Wednesday, October 27, 2010

Financing higher education

Government universities cannot afford to continue large subsidies to students. They have to raise fees. This is true not just for India but for other countries as well. How to increase fees without undermining accountability? In today's ET, Arvind Panagriya cites the recommendations of a panel on higher education in the UK.

The panel suggests that students not be asked to pay fees upfront. The government should foot the expenditure of 6000 pounds per student. Students should start repaying the fees to the government once their income crosses a certain threshold- say, 21,000 pounds.

I don't know whether such a scheme is enforceable. It means keeping tabs on every graduating student and the income he or she is earning after graduation. But the underlying principle is interesting. The panel has not asked that students simply finance their education costs through loans. It apparently sees education loans as impeding access. It is one thing to repay fees as and when able. It is another to be committed to huge outflows at the point of graduation.

The panel's approach is in refreshing contrast to the approach in India where education loans are seen as the answer to rising fees especially in the professional courses. The IIMs, for instance, have taken this line to justify huge increases in fee in recent years. As HRD minister, Murli Manohar Joshi had opposed high fees at IIMs and other places during the tenure precisely on the ground that it would impede access.

The problem with the IIMs' increasing their fees is that it has led to an across the board increase in fee in business management course. While IIM graduates may be able to repay their loans, students at other b-schools are finding the going rough. Commercialisation of education comes in the way of inclusion. The answer to universities' or schools' need for higher fees has to be some combination of government subsidy, private endownment and loans or, if feasible, pay-as you- earn schemes.

Monday, October 25, 2010

Backdoor privatisation of IIMs?

The report of the second Bhargava committee on governance at the IIMs was made available to the government a few weeks ago. It was discussed at a meeting that Kapil Sibal had with IIM directors recently. (The first Bhargava committee report came out in 2008 and was shelved following objections from the IIM establishment).

I read the report with some dismay. Let me just react to one or two proposals for now. The committee wants the ownership of the IIMs to vest with the Society in which ownership is nominally vested today. It suggests that corporate entities be allowed to become members at a price of Rs 20 crore. For individuals, the price could be Rs 5 crore; for alumni Rs 3 crore. These numbers may be lowered if the IIMs think that is necessary.

What does this mean? That any businessman and his family are associates can garner three or four memberships of the Society for Rs 20 crore or so? Or that any industrial group can pick up two or three seats for Rs 60 crore? And then proceed to call the shots? This strikes me as backdoor privatisation of the IIMs. The worst part of it is that businessmen or affluent individuals would be able to run the IIMs without having to invest a great deal.

At the same time, the committee wants the government to continue to meet capital expenditure for the older IIMs, revenue expenditure as well of the newer IIMs and make contributions towards pension liabilities at the IIMs. Call it PPP if you like- a public private partnership in which the government bears the costs, the private sector calls the shots. It is astonishing that three IIM directors should have been party to this proposal. (The fifth member was an alumnus of IIM-B).

The report says somewhere that ownership should vest in the Society, not in the faculty. That will be news to faculty at least at IIMA where the concept of a 'faculty-governed institute' is sacrosanct and ownership or decision-making is divided amongst the Board, faculty and government.

Monday, October 18, 2010

Microfinance bubble burst?

Many have been warning that the runaway growth in microfinance assets is not sustainable. is the bubble about to burst? Well, the AP government's ordinance is certainly ominous as it requires microfinance institutions to suspend collections until they have registered with local authorities. (see FT report). Banks cannot escape the fall-out as they as the primary funders of MFIs mainly in order to meet priority sector obligations.

A number of practices of MFIs are now coming to light: multiple lending, aggressive marketing of loans to the unwary (much like the sale of credit cards and consumer loans done by foreign and private banks), dubious HR practices (hiring 18 year olds and not issuing any appointment letters), weekly repayments, harsh recovery methods, forming liability groups out of self-help groups created by NABARD and other government agencies.

Some of the arguments for high interest rates charged by MFIs are downright absurd. Eg. The interest rate of 30% if ok as money-lenders charge over 100%. Says who? Besides, money-lenders don't market their loans. They make loans to people who come to them- and strictly against collateral.

It has taken the SKS IPO and a spurt in suicides in AP for people to wake up to what's going on. One thing is certain: microfinance will not be the same again.

Rumblings in NIT system

Directors of two NITs, Warangal and Trichy, have been suspended following various charges against them, IE reported a while ago. The ministry of HRD has sought the approval of the President for the dismissal of the chairman of the board of NIT, Kurukshetra. Apparently in a sign that it is not happy with the state of affairs of NITs, the ministry has commenced the search for various NIT directors a full year before the completion of tenures of the present ones.

I can't comment on the specific cases above. But if the system is acting at all, it is a good sign. One of the sorriest things about our elite institutions is the complete lack of accountability of directors and the boards. If people are being called to account, that is a healthy sign. I also approve of the search process commencing well in advance. Typically, the search starts so late that the incumbent hangs of for several months after his tenure.

Here's a suggestion towards ensuring accountability of directors: there should be a mid-term appraisal of all directors. The appraisal should document what has been accomplished during the director's tenure up to that point and what is proposed to be accomplished in the remaining period of his tenure. This appraisal should be placed in the public domain by being posted at the Institute's website.

Thursday, October 14, 2010

US bail out cost less than 0.5% of GDP!

The US government faced fire for its $700 bn rescue of the financial sector in 2008 which was called Tarp. Surprise, surprise. The final cost is now estimated at less than $50 bn. My latest ET column explains how.

The losses in the financial sector across the world too were exaggerated by estimates made in a time of panic. Financial institutions hold mark to market securities whose prices are heavily depressed in times of panic. No point in estimating losses at these prices and the costs of a rescue. Governments will be frozen when they see the numbers. Just go out and save the large banks. Markets will bounce back and the costs will be far less than thought earlier. That's the lesson from the Tarp experience.