDAQ and 26.2 percent for the Russell 2000 index of small companies.

    And Lehman Brothers is sponsoring a conference in February for education companies and institutional investors to look at the investment opportunities being presented by changes in education.

    Whether those changes will include the large-scale private management of school districts remains very much in doubt.

    In Hartford, the school district canceled the company's contract last week after the company sought payment for some of the $11 million it has invested in the city's 32 schools. So far, the company has been paid only $343,000.

    "I can't see how there's big money to be made in managing school systems that are failing, for the most part, because of a lack of resources, not because they're grossly mismanaged," said Edward Miller, editor of The Harvard Education Letter.

    "The idea of taking an existing school system like Hartford and turning it around is just one of the most foolish, unrealistic propositions I've ever heard of."

    Some analysts are less downbeat, saying the problems in Hartford and Baltimore, where Education Alternatives' contract was also curtailed, had more to do with bad decisions and bad contracts than the concept itself.

    More common is a sense that the prospects are far greater for operating individual schools under contract with school districts than for running whole districts. The spread of charter schools -- which run independently of local districts and receive direct financing from the state -- has offered avenues for public-private partnerships that did not exist even three years ago.

    Thus, the Edison Project, after being almost dragged down by the financial problems of Whittle's other ventures, began operating four schools this year. It has signed contracts for three more next year, which will more than double its current enrollment of 2,300 students.

    "It is far more feasible and far more sensible to pursue innovation on a smaller scale than to think about it systemwide," said Benno C. Schmidt Jr., president of the Edison Group. "There's a lot of fresh thinking about reinventing government and finding new ways to deliver services, and public education is looking for the same thing."

    Many districts remain more interested in contracting for support services than instructional ones.

    "Our primary mission is the education of young people, and we do that better than anyone else," said Robert Stalick, former superintendent of the Albany, Ore., schools. "We aren't necessarily trained, nor are we better than anyone else, at busing kids, providing food service, maintenance and custordial."

    Many others remain skeptical that businesses providing instructional services will be able to cut costs or raise performance.

    "People seem to assume that raising performance is an easy thing, that businesses can just come in and do it," said DeWayne Boyd, superintendent of the Bremerton, Wash., schools. "If it was that easy, we would have done it a long time ago."

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