by
Rob Corder on Wednesday, 3 June 2009 at 04:23 UAE time.
Every time the UAE government tries to fix prices with centrally imposed targets, it ends up falling foul of the laws of unintended consequences.
In the past few years, we have seen ministries trying to engineer prices of groceries in supermarkets, home and office rents, and now school fees.
For a capitalist government - and it is passionately free market at heart - these price controls appear out of character.
Meddling with prices is done with the best intentions, but conflicting interests always lead to the wrong solution emerging.
Take the question of Dubai rents, and the much-ridiculed RERA Rental Index. The real estate authority is trying to protect both tenants and landlords at the same time, leading to the farcical situation where they are recommending increases in rents for vast swathes of the population at a time when supply of accommodation is increasing, demand is decreasing, and tenants are fearful for their futures.
Even the rental cap, which aimed to prevent hikes of above 7 percent during the 2005-08 boom, backfired. Landlords were motivated to kick out loyal tenants and find new ones, while moving house through choice became punitively expensive, driving a spanner into what ought to have been an effective free market machine.
The knock on effect is the paucity of talent we now find in the real estate industry. Since there were no interesting decisions to be made, there was little point in coming up with creative ideas that would create genuine win-win relationships between buyers and sellers; tenants and landlords. Entrepreneurship was engineered out of the system.
The stakes are even higher for the school system, and again the authorities are making a challenging situation worse.
The role of government is to provide opportunities for its citizens. It is therefore natural for a government department to oversee government provision of education. It also has a role in regulating the private sector so that students and parents receive the education they are paying for.
However, regulation should not extend to price-fixing, and the current Knowledge and Human Development Authority (KHDA) initiative to suggest price increases based on inspections of Dubai schools is wrong for all the same reasons that led to RERA’s failure to improve the real estate market.
Private sector schools are run for profit. No parent disputes this fact and, in fact, should welcome it. The best schools will attract the best staff, the best pupils, and will be able to command the highest fees. Profits are underpinned by innovation, creativity, hard work and top-to-bottom commitment to quality.
Governors, administrators, principals, teachers and support staff need no encouragement to do a better job than competing schools. It is the competition that drives up standards, and the delivery of better services that influences prices.
Demand will be highest for the schools that offer the best value for money, a calculation based on myriad factors: price, exam results, stability and continuity for their children, location, and intangibles like trust, relationships and snobbery.
The government is right that market forces will not make all schools operate to the highest standards, but their role should be to define minimum acceptable standards, and regulate schools through a measurement and inspection system to ensure they are met.
A system that all-but cements in a 7 percent annual price increase for schools that are, by KHDA’s own measure, “unsatisfactory”, is not serving schools, pupils, parents or the country and should be scrapped.