3.2.2 PENSUM DEL BACHILLERATO EN CIENCIAS GENERAL

Introduction

Private financing of education involves the use of direct user's charges as the main source of revenue. As earlier defined, publicly financed education system depends solely on taxes. The former is the exact opposite of publicly financed education. The usual practice is where users of educational services are asked to supplement taxes by paying part of the cost of what they consume. When this happens, the private costs of education are likely to rise and therefore, reducing the net benefits of education to the individuals.

Whereas, when an education system is entirely financed out of general taxes without charging the users, there will be a relatively high private net benefits, because of the reduction in private cost through public financing. This lecture is in two major parts:

(1) Rationale for private financing of education; and

(2) Conditions under which private financing of education can succeed.

Objectives

At the end of this lecture you should be able to:

(i) Define private financing of education;

(ii) Mention from reasons necessitating private financing of education; and

(iii) Identify four conditions under which private financing of education can succeed.

Pro-Test

1. Which of the following financial arrangements involves the use of direct user's charges as the main source of revenue:

(a) Private financing of education (b) Public financing of education (c) Consumer's subsidy

(d) Producer's subsidy

2. When there is a discrepancy between social and private returns to education in some areas of specialization such that social net benefits are less than private benefits, then it is advisable to:

(a) Finance education privately (b) Subsidize education heavily (c) Finance education totally

3. All the following are conditions under which private financing can succeed except:

(a) When there is inter-sectoral competition for public funds

(b) When there is discrepancy between social and private returns to education in some areas of specialization

(c) When there is need to generate additional revenue which can be used to improve and maintain quality of teaching through an increased expenditure on teaching materials (d) Where there is lack of incentives for prudence and efficiency in the education system

Content

(1) Rationale for Private Financing of Education

You will remember that we have earlier discussed some reasons for a predominant public funding of education in most countries of the world. Yet, there are occasions when it has to be financed privately owing to the following reasons.

(a) Income Factor. Reduction in national income is a strong factor that may lead a country to explore private financing. This is the case in Nigeria in the 1980s, when government supports to educational institutions were drastically reduced, because of the dwindling government revenue. Hence, there were cuts in government budgets and consequently, in educational budgets. As a solution, fees were charged in some public schools which were formerly non-fees paying schools. Similarly, meal subsidies were removed in Nigerian higher institutions and students bursaries were either reduced in size or limited to few students.

(b) Competition factor. There is inter-sectoral competition for public funds. The more the share of the total public funds consumed on education, the less the shares of such funds left for other sectors in the economy. On the other hand expansion in other sectors may lead to a drastic curtailment in educational investment. As a solution, private sources of revenue may be sought to supplement the share of public expenditure available for education.

(c) Expenditure factor. Education usually takes a large share of public spending. In the early 1980s, total educational expenditure as percentage of total government expenditure in African countries ranged from 4.1 in Namibia (1982) through 9.3 in Nigeria (1983) to 30.2 in Mali (1984) and 36.0 in Chad (1982).

As children population increases, there is the likelihood of an increasing trend in the share of education among all government expenditures. For example, population of the age group 0 - 14 increased from the estimated figure of 36,528,000 in 1980 to 51,739,000 in 1990 in Nigeria. That is 41.64 per cent increase in ten years. With time, larger share may no longer be feasible and a solution may be sought through private financing. This is because there is a need to seek for added revenue.

(d) Equity Factor. Equity in education demands that subsidization of an education system should not make the poor poorer and the rich richer. But it ha.« been found that the poorer the country, the more the benefits of subsidized education that accrue to children of wealthy families. If this is true, then there will be a need for a selective system of users' charges in the these countries.

(2) Conditions under which Private Financing can Succeed

You have learnt about the rationale for introducing private financing of education. It is not just enough to have good reasons for introducing it, the idea may die if certain conditions are not in existence. We shall now discuss the four main conditions under which private financing of education can succeed.

(a) Fiscal constraints on expansion. Where there are fiscal constraints on expansion, heavily subsidized education system has the tendency of creating financial difficulty for the government. They may find it increasingly impracticable to provide more subsidized places in schools.

(b) Social pay offs are low. Private financing becomes advisable when there is a discrepancy between social and private returns to education in some areas of specialization. The essence of private financing is to discourage enrolment demand in the area where pressure to expand has made social net benefits to be less than private net benefits. In other words, where social pay offs are low and where there is the likelihood of over expansion, a mismatch and an eventual incidence of unemployment.

(c) Incentive structure is inefficient. Private financing may become necessary where there is lack of incentives to be prudent or efficient in the education system. A shift from a heavily subsidized system towards greater private financing of education might help change the incentive structure. Once there is a shift in the financial arrangement, there will be a corresponding shift in risk of investment which will consequently lead to a shift in attitude of users of resources. The tendency is now for the users to become more of investors than consumers. Therefore attempts will be made to scrutinize costs more closely, and reduce wastages. In fact, the moment employers of labour are involved in the funding of education, the more realistic their demands for increased quality of education. They will then know that good means more money.

(d) Revenue drive. Private financing may become necessary in order to generate additional revenue which can be used to improve and maintain quality of teaching.

During cuts in public allocations to schools, private financing provides the funds to operate them and therefore arrests deterioration in the quality of education.

Under this condition, the school is allowed to employ users' charges to cover the cost of teaching inputs such as textbooks, teaching aids and laboratory materials. Obviously, government will continue to finance salaries and allowances. The only problem is how to finance educational goods and services.

(1) Memory Aid: Rationale for Private Financing of Education I C E E where:

I = Income factor;

C = Competition factor;

E = Expenditure factor; and E = Equity factor

(2) Memory Aid: Conditions under which Private Financing can succeed

F S I R Where:

F = Fiscal constraint on expansion S = Social pay offs are low

I = Incentive to be efficient or prudent is low R = Revenue drive is expedient.

Summary

(1) Private financing of education involves the use of direct users' charges as the main source of revenue. Users of educational service are asked to supplement taxes by paying pan of the cost of education.

(2) Any of the following reasons may be given to justify private financing of education:

(a) Reduction in national income;

(b) There is inter sectoral competition for public funds;

(c) Education usually takes a large share of public spending; and

(d) Equity in education demands that subsidization of an education system should not make the poor poorer and the rich richer. In poorer countries, heavy subsidization of education may enhance inequity.

(3) Private financing of education is likely to succeed under the following conditions:

(a) Where there is fiscal constraint on expansion of a heavily subsidized education system;

(b) Where social pay offs are low and there is likelihood of over expansion, a mismatch and an eventual incidence of unemployment; and

(c) Where there is need to generate additional revenue to supplement government expenditure on education.

Post-Test

1. Which of the following financial arrangements involves the use of direct users' charges as the main, source of revenue

(a) Private financing of education (b) Public financing of education (c) Consumer's subsidy

(d) Producer's subsidy

2. When there is a discrepancy between social and private returns to education in some areas of specialization such that social net benefits are less than private benefits, then it is advisable to

(a) Finance education privately (b) Subsidize education heavily (c) Finance education publicly (d) Finance education totally

3. All the following are conditions under which private financing can succeed except:

(a) Where there is intersectoral competition for public funds

(b) When there is discrepancy between social and private returns to education in some

(c) When there is need to generate additional revenue which can be used to improve and maintain quality of teaching through an increased expenditure on teaching materials

(d) Where there is lack of incentives for prudence and efficiency in the education system

References

Jimenez, E. Pricing Policies in t/ic Social Sectors: Cost Recovery for Education and Health in Developing Countries, Baltimore: Johns Hopkins University Press. 1987.

Mingat, A. and J. Tan "Expanding Education through User Charges: What can be achieved in Malawi and other LDCs" in Economics of Education Reviews, 5(3): 1986. pp 273 - 86.

Woodhall, M. "Student Loans as a Means of Financing Higher Education: Lessons from International Experience*. World Bank Staff Working Paper 599, Washington D.C 1983.

Wolff, L. "Controlling the Costs of Education in Eastern Africa: A Review of Data, Issues and Policies, World Bank Staff Working Paper 702, Washington D.C. 1984.

LECTURE ELEVEN