If school fee regulation had to be done, how can it be done better?

by Bhuvana Anand and Shubho Roy.

In the Indian policy discourse, there is a strand of thought which sees schools as aggressors and parents as victims in a fight over school fees. The National Education Policy 2020 for example is concerned with “...the commercialization and economic exploitation of parents by many for-profit private schools...”. The COVID-19 pandemic has increased disputes between parents and schools over fees. Some parents are demanding a moratorium on fees. Some state governments are insisting that schools continue paying teachers. The managers of schools are struggling to balance these demands.

It is useful to take two steps back and ask: Is there a role for state power in controlling prices? In a market economy, market prices coordinate supply and demand, resulting in optimum resource allocation. Any state manipulation of the market price, such as a price cap, distorts this process and hampers mutually beneficial exchanges (Coyne and Coyne 2015). Price caps in general lead to poor outcomes. We see reduced investments and innovation (Ross 1983), collusion amongst suppliers (Grayson 1974, Knittel and Stango 2003), and regulatory capture. In the school education section in India, there is some evidence that implementing fee caps results in perverse outcomes (Agarwal et al. 2019).

Government control of prices has gone out of fashion in some areas (cement, steel) but this continues to be mainstream thinking in fields like education policy in India. Nine states and union territories have legislation that establishes fee regulation for private schools. Other states, such as Delhi, use executive power to regulate school fees. States with fee regulations impose absolute caps on fees or limit annual hikes.

In a previous article (Anand and Roy 2020), we discussed regulatory capture by teachers in fee setting. In this article, we discuss the hold-out problems that fee regulation creates. The current approach to fee regulation gives parents the power to hold up fee hikes. The exception to this is Maharashtra Educational Institutions (Regulation of Fee) Act, 2011. The Maharashtra law reduces the chances of a single parent holding up a fee hike. If there was a desire to have price controls in elementary education, the Maharashtra law gives us a better method for implementation as compared with what has been done elsewhere.

Fee regulation and the power of parents

Multiple states in India allow parents to challenge the decision of school management to hike school fees. This is, in and of itself, an awkward arrangement: Customers will always be biased in favour of lower prices. For example, if customers could hold up price hikes by security guards, they would always do so. Similarly, if exporters are given power on government control of the exchange rate, they will always favour depreciation.

Under the conventional arrangements, if parents find that schools have hiked fees 'unreasonably', they can complain to district/divisional fee regulatory committees. These committees are composed of parents, school representatives and government officials. Most laws characterise such action as raising a “grievance” or a “complaint” and require quasi-judicial proceedings to determine fees.

In Chandigarh, students, parents or guardians can register “complaints” with the regulatory body against schools for charging 'excessive' fees. Any hike beyond 8% of previous year’s fees, or attempting to profit (Section 7) is considered excessive.

In Bihar, schools may increase fees up to 7% over the previous year’s fee. Any increase beyond the 7% cap, requires the approval of a fee-regulatory committee. Any parent can file “objections” to the committee in case a school charges over the fee cap (Section 5).

Uttar Pradesh allows schools to hike fees in proportion to teacher salaries. However fees cannot be increased by more than CPI + 5% of previous year’s fees. Parents may complain to the district fee regulatory committee in cases where the school does not address their “objections” (Section 8).

In each of these states, an individual parent can start legal proceedings against the school management on the question of fee hikes. In the legal proceedings, the district fee regulatory committee has the power to question the fee increase. The school management has to justify why the fee increase is legitimate. If the district fee regulatory committee is not satisfied, it may impose fines on the school. In Bihar and Uttar Pradesh, if a school fails to pay fines on time or repeats offences, the committee may recommend revoking recognition which will lead to the school shutting down. Managers of schools are potentially subject to this legal process, the corresponding legal risk, and the cost of time and resources required to acquire political capital ahead of time to navigate these situations at the district fee regulatory committee as and when they might arise in the future.

In most states with fee regulation, one parent is capable of holding the entire school at ransom for raising fees. A single parent can engage in what is called a hold-out (Epstein 1993). Schools may need to hike fees to meet operational expenses (teacher salaries), comply with regulations (setting up CCTV cameras) and for infrastructure development (ed-tech). A bulk of parents may be willing to raise fees to meet these costs and improve the quality of education for their children. But the law allows a single parent to make it costly for the school to raise prices.

Maharashtra

Maharashtra regulates fee dispute with an added nuance: it imposes a minimum threshold that parents have to meet before raising a complaint against schools.

Schools in Maharashtra can hike fees only after approval from a school-level committee. This committee is composed of parents, teachers, and school management. Where parents disagree with the decision of the school-level committee, they may appeal to the divisional fee regulatory committee (Section 6). However, the Act does not give the power to an individual parent to raise a legal dispute. The Act creates a category called an ‘aggrieved parents group’ thus:

"aggrieved parents group" means the group of parents of the children, not be less than 25 per cent of the total parents of the children of affected standard or school, as the case may be, who are aggrieved by any decision under the Act (Section 2).

In Maharashtra, parents can challenge the decision of the school-level committee only if 25% (or more) of the parents affected by the hike come together to register a dispute. By raising the bar to 25% of affected parents, the Maharashtra law makes it difficult for one parent to stop the school from ensuring financial viability or improving services.

In the modern age of mobile phones, it may not be hard to solve coordination problems and muster a quarter of the parents as a coalition. The basic problem remains: should customers be given access to a non-market mechanism to influence prices? But this appears better than giving each parent the power to initiate a legal process.

The way forward

The literature shows that school education can be sticky; moving schools frequently can have social, emotional and learning consequences (see here, and here). Parents need to plan household finances for a 5-15 year horizon. Schools, on the other hand, want autonomy to run, expand and modify their offering, and to be able to respond to environmental demands, unforeseen circumstances, and competition from other schools. Parents want to remove consumption volatility in their purchase of vegetables, this does not mean we use state power to prevent price changes in vegetables. If parents wanted to eliminate price uncertainty enough, the market economy might find solutions on its own: e.g. perhaps schools could offer price lock-ins for a group of years at a time.

The present configuration of state power in fee regulation is biased against the school management. The law ignores the possibility that parents have no interest in the long term financial viability of a school. Once their children graduate from a school, they have no interest in whether the school survives. On the other hand, the management, which may run the school for decades (more than a century in some cases), has to consider the long term. By allowing one parent to hold up fee hikes, such laws hamper the long-term financial viability of schools, and create a bias in favour of school promoters who are politically well connected.

The rational response to a disagreement over fees would be parents shifting out when the school raises fees above what they are willing to pay. The Indian state, however, has created artificial constraints on the supply of schools through multiple laws (Singh and Sudhakar 2020). Parents have limited options to choose from for their child’s education.

The foundational mistake in Indian education policy is imposing artificial restrictions on the entry of new schools. The Indian state attempts to respond to the consequences of this bad idea by introducing other bad ideas like fee regulation and involving parents and teachers in school fee setting. This does not solve fee hike disputes and instead introduces new problems. We need to address the core problem head-on and not entangle ourselves into more complicated laws and administrative mechanisms to address them.

References

Controls are not the answer, Jackson C. Grayson, International Economic Review Vol. 21, Issue No. 2, 1974.

How are private school fees regulated?, Ritika Agarwal, Atreyi Bhaumik, Adit Shankar and Anindya Tomar, in Anatomy of K-12 Governance in India, Centre for Civil Society, October 2019.

Holdouts, Externalities, and the Single Owner: One More Salute to Ronald Coase, Richard A. Epstein, The Journal of Law & Economics, John M. Olin Centennial Conference in Law and Economics at the University of Chicago, April 1993.

Moving Matters: The Causal Effect of Moving Schools on Student Performance, Amy Ellen Schwartz, Leanna Stiefel and Sarah A. Cordes, Association for Education Finance and Policy, 2017.

Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards, Christopher R. Knittel and Victor Stango, The American Economic Review Vol. 93, Issue No. 5, December 2003.

Pricing education: An example from Uttar Pradesh, Bhuvana Anand and Shubho Roy, The Leap Blog, July 2020.

Restrictions on for-profit education in India, Akash Pratap Singh and Tarini Sudhakar, Latest Analysis, Centre for Civil Society, May 2020.

Switching Schools: Reconsidering the Relationship Between School Mobility and High School Dropout, Joseph Gasper, Stefanie DeLuca and Angela Estacion, American Educational Research Journal, 2012.

The economics of price controls, Christopher J Coyne and Rachel L. Coyne, Chap. 2 in Flaws and Ceilings: Price Controls and the Damage They Cause, Institute of Economic Affairs, 2015.

The Private Schooling Phenomenon in India: A Review, Geeta Gandhi Kingdon, The Journal of Development Studies, 2020.

The Price of Education, Ernest Ross, Foundation for Economic Education, 1983.

Bhuvana Anand is a researcher at Centre for Civil Society and Shubho Roy is a researcher at the University of Chicago. The authors thank Tarini Sudhakar at Centre for Civil Society for research support.