Unrest may fuel higher dividends for Brazil’s for-profits

Private sector hopes to grow on back of oil-backed education funding boost

September 19, 2013

Source: PA

Field of protest: demonstrators at the Confederations Cup in Brazil take a stand against corruption, police aggression and poor public services

At a time when you might have expected to hear the youth of Brazil chanting about the nation’s football team, they called out “Vem pra rua” – “Come to the street” – an invitation to protest against corruption, police aggression and poor public services.

At the peak of the Confederations Cup competition in June, a dry run for the Fifa World Cup to be held in Brazil next year, millions were asking how the country could afford to spend more than R30 billion (£8.3 billion) on sporting events while healthcare, education and infrastructure were neglected.

For much of the population, the protests captured their frustration with the slow pace of the progress that had been promised by the country’s economic boom. But as the government looked to appease protesters by committing to reform and investment in healthcare and education, the financial markets predicted some unlikely beneficiaries.

For example, the share price of Kroton Educacional SA, Brazil’s largest for-profit higher education provider, rose by more than 7 per cent in the last week of June to double that recorded 12 months earlier.

At the height of the protests, Dilma Rousseff, Brazil’s president, reignited plans to invest 75 per cent of future offshore oil royalties in education – estimated to amount to R112 billion (£31 billion) from oil already being extracted alone – as well as a 50 per cent share of a fund created in 2010 to receive resources from a large “pre-salt” oilfield.

Kroton’s chief executive, Rodrigo Galindo, hinted to the financial press that the government’s response to the social unrest might bring dividends.

No one knows yet quite how the government will spend the royalties, which were confirmed when proposals were signed into law last week. But with the auction of new oilfields already planned for October, a huge injection of funds for education is predicted over the coming decades.

By design, the funds will be earmarked for public education and focus on “basic education”. But speaking on a weekly “coffee with the president” radio programme last month, Rousseff included “better pay for teachers [and the] training of scientists, technologists, innovation and courses abroad” as necessary parts of high-quality education provision alongside literacy, daycare and full-time schools.

The government will try to invest as much as it can in the public sector, says Simon Schwartzman, social scientist and president of the Institute of Labour and Society in Rio de Janeiro. “In general there isn’t public support for private education except for money for research institutions.”

But companies in the private education sector – and their investors – are nonetheless optimistic that the knock-on effects of the government’s approach to education will fuel their business.

Earlier this month, Reuters reported that shares of Brazil’s four listed education firms were outperforming the market, up a combined 18 per cent this year compared with a benchmark slump of 15 per cent.

Although a few private institutions, particularly in business and law, are among the best in the country, most of Brazil’s top universities are public, free and well-funded. But they currently educate just 25 per cent of students – mostly wealthier graduates from private schools trained to pass the country’s tough university entrance exams. Most students attend for-profit private institutions, which favour cheaper-to-teach vocational courses, evening classes that fit around work and distance learning.

Noises from the government so far suggest that schemes allowing poorer students to access private education may increase. These include the Student Financing Fund (FIES) – which covers 50 to 100 per cent of tuition fees according to students’ gross monthly household income – and ProUni (“University for All”), a scheme through which private institutions provide free places to low-income students in return for tax exemptions.

Speaking at a ceremony in São Paulo on 22 August to celebrate the signing of the one millionth FIES contract, Aloízio Mercadante, the education minister, said: “The system needs to keep on expanding: we need more ProUni, more FIES [and] more funds for education to meet this huge demand.”

The number of loans provided through FIES quadrupled between 2010 and 2012 after reforms that included lowering interest rates to 3.4 per cent a year, increasing the grace period for repayments post-graduation and lengthening the repayment period.

Galindo told the news agency Bloomberg that as more middle-class Brazilians get help with paying for university, classes at Kroton, which is part-owned by the US private equity firm Advent International, should rise by 10 to 15 per cent annually over the next five years.

The pace will accelerate further if student aid through FIES is extended to cover distance learning, he added, a move the government is already considering for high-quality courses for 2014.

Dilma Rousseff

Supply and demand

However, even if (as Schwartzman believes) the majority of the funding from oil revenue is targeted at secondary education, where many see the most pressing problems, private universities could nonetheless benefit simply from the creation of a larger market for higher education as more young people complete high school.

Unesco figures show that the number of higher education students in Brazil jumped from 2.8 million in 2000 to 6.6 million in 2010.

Ignacio Marín, a consultant within the Directorate for Education and Skills at the Organisation for Economic Cooperation and Development, says that Brazil’s size and growing economy mean there is room for further expansion.

“The rates of higher education attainment at the moment are very low,” he says, adding that just 13 per cent of the population aged 25-34 had benefited from tertiary education, compared with an OECD average of 40 per cent.

The high premium attached to degrees in Brazil – wages are 157 per cent higher and employment rates 15 percentage points higher among graduates than for those with upper secondary education – also means that demand for higher education is likely to continue, Marín argues.

Private institutions are targeting this increase in demand. Company literature for the education group Estácio, for example, outlines how its network – which includes one university, four university centres, 34 colleges and 52 distance learning units – is “strategically located close to the homes and/or workplaces of our target public of middle- and lower middle-income workers”. It aims to grow through distance learning as well as additional units and acquisitions, it adds.

While in recent years the government has also made an effort to expand the public sector – by providing evening classes, catering for more remote areas and increasing distance learning provision – it has not got very far, says Schwartzman.

While the public sector deals with teaching strikes and bureaucracy, private institutions (many of which are more like “education service providers” than universities, adds Schwartzman) benefit from being members of the same umbrella company even when scattered across the country, with the centralised production of materials and teacher training supporting further penetration.

According to Fernando Schüler, director of Ibmec Rio de Janeiro, an elite private business school, it will be the private sector that accounts for the future growth of higher education in Brazil, “as has been happening over the past two decades”.

Competition will also drive up quality, he adds.

One way the public sector could seek to absorb some of the growing demand (and take advantage of the billions in oil money that Rousseff plans to spend in turning Brazil into a knowledge economy) would be to diversify its provision to combine expensive research institutions with cheaper teaching-led universities.

That would mean investing differing amounts in different institutions and embracing the models that are working for private companies.

But Schwartzman sees little movement in this direction.

“There’s strong resistance in the university sector to considering diversification…so this places a limit on what it can do.”

Meanwhile, “the private sector will follow the market”, he says.

elizabeth.gibney@tsleducation.com

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