June 08, 2009

Modelling Education Reforms on the Financial Sector

Pratap Bhanu Mehta's article in the Indian Express on the devil being in the detail of educational reforms is very interesting. It makes us look around for successful models and one that strikes the eye is obviously the Stock Exchange mechanism -- that is perhaps one of the most successful model that has emerged from Indian reform process. To see if this model can be used as a reference, let us see some of the regulatory issues that a "company" needs to address before it can transact business and earn money.

At its minimum, a company must adhere to the conditions of the Companies Act and register itself with the Registrar of Companies. We note that the RoC does not really approve or reject the application on the basis of the quality of the companies products or that of its promoters. All that the RoC ensures is that the company meets certain basic disclosure norms in terms of ownership and financial issues. The focus is on accurate disclosure -- or transparency -- not on the actual facts and figures that are being disclosed.

As the company gets bigger and needs access to more funds, it seeks listing in a stock exchange. A stock exchange is not a monopoly government organisation -- it is run by its members as per rules that dictate a certain minimum level of financial competence and ensures a far more rigorous level of financial and administrative transparency. Once again, the focus is on transparency of the organisation, not on the quality of products or services offered. A stock exchange has two interesting aspects : first there can be more than one stock exchange, so there is no threat of a monopoly and second they are supervised by SEBI to ensure compliance with the laws of the land.

However the stock exchanges do not provide financial support to any company. That is done by individual investors in the capital market based on their personal or institutional perception of the company's performance.

So the three components of financial sector are (a) Registrar of Companies and the Companies Act (b) Listing in the Stock Exchange under SEBI supervision and (c) Funds from the Capital Markets. For foreign companies wanting to do business there is the fourth agency -- FIPB that has a wider mandate of protecting India's strategic interests.

Let us now map these components into the Education sector.

First the role of the Registrar of Companies can be performed very well by the AICTE -- provided we remove its authority to approve or accredit institutions. This authority used with malafide intentions has been the bane of education in India because it has kept out the best and allowed in the worst operators. The powers of the AICTE should be restrictively defined in a new Education Act and should be modelled on that of the RoC.

Any institution registered with the AICTE should be allowed to offer any educational services subject to the Consumer Protection legislation in the country. Consumers in India are quite conscious of their rights and if they have the choice -- as they now have in telecom or air travel, not to mention on soaps, shampoos or cars -- there is no fear that educational service providers will be able to cheat them. Let us have some respect for the Indian customer.

But if an institute wants to move into the next, higher league, we need a self-managed organisation like the industry association that will ensure discipline and transparency in its members. One or two leading institutes -- some from the government sector like IIT, IIM and some from the private sector like BITS, ISB -- can take the initiative to form these associations. Initially this might lead to multiple organisation -- like multiple stock exchanges -- but in the long run, through a natural process we might end up with two or three, similar to the BSE/NSE model that we have today. These associations would ensure transparency and consistency in the behaviour of its members and could be supervised by a government body like the AICTE. Institutes accredited through these associations would be ranked higher in the perception of students -- who are the customers of educational services.

Finally funds ! And this is where both the government and private organisations must step in with generous support -- but we must use a market driven approach. Both the government and the private sector should set up multiple funding organisations each with its own goals and objectives. The UGC is an obvious candidate but the Department of Space could provide separate funding for programs leading to astrophysics and the Department of Minority Affairs could have a separate funding for Muslims. Similarly Tata Steel could fund institutes operating within 50 kms of Jamshedpur and an NRI in California could fund institutions in his native Bankura district -- to each his own !

Whatever may be the source and intent for funds we need transparency on two fronts (a) the criteria for funding and (b) the actual distribution of funds in each year. Each funding agency could have its own criteria publicly available and any "registered" institute can in principle apply for funding provided it meets the requirements of the funding agencies. Agencies would distribute funds to eligible institutes based on their perception of how "good" the institute is -- in terms of how published criteria. This is where metrics like "student-teacher ratio", "placements", adherence to social goals in terms of gender and caste equity, quality of research, patents can be introduced. All funding agencies may not have the same set of criteria -- each should have the liberty to specify its requirements and institutes will have to compete for funds.

Some of the funding may be automatic and statutory – for example HRD funds to IITs and IIMs – while others may be discretionary based on the extent to which an institute meets the criteria. However all funding agencies , especially those based on tax payer's money, must make available to the public all information on funds disbursed to each institute AND the justification for the same in terms of the adherence to the funding criteria.

Potential students can study the pattern of fund disbursals and draw their own conclusions about how good or bad an institute is as perceived by funding experts who have voted with their purse ! In a sense, market forces will drive both funding and students to the best institutes in the country.

In fact honest competition is what is completely missing in the education sector and this has led to an immense complacency in the public sector education system in the country. What makes it worse is that public sector institutes are so dependent on the bureaucrats in the HRD ministry for money that they have no option but to toe the sarkari line. Both these issues can addressed through the structure that is proposed here.

And finally what about foreign universities ? If as a nation we are brave enough we can allow them to come and operate through this route but otherwise we can have the equivalent of an FIPB to ensure that trashy organisations are kept out -- but this is neither necessary nor sufficient for quality and is best kept in abeyance for the time being.

As a part of the Prime Ministers 100 day program, may I request Mr Kapil Sibal to organise a conference on Higher Education where ideas like these – and those from other, more eminent people – can be formally considered for speedy execution.

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