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Sun 7 Sep 2008 04:00 AM

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Crisis of the class of 2009

As Gulf school waiting lists lengthen, banks and private equity houses are investing billions in education.

As school waiting lists lengthen across the Gulf, banks and private equity houses are set to invest billions of dollars in private education. But will learning take a back seat in the quest for profits?

Gary Stanton registered his daughter at her local school in Dubai before she was even born. Five months ago though he was told that four year-old Summer had very little chance of being accepted next September.

"We put Summer's name on the admission list before she was even born and the school was even built," he tells Arabian Business. "We were told that all of the places will go to children with siblings already at the school or children whose parents work at local companies. It's too late to put her name down for any other school," he says.

Last week as the school bell rang for the first time marking the start of the new academic year, it was revealed that as many as 10 pupils in the UAE were competing for one place at nursery and private schools.

The American International School in Abu Dhabi confirmed it had more than 500 children on its waiting list while Dubai College said it had 300 children take its entrance exam for just 120 places.

Analysts fear the growing shortage of school places could threaten growth across the region. "Long term any failure to address the current shortfall in terms of education capacity and subjects offered, has the potential to affect the economy," says Oliver Cornock, regional editor at the Oxford Business Group.

"The UAE and Dubai, in particular is positioned as the economic and commercial centre of the region. To sustain the country's position the provision of high quality public and private sector education will be critical," says Dino Varkey, senior director of business development for Global Education Management Systems (GEMS) Education.

The Research Unit at Mashreq predicts that the UAE's population will increase by 18 percent in 2011 to 6.88 million compared to 5.19 million in 2007. Around 40 percent of the population is under 15 years old.

Struggling to keep up with rapidly rising populations, regional governments are looking to the private sector to fulfill increased demand for education. Traditionally a sector restricted to privately run schools with educational expertise, the industry is now witnessing interest from a number of unconventional groups from private sector firms to private equity groups and profit making groups and schools.

"There is huge demand; education is the underbelly of Dubai. You see the Palm and the development taking place but actually there is a huge problem in terms of infrastructure in schools. There are people on waiting lists all over the place," says a Dubai-based teacher who wished to remain anonymous.

In the past, local education has fared poorly compared to worldwide standards. A 2007 McKinsey & Company report into regional schools noted that students' performance in core subjects such as Maths, Arabic, English and Science, was low compared to international standards.

"[The education sector] is at a critical situation and historically education has failed to keep a pace," says Cornock.

Governments are now recognising the need to invest in a knowledge-based economy at its most basic level. Last year the UAE committed $7.7bn of its federal budget to the education sector, representing 25 percent of its overall budget.

Last week the Ministry of Education unveiled new reforms for the region's public education. The renewed focus on modern teaching methods taught in schools represents an ambitious effort to reform the efficiencies of the state school system.

"Massive investment is required just to meet existing demand."Schools are operating at 100 percent capacity and there is a lot of stress on the existing capacity especially for the better known schools," says Purshotam Ramchandani, senior vice president at Abraaj Capital which has investments in more than 50 schools across the region through its stake in GEMS.

He points out that more than 22,000 new students joined the UAE school system annually between 2001 and 2006.

It is not only state schools being targeted. The number of private sector places is also being addressed as an increasing number of parents consider privately educating their children.

Since the early 1990s private enrolment in the UAE has increased fourfold. More than 40 percent of the UAE's student population is currently enrolled in private education and according to the Dubai government, 88 out of 132 of Dubai's schools were privately run during the 2006-07 academic year.

Those who have already invested in the region's education sector include Dubai-based GEMS, Evolvence Capital and Zabeel Investments, which recently acquired a stake in the National Bonds Corporation's Madaares initiative which plans to open several primary and secondary schools across the UAE.

"Governments are keen and determined to increase the quality of education across the board," says Ramchandani.

There is a migration from public to private but at the same time, governments are engaging with the private sector to allow them to come in and transfer their know-how, to manage these schools over a 10-15 years contract," he adds.

GEMS is one of the region's largest private education providers with 26 schools across the UAE educating around 70,000 pupils, which, the group claims, accounts for 14 percent of the UAE education market. In July the firm announced a $408m expansion plan which would provide 20,000 new school places across the UAE.

The group owns and operates 60 percent of its schools while the remaining 40 percent are owned by others and managed by GEMS, a proportion which has more than doubled in the past two years.

"Increasingly there are a number of investors in the region that are interested in socially responsible investments that not only provide them with a stable rate of returns but also an investment that gives back to the community," explains Varkey.

Dubai-based buyout firm Abraaj Capital acquired a 25 percent stake in GEMS last June. Investing in education is an attractive investment, particular in the primary and secondary sectors in which GEMS operates in, says the firm.

"Kindergarten to Year 12 presented the maximum opportunity in terms of a demand and supply imbalance, from an investment perspective," says Omar Lodhi, executive director at Abraaj Capital.

The number of private equity fund houses in education is also on the rise. Last year Kuwait's Global Investment House acquired a 70 percent stake in Al Rayan Holding Company, a Sharia-compliant education-specific holding company.

The firm also has a number of investments in universities and schools in Kuwait and plans to continue to invest in the industry as the opportunities arise.

"[Parents] here are looking for more sophisticated education and schools which provide a wide range of subjects - such as more than one language - and most of the expatriates in the Gulf look at the private sector. Financial investors will be taking the business of education to a higher class," explains Majde Fanous, senior investment manager at Global Investment House.

Dubai-based Evolvence Capital is also investing heavily in education and has already secured a Dubai-based campus for British boarding school, Repton and the American Community School. The firm, which is currently in talks with a number of other reputable American schools, sees its investment in education as a long-term value-added commitment rather than a short-term money maker.

"There are other more profitable businesses," says the firm's founder and CEO, Khaled Al Muhairy. "Its much more value added to us in terms of us contributing back to society. If you are going to build the best school in the region you need to be patient and have an ability to absorb losses," he says.

Now in its second year, Repton has managed to secure 1000 students each year despite the fees of between $22,000-38,000 per year.

"The difference between us and other private equity firms is that we knocked on Repton's door, we convinced a 450 year-old school and we showed them that there is a need for the level of education they are providing in the UK here. We wanted to make history with them."

Investing in private education may not seem like an obvious choice in many other regions, but in the Gulf it is creating a buzz among private equity houses, banks and funds.

"Education as an industry is recession-proof. It's like healthcare - it's not as affected by cycles. People have to send their children to schools and it's an attractive investment which we think will see a lot of additional investment over the next five years," explains Lodhi.The potential profits which can be generated are likely to result in an increasing number of private equity firms looking at investing in education says Cornock.

"Education hasn't been a traditional sector for private equity but I am sure in the future it will become more profitable."

While Al Muhairy maintains that profits made from Repton will be ploughed straight back into education in the other form of schools, he is concerned by the number of private equity firms that will be looking to education as a lucrative form of income.

"They [other private equity firms] claim they want to help but it's a very tough balance...Once you increase that bottom line, it is on the counter and you end up cutting corners," he warns.

Al Muhairy is not alone in his apprehension. A number of teachers are also concerned that motivation will be driven by profits rather than education.

"It is possible to run schools on a profit basis and to be a good school but there are non-profit schools who plough all of their money back into the school. That's not the case with many of Dubai's schools," argues our anonymous teacher. "Money plays a big part in it," he adds.

"The bottom line is that because they are for profit then their reinvestment of any surplus cannot be 100 percent back into education. It cannot be, because that's not the definition of their purpose," agrees Martin Prince, registrar, British University in Dubai.

Clearly investment in education is a balancing act; one Gary Stanton wishes more companies would learn to do before Summer starts school next September.

Developers go back to school

The two largest developers in the UAE are both investing heavily in education to ensure planned residential communities have maximum appeal for potential homeowners.

Emaar Properties, the largest developer in the Middle East, has formed its own education unit to develop schools and nurseries.

At the same time Aldar Properties, the largest developer in Abu Dhabi, has created Aldar Academies with the same goal.

Emaar Education runs five international schools and nurseries in Dubai, one international school in Singapore, with one international school to open in India and plans to open several new institutions in the region.

Boon Yew Ng, CEO, Emaar Education, says admission is open to students from both Emaar communities and the general public on a first-come first serve basis.

"While commercial viability is a key consideration in any business endeavour, Emaar's educational institutions play a larger societal role. With the overall economic environment of the region improving, there is a stronger influx of professionals, employees, entrepreneurs and their families. This translates to a greater demand for quality education."

The developer operates its educational facilities through Singapore educational provider Raffles Campus, which was acquired by Emaar Properties in 2006.

Loic Pelichet, analyst at ING Wholesale Banking, believes offering schools within developments is a major drawcard for Emaar's developments. "It's quite difficult for expats in Dubai to find a suitable school so it fits their development.

I suspect it can be a profitable business in itself but on Emaar's scale I don't think it makes too much difference since they are looking at it as something to help sell developments."

Aldar Properties launched Aldar Academies in 2007, after identifying an urgent need for access to education in Abu Dhabi. The company plans to build and operate 20 new schools with a capacity for 20,000 students in Abu Dhabi in the next five years.

The first school, the Pearl Primary School, opened in September 2007 and the second school Al Yasmina, will open in September 2008.

International schools in the Gulf

Demand for Western degrees is driving an influx of international colleges into the UAE with the Sorbonne, the New York University and the New York Film Academy in Abu Dhabi, all creating local campuses.

A range of foreign universities have arrived in the UAE, with many more due to open over the next decade. Dubai International Academic City aims to eventually host nearly 40 universities and 40,000 students.Oliver Cornock, regional editor for Oxford Business Group, believes these foreign campuses are a "case of mutual interest" for both the provider and the host nation.

"The Gulf has a rapidly growing population of young people and very few of these young people in recent history have been suited to the jobs on offer. The governments have therefore realised that education is key to this.

They are not looking at the blue collar work for these university graduates - they are looking more to develop knowledge-based industries like IT, ICT."

Cornock says the trend is especially noticeable in Qatar and Saudi, where there is a huge investment in building a knowledge based-economy.

"This interests the UK and American universities because as long as the government makes it simple to set up, it's quite profitable - not so much in terms of pure cash, but also the amount of investment that goes the other way.

"It goes both ways in a partnership because you can educate young Saudis, young Qataris, young Emiratis in the States, for example, and that brings money in as well."

Cornock notes Saudi Arabia is taking a "very precise" attitude on where it wants foreign investment in education investment.

"Saudi is targeting areas where it needs to create jobs.

"Governments have realised education is critical for future long-term prosperity, especially for these economies to develop their non-oil futures."

Education push In 2007, GEMS, in collaboration with New York-based Edison Schools, the largest manager of public schools in the US, established School Improvement Partnership (SIP), to manage four Abu Dhabi public schools.

In coordination with the government of Abu Dhabi, the public-private partnership programme is focused on raising standards, improving the quality of teaching and learning and coaching school leaders to develop reform strategies.

Margaret Corcoran, project director for SIP, describes the programme as a "bridge".

"Our metaphor is that we are the bridge between and private and public education. SIP commenced about 18 months ago, and we have a number of contracts signed with ministries and governments to work on reform in national schools.

"Specifically Abu Dhabi schools, and also schools in Doha. We are in conversation with Bahrain, and are looking to work in India, the US and the UK.

"There's no doubt that there's been a huge push from the government in all of the emirates - and we notice it particularly in Qatar - for the national system to rethink its focus and approach.

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