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The government’s flagship schools reform policy will fail to make a substantial difference unless the government allows for-profit companies to provide free schools.

A new IEA report published yesterday, The Profit Motive in Education: Continuing the Revolution, argues:

• 11% of children in Sweden now go to the equivalent of free schools.

• More than 60% of Sweden’s equivalent of free schools are run as for-profit limited companies.

• Merit value (the average value of marks received by pupils) across all Swedish compulsory schools in 2011 was 211 points (max. 320 points); in the equivalent of free schools alone it was 229.

• Allowing for-profit companies to set up free schools is the key to increasing investment and competition in education.

• For-profit providers would create the innovation that is desperately needed to improve pupil performance.

• For-profit providers would promote co-operation across a “chain” of schools throughout the country with regard to teaching methods, curriculum provision, assessment and so on. Currently, this is rare in the state system. Such cooperation lowers costs and allows more investment at the chalk face.

• For-profit providers could take advantage of economies of scale in overcoming the regulatory and bureaucratic obstacles faced by those setting up free schools.

• As well as investing capital, for-profit providers would take the equity risk of failure.

In the report Toby Young, free school founder, argues:

“Thanks to the complexity of the process, the scarcity of suitable sites and the government’s limited capital expenditure budget, I cannot see more than a few hundred free schools being established in the lifetime of this Parliament… The obvious solution is to enable for-profit companies to set up, own and operate free schools provided they soak up all capital costs.”

The report also examines the role of profit in education more broadly, looking at lessons for the UK from the existence of profit-making universities in the US and the role of private schools in the developing world. It recommends:

• Ending all discrimination against private providers – so public funds follow parents’ choices about education provision.

• Abolishing all corporation and capital gains tax on for-profit education companies.

• Informing parents of the annual cost of their children’s education – this would help parents to know whether they are getting value for money and would provide potential private providers with important information on the costs of government schooling around the country.

• Private providers should establish an association – private providers of education need to do a better job of articulating the value they can add to the UK’s education sector.

• Business schools should consider becoming wholly private.

• Student support systems in higher education should not reward failure if we are to get the most out of widening higher education to profit-making bodies.

Commenting on the publication, Philip Booth, Editorial Director of the Institute of Economic Affairs, said:

“Britain’s education system is failing in many respects. Encouraging profit-making into the education sector at all levels is the key to increasing opportunities, driving up standards and promoting investment. We all understand that the profit motive leads to higher quality services in other areas of our lives. We need to apply this lesson in education.”

Notes to editors:

To arrange an interview about the publication please contact Ruth Porter, Communications Director, rporter@iea.org.uk or 077 5171 7781.

The IEA previously published Schooling for Money: Swedish Education Reform and the Role of the Profit Motive (2010). This report looked specifically at how the Swedish version of free schools was the key to improving the performance of children from low socio-economic backgrounds.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.