INDIA: Private-public fund for higher education

India is looking to raise money from the markets through a special education finance corporation to fund a much-needed expansion of higher education. In a radical move, the Education Ministry is finalising plans to issue government bonds through a proposed National Education Finance Corporation, or NEFC, which will lend to higher education institutions.

A project report drawn up by the ministry and presented to Human Resources Minister Kapil Sibal last week proposes that the bonds will be gift-wrapped with tax exemptions and other attractions to tempt buyers, which may include companies, corporations or even citizens interested in contributing towards the education fund.

The report defines the corporation as a "special purpose vehicle to facilitate the philanthropic concern in financing higher education, basically through two mechanisms: refinancing education loans and infrastructure loans for establishment of institutions and direct lending at concessional rates".

It is modelled on the country's successful National Bank for Agriculture and Rural Development. The bank offers low-interest loans for social projects and has raised millions of rupees to support small-scale industries and agriculture through bonds and term deposits. Demand for these bonds is strong, in part because of tax exemptions.

India has 480 universities and about 22,000 colleges, but the country needs an additional 800 universities and close to 35,000 colleges to raise the enrolment rate of 18-30 year-olds from just over 12% to 30% - the target set by Sibal for the next 10 years.

Without the resources to fund this expansion, the government wants to encourage state governments and private players to chip in.

The new corporation will enable investors to access funds for building education infrastructure at priority lending rates, instead of commercial rates which levy interest charges of up to 13.5% for educational projects.

The burden of higher interest rates was being passed on to students through higher fees, Sibal has said. He has been encouraging more private-public cooperation since he took charge of education last year.

"If the government does an evaluation of the interest rates in the countries and studies the economic value of the project, it should be able to offer a competitive interest rate. While many players have skilled manpower, they don't have the financial equity to expand and would welcome any subsidy in interest rates," said Saumyajit Roy, an education consultant with real estate firm Jones Lang LaSalle Meghraj.

Private players in higher education welcomed the move. "If the NEFC is genuine and the government wants to facilitate private players through it, it will do wonders for the higher education sector," said Surjit Singh Pabla, Vice-chancellor of Manipal Sikkim University, one the country's largest private institutions.

"High lending rates are one of the biggest reasons for high fees charged to students and also the failure of many new institutions," Pabla said.

"In Sikkim, every industry is given a 30% subsidy on their investment along with tax exemptions for 10 years. But this facility is not available for the education sector. The government must change its approach if it wants to encourage private participation in the higher education sector."

Tamil Nadu State Education Secretary Thiru K Ganesan said states facing a cash crunch could be helped through the NEFC. "States need to invest much more in higher education. This will be a good vehicle for many state governments," Ganesan said.

The novel method of funding universities may come under fire from a cross-section of politicians, notably the Left parties, which oppose private participation in education. They regard this as commercialisation of higher education.