{"id":543703,"date":"2022-02-14T03:52:04","date_gmt":"2022-02-14T03:52:04","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/blackboards\/private-schools-in-egypt-are-feeling-the-pinch-of-inflation\/"},"modified":"2022-02-14T03:52:04","modified_gmt":"2022-02-14T03:52:04","slug":"private-schools-in-egypt-are-feeling-the-pinch-of-inflation","status":"publish","type":"blackboard","link":"https:\/\/enterpriseam.com\/egypt\/blackboards\/private-schools-in-egypt-are-feeling-the-pinch-of-inflation\/","title":{"rendered":"Private schools in Egypt are feeling the pinch of inflation"},"content":{"rendered":"

<\/a> Inflation is hitting Egypt\u2019s private schools, and those with high CAPEX expenses<\/strong> are feeling the greatest squeeze:<\/strong> Private schools have been hit by price increases in recent months, as Egypt\u2019s inflation accelerates amid high shipping and construction costs, and high domestic selling prices. With urban inflation now running at near two and a half year highs<\/a>, spending is being impacted across the board, with rising capex costs putting particular pressure on companies in the sector, say several operators. Today, we look at how the impact of inflation varies among Egypt\u2019s private schools, and what they\u2019re doing to mitigate it.<\/p>\n

Several private schools have seen rising inflation drive up overall costs<\/strong>, operators tell Enterprise. El Alsson\u2019s OPEX spending is an estimated 12-15% higher now than it was in April 2021 \u2014 the last time its annual budget was set, says Executive Director Karim Rogers. Education management company Eduhive\u2019s total costs increased by a minimum of 25% in the last year, estimates CEO Karim Mostafa: \u201cEverything\u2019s inflated: the price of electricity, utilities, purchases, cleaning materials and sanitizers \u2014 even teacher housing and plane tickets.\u201d<\/p>\n

Families are feeling the pinch, too: <\/strong>A trend of transferring children to less expensive schools, seen in the last five years, has recently been increasing, says Mostafa. \u201cPeople paying EGP 100k per year are now looking for schools in the EGP 60-70k range. This is a sign everybody\u2019s getting hit.\u201d This trend is impacting enrollment at private schools, where schools in the lower-middle income bracket are seeing enrollment at an estimated two-three times the rate of high-income schools, education investment platform Lighthouse Education Deputy Chairman Mohamed El Sherif says. Education costs rose 13.9% y-o-y in January, with primary education rising 19.5% and secondary education rising 5.3%, Capmas data (pdf)<\/a> shows.<\/p>\n

But it\u2019s schools with hefty CAPEX costs \u2014 especially land purchases \u2014 that seem to be hit hardest: <\/strong>Inflation has substantially impacted land prices and construction costs, with greenfield projects becoming particularly expensive, El Sherif tells Enterprise. \u201cIt costs a lot to buy land and build a school that\u2019s up to standard.\u201d Land pricing was already expensive, as we noted last year<\/a>. Now, prices are being increased by brokers, says El Sherif. Land has essentially become unaffordable, notes Mostafa. And construction costs have been rising rapidly, with noticeable price differences in iron, steel and concrete since summer 2021, says Rogers.<\/p>\n

Ultimately, this means investment in greenfield projects will slow,<\/strong> El Sherif predicts. \u201cWe\u2019re currently seeing many new players who bought land with the intention of building schools. But prices have gone up, so they\u2019ve decided it\u2019s more profitable for them to sell the land than build schools. This tells you that something\u2019s not right.\u201d Growth is effectively limited to investors with sector experience, he adds.<\/p>\n

The impact won\u2019t be felt immediately:<\/strong> It\u2019s difficult to predict how much investment will slow by, as it\u2019s down to individual project economics \u2014 which can be impacted by many variables, says El Sherif. But it usually takes around two years from land acquisition to a school becoming operational, which is when the impact will be felt, he adds.<\/p>\n

Schools without significant CAPEX investment are more sanguine: <\/strong>Schutz always takes inflation into account when setting its annual budget, but isn\u2019t feeling the general sense of alarm about inflation that seems to be prevalent in the country, says Assistant Head of School Massimo Laterza. \u201cStill, we\u2019re not currently engaged in any major capital developments. We\u2019re not in the middle of projects with any debt, or affected by the rapidly increasing prices of steel or cement,\u201d says Laterza.<\/p>\n

OPEX losses don\u2019t appear to be all that impacted:<\/strong> OPEX cost increases can be an \u201cannoyance,\u201d but El Alsson hasn\u2019t taken any major financial hits, Rogers notes.<\/p>\n

But inflation could be compounding FX losses for int\u2019l schools: <\/strong>All international schools spend about 70-75% of their budgets in FX \u2014 to pay expat teachers \u2014 while collecting all their revenue in EGP, notes Mostafa. This makes them highly vulnerable to any exchange rate fluctuations, so inflationary cost increases become even more challenging, he argues.<\/p>\n

And other fees aren\u2019t helping:<\/strong> Meanwhile, new expenses \u2014 like the obligatory<\/a>1-3%<\/a>of annual revenue<\/a> that schools now need to pay to the government\u2019s Support Education fund \u2014 aren\u2019t factored into school budgets or buffers when they are introduced in the middle of the yearly business cycle, months after the budgets have been set, says Rogers.<\/p>\n

The Education Ministry\u2019s <\/strong>7% cap on tuition fee increases<\/a><\/strong> further compounds the problem<\/strong>, because it doesn\u2019t take inflation into account \u201cas part of the formula,\u201d says Mostafa. Tuition fees are the only source of revenue for education operators, he notes.<\/p>\n

What steps are schools taking to mitigate the fallout from high inflation? Cost-cutting is one obvious move: <\/strong>Schools are cutting costs where they can, to limit financial pressures, say sources. International schools won\u2019t cut their salary structures, which are carefully calibrated according to market research, say Mostafa and Rogers. But they might look at trimming benefits packages, Mostafa says: \u201cSometimes you have to cap the housing or transportation allowance, as these things add up.\u201d<\/p>\n

Some school operators hope the Education Ministry might review the cap on tuition fee increases<\/strong>, one leader tells Enterprise off the record. \u201cWe\u2019re holding meetings, submitting requests and having open conversations. I think the ministry is receptive to our ideas, and I\u2019m optimistic this issue can be resolved.\u201d It looks like the cap may be revised within a year or two \u2014 possibly pushed up to 10%, or even scrapped completely, the source adds.<\/p>\n

But some are hoping inflation is \u201ctransitory,\u201d<\/strong> which could also be a reason for overall optimism, says Laterza. Even as inflation accelerates, the Central Bank of Egypt expects price stability in the medium term, it said following its last monetary policy committee meeting<\/a>.<\/p>\n

And inflation\u2019s full impact may only be seen when operators set their budgets in the coming months. <\/strong>El Alsson usually plans its budget in March, and so far, the buffer set last year has absorbed the worst of the cost increases, says Rogers. \u201cBut I can\u2019t predict what will happen in the next couple of weeks or months. I\u2019m stable, but my guard is up for the unpredictable.\u201d Schutz typically starts its budgeting process in April or May, says Laterza. That\u2019s when it will gauge internal expenses to determine how cost increases could impact next year\u2019s budget.<\/p>\n

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