{"id":588018,"date":"2023-06-05T00:00:00","date_gmt":"2023-06-05T00:00:00","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/blackboards\/tight-macro-conditions-are-pushing-private-education-players-to-look-more-closely-at-ppp-alternative-financing-options\/"},"modified":"2023-06-05T00:00:00","modified_gmt":"2023-06-05T00:00:00","slug":"tight-macro-conditions-are-pushing-private-education-players-to-look-more-closely-at-ppp-alternative-financing-options","status":"publish","type":"blackboard","link":"https:\/\/enterpriseam.com\/egypt\/blackboards\/tight-macro-conditions-are-pushing-private-education-players-to-look-more-closely-at-ppp-alternative-financing-options\/","title":{"rendered":"Tight macro conditions are pushing private education players to look more closely at PPP + alternative financing options"},"content":{"rendered":"

<\/span>Will cost pressures and tightening economic conditions drive more PPP in education?<\/span> WIth increasing financing pressures amid rising inflation and the weakening EGP, private education players have all but halted their expansion plans, while new investors are wary of the steep upfront costs. This dearth of fresh investments in the sector is creating a supply gap, particularly among the middle class segment, who stand at an estimated 2.5 mn students, according to participants at an education-focused investment conference held last week. Private sector players need to look to private-public partnerships (PPP) and search for alternative financing options to help cover that gap, industry players said. <\/span><\/p>\n

IN CONTEXT-<\/span> Schools looking to expand their footprint with new branches or adding capacity at<\/span> existing campuses are struggling to cover the costs of new construction, which have jumped due to inflation and high prices of building materials. These hikes prompted some to accelerate implementation of their projects in order to avoid <\/span>future increases<\/a><\/span>in costs, while others have had to put a <\/span>complete halt<\/a><\/span> to their new projects. Besides building costs, schools are facing other challenges like the <\/span>government-imposed cap<\/a><\/span> on annual tuition fee increases, and the burden of accommodating <\/span>teachers\u2019 salaries<\/a><\/span>.<\/span><\/p>\n

Financing represents the biggest challenge standing in the way of fresh investment in<\/span> the education sector<\/span>, with the high interest rate environment making it difficult for private sector players to access funding for capital expenditures on facilities and land purchases, Saint Fatima School board of directors member Saif Sameh said at the conference. Education and its sustainability depend on adequate access to capital for expansion to cover market demand, Sameh said. \u201cConfidence in the operating model used in private and international schools, along with the preparation of adequate technical studies, is the main entry point for obtaining financing from banks,\u201d according to Ghada Mostafa, the assistant <\/span>managing director<\/span> and head of the investment sector at United Bank.<\/span><\/p>\n

Bank funding needs to be more accessible for private and international schools, which<\/span> are a long-term investment:<\/span> \u201cBanks should loosen their lending criteria and make loans more accessible to support financial growth to educational institutions that make long-term investments whose lucrative returns are not achieved until after years of operation,\u201d Zilla Capital Managing Partner Moustafa El Shenety told Enterprise.<\/span><\/p>\n

That financing gap was the main culprit behind the stalling of the PPP schools program<\/span>,<\/span> according to Ater Hanoura, head of the Finance Ministry\u2019s Private Partnership Unit. The government found that several education players who were interested in the program were unable to secure bank financing, prompting the government to reconsider the tendering process for the program and provide more incentives for prospective investors, Hanoura said. <\/span><\/p>\n

PPP agreements require a clear contractual system that caters to all parties involved<\/span>, participants at the conference agreed. The Education Ministry lacks the in-house know-how of managing partnership contracts with the private sector from the technical, legal, and financial perspectives, which limits the participation of the private sector in investing in the education sector, some speakers said. The provision of an attractive contractual system would encourage more investor appetite for partnership with the government, akin to <\/span>what the Sovereign Fund of Egypt (SFE) is doing<\/a><\/span> in the sector.<\/span><\/p>\n

The SFE is pushing ahead with more private sector partnerships in the sector:<\/span> As public<\/span> investments are not enough to keep up with demand in education, the SFE is working to offer up more partnerships with private sector players to create \u201cfavorable options to sustain investments in the sector,\u201d SFE CEO Ayman Soliman said. <\/span><\/p>\n

But pulling in FDI requires a rethink of current legislation regulating the education sector<\/span>,<\/span> including stipulations that impose a 20% cap on foreign ownership of both private and international schools, El Shenety said. Reassessing these laws could unlock a significant amount of private investments in the education sector, he suggested. As it currently stands, private sector players account for c.11% of investments in the sector, while the government covers the remaining 89%, Mostafa <\/span>said<\/span>. <\/span><\/p>\n

Private sector players also want to see a rethink of land pricing models:<\/span> Land plots are<\/span> allocated to schools at a unified price without taking into account the different educational models and their varying investment costs, according to Egypt Education Platform (EEP) CEO Ahmed Wahby. Land prices should be determined based on a tier system, particularly since the cost of purchasing land for a new school in upscale residential areas is a significant burden, Wahby said.<\/span><\/p>\n

Meanwhile, education players need to get their governance ducks in a row:<\/span> What\u2019s really<\/span> holding back most educational institutions is that they\u2019re \u201clacking administrative governance, especially since most of them are family-owned, and many are managed by non-specialists,\u201d El Shenety said. \u201cThis limits their chances of securing financing for expansion or attracting new investments, and tends to restrict M&A activity in the sector,\u201d he said.<\/span><\/p>\n

There are alternative financing solutions on the table:<\/span> Private and international schools can<\/span> take advantage of debt tools available in the market, such as future flow securitization \u2014 which our friends at CIRA Education became the first to tap last year with its <\/span>EGP 800 mn issuance<\/a><\/span>, noted CIB board member and former Financial Regulatory Authority head Sherif Samy. Future flow securitization issuances offer a cheaper alternative to expensive bank loans, as securitized bonds generally have lower interest rates than non-securitized bonds. This debt instrument could also give companies that struggled to secure growth capital access to immediate funds. New market entrants that are struggling with the high cost of entry could also tap into real estate investment funds to help move forward with their expansion plans, Samy suggested. <\/span><\/p>\n

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