April 08, 2012

Tax Free Bonds to fund Education Infrastructure

Tax free bonds have always been very popular in India. In the good old days of the distant past we had RBI “Relief Bonds” that offered up to 10% tax free income but it was never quite sure for whose relief the bonds were for -- perhaps for the Indian tax payer! That was then. Now we have similar bonds floated by  IIFCL and NHAI, albeit at far lower rates that vary between 6.5% and 8.3% but even these have garnered Rs 30,000 crores in FY 11-12. Carried away by this appetite for tax free bonds, the finance minister has proposed to float similar bonds to the tune of Rs 60,000 crores in the next fiscal.

But where could or should this money be used ? The NHAI has of course been building roads but I think there is another piece of critical infrastructure that can be funded through this route -- education !

Why ? Because education is the mother of all infrastructure that this country needs very badly..

For a variety of reasons not directly attributable to government policy or purposeful planning, India is “blessed” with a burgeoning population of young people that we flaunt in front of an ageing China, Western Europe and North America. But between this young population and the hypothetical demographic dividend that the nation expects from them lies a deep moat of a non-existent educational infrastructure ! If our youngsters cannot be taught and trained in a manner makes them productive the demographic dividend will disappear into the blue and we will be left instead with the demographic liability of a sullen, disillusioned population that will take to urban and rural terrorism under the guise of Maoism and related labels.

But why can we not build enough schools and colleges to accommodate the educational aspirations of our youth and their worried parents ?

To begin with the Government has neither the money nor the project management skills -- let us admit it, our sarkari babus do not have the drive, energy, enthusiasm  -- to create the lakhs of school and college seats that the nation needs urgently. Should it even try, it will get bogged down in corruption and redtape and all that will result is another scam followed  by more howls of anguish in Parliament.

But what is worse is that even private entrepreneurs are debarred, by policy,  from filling this gap. How ? Because our policy makers have allowed only not-for-profit organisations to build schools and colleges. Prima facie this seems to be a noble idea but the devil lies in the detail. Even if there were a few public spirited individuals or groups of individuals who are keen to build good schools and colleges they will be caught in a policy quagmire that is possible only in India.

Consider the following : AICTE regulations require that the society running a college must own the premises. Now unless the entrepreneur has a rich uncle ( or more unsavoury sources of money ) how will they acquire the land and construct the premises ? Will any sensible bank give a loan to a  not-for-profit society that wants to start a college ? Very unlikely unless the society has political connections !

Net-net it is not possible for a normal, honest, entrepreneurial educationist to start a college. So how do we see so many private engineering, medical and management schools sprouting up all around the country. Because they have all been created with shady money or by people with strong political connections and are designed not to educate our youth but to siphon off the money from their parents wallets. There could be a few exceptions like BITS Pilani, created by the Birlas but that is a manifestation of the rich-uncle syndrome and not likely to be replicated on a large scale.

There could be many ways to break this logjam. First our obsession with not-for-profit education can be overcome. Second the stranglehold of the AICTE and other unsavoury educational regulators can be weakened. But these are major policy matters that would call for an extensive debate. Instead, a simpler solution would be to create a National Educational Funding Agency (NEFA) on the lines of the NHAI and IIFCL.

With the blessings of the Finance Ministry, NEFA could float tax free bonds with coupon rates and tenors similar to the other tax free bonds. Funds collected through these bonds could be deployed as long term loans advanced exclusively to new and existing not-for-profit societies that have been approved by the AICTE or other regulatory bodies. This will easily fund the capital expenditure necessary to create new infrastructure in the form of classrooms, hostels, laboratories and playgrounds that are essential for institutions as per regulatory norms.

With ready access to legitimate, low cost capital, entrepreneurs would be free to direct their energy to create good quality educational institutions where the running costs -- revenue expenditure and loan service -- can easily be met from tuition fees. Most parents today are already paying a lot of money for private tuition and coaching classes and would be happy to transfer a portion of this expenditure towards fees of schools and colleges set up by honest and competent educational entrepreneurs.

Tax free  bonds to fund private educational infrastructure could be a neat way to transfer private funds to private entrepreneurs to build national infrastructure that would be under the supervision and control of a national regulator -- could anything be more win-win than this ?  But is there a catch ? Who or what could derail this idea ? And why would they ?

Education in India is a highly regulated market run under a ruthless license-and-permit raj. Most private educational institutes are owned and operated by politicians or their crony capitalist friends to fleece the hapless parent and earn enormous profits right under the nose of our hypocritical not-for-profit education policy. These individuals and their lobbying agencies will work hard to ensure that policies that hit their cosy oligopoly are nipped in the bud.

Can the nation free itself from such self-tied knots ? And live up the aspirations of its youth ? Let us wait for the answer that lies in the womb of the futurity and in the sagacity of the Finance Minister.
image taken from http://www.faadooengineers.com -- a source of information about engineering education

1 comment:

Tax said...

our full support will be there for this..because education plays important role in one's life.well done article..