* Sweden adopted some of most radical school reforms
* Private equity involvement now under fire
* Bankruptcies, falling standards made country rethink
By Niklas Pollard
STOCKHOLM, Dec 10 (Reuters) - When one of the biggestprivate education firms in Sweden went bankrupt earlier thisyear, it left 11,000 students in the lurch and made Stockholmrethink its pioneering market reform of the state schoolssystem.
School shutdowns and deteriorating results have taken theshine off an education model admired and emulated around theworld, in Britain in particular.
"I think we have had too much blind faith in that moreprivate schools would guarantee greater educational quality,"said Tomas Tobé, head of the parliament's education committeeand spokesman on education for the ruling Moderate party.
In a country with the fastest growing economic inequality ofany OECD nation, basic aspects of the deregulated school marketare now being re-considered, raising questions over privatesector involvement in other areas like health.
Two-decades into its free-market experiment, about a quarterof once staunchly Socialist Sweden's secondary school studentsnow attend publically-funded but privately run schools, almosttwice the global average.
Nearly half of those study at schools fully or partly ownedby private equity firms.
Ahead of elections next year, politicians of all stripes arequestioning the role of such firms, accused of putting profitsfirst with practices like letting students decide when they havelearned enough and keeping no record of their grades.
The opposition Green Party - like the Moderates long-timesupporters of privately run schools but now backing theclamp-down - issued a public apology in a Swedish daily lastmonth headlined "Forgive us, our policy led our schools astray".
In the early 1990's, parents were given tax-funded vouchersto pay for a school of their choice. Private schools wereallowed for the first time and could even turn a profit.
Britain has taken on board many feature of the system,although it has stopped short of allowing publically-fundedschools to make a profit, and Swedish school corporations haveexpanded as far afield as India.
This year's demise of JB Education, owned by Danish privateequity firm Axcel, was the biggest, but not the only bankruptcyin Sweden's reformed education sector.
It stripped almost 1,000 staff of their jobs and left morethan 1 billion crowns ($150 million) of debts, mainly to banksand suppliers, as well as abandoning its students.
"I was furious," said Margarete Grugel, 56, whose16-year-old daughter Tina had one week left of her first term ofa hair styling course at the JB school in Jonkoping when itfolded.
"Tina was absolutely shattered by it."
Axcel acknowledges mistakes were made.
"Of course we could have been better at managing theschools," senior communication advisor Joachim Sperling said.
"Many of the schools were in bad shape and even though weknew that from the start, we did not manage to deal with thechallenges in due time."
It is a cautionary tale in a market estimated to have beenworth more than $400 billion worldwide in a 2010 report by theInternational Finance Corporation.
With annual turnover in Sweden of roughly 20 billion crowns($3 billion), according to a recent parliamentary study,education should be an attractive prospect.
But while some of the early players sold quickly at aprofit, nowadays it is no cash cow.
One in four secondary schools is lossmaking and since 2008,the risk of insolvency has shot up 188 percent and is 25 percentabove the average for Swedish corporations, said UC, a businessand credit information firm.
"Few sectors can show as bad figures as this," it said.
Part of the problem stems from demographics, with overallsecondary school numbers in sharp decline since 2008 andunlikely to recover to the past peak for a generation or more.
A lax regulatory environment is also to blame.
Sweden replaced one of the world's most tightly regulatedschool systems with one of the most deregulated, leading toscandals like the 2011 case of the convicted paedophile who setup several schools quite legally.
"I've often said it's been easier to start an independentschool than set up a hot-dog stand," said Eva-Lis Siren, head ofLararforbundet, Sweden's biggest teachers union.
"In the push toward freedom of choice, one lost sight ofquality control."
The private schools brought in many practices once foundexclusively in the corporate world, such as performance-basedbonuses for staff and advertising in Stockholm's subway system,while competition has put teachers under pressure to awardhigher grades and market their schools.
The idea that private equity firms and large corporationswould run hundreds of schools was a far cry from the individual,locally-run schools envisaged at the start.
"This was something that was not ... even considered inone's wildest dreams," said Staffan Lundh, who handled schoolissues in the prime minister's office at the time and now leadsevaluation at the National Agency for Education (NAE).
While it is difficult to say how, or even whether, privateinvolvement and falling standards are linked, the NAE says thereare indications the market-driven reforms have contributed towiden the gaps in school performances.
The Organisation of Economic Co-operation and Development's(OECD) benchmark Programme for International Student Assessment(PISA) study paints a bleak picture, with Sweden now rankingbelow Russia in maths.
A quarter of 15-year-old boys cannot understand a basicfactual text, said Anna Ekstrom, head of the NAE, while an NAEstudy last year showed a growing gap between students, with moreand more failing to qualify for secondary education.
"In my mind, this no longer only pertains to Sweden'sposition as a knowledge-based nation, but also to our democraticdevelopment," Ekstrom said.
Part of the problem stems from introducing choice. As thebest students flock to certain schools, standards suffer at theschools they leave behind.
Quality is also an issue.
Last year, Sweden's Schools Inspectorate said JB was notdoing enough to ensure quality and help students achieve morethan passing grades.
It also criticised Praktiska Sverige AB, which runs schoolsfor almost 5,000 students, for the number of temporary teacherswithout educational degrees and lack of access to adequatelibraries and school nurses.
It closed one Praktiska Sverige-run school and demanded itaddress shortcomings at all its more than 30 other schools byearly 2014. Praktiska says the criticism is based on outdatedinformation and that it is considering a legal appeal.
Housed among the stately buildings in the banking heartlandof central Stockholm are the offices of EQT, one of NorthernEurope's leading private equity firms with about 20 billioneuros ($27 billion) in raised capital.
EQT owns Sweden's biggest school corporation, AcadeMedia,which has almost 50,000 youngsters in its schools andpre-schools. Other private equity firms such as FSN Capital, TheRiverside Company, TA Associates and Bure Equity, as well asInvestor AB, the investment vehicle of the Wallenbergfamily, own all or parts of school chains.
AcadeMedia runs a modest, 390 million crown profit on aturnover of about 5 billion crowns. It does not have the samehigh-profile quality issues that afflicted JB, but it recognisesa hardening regulatory environment.
"I think we are in a phase where the good ones are beingseparated from the bad ones," AcadeMedia Chief Executive MarcusStromberg said. "I think we will see a continued consolidationof the sector. I sincerely hope we won't see any morebankruptcies, but you can't guarantee it."
Centre-right School Minister Jan Bjorklund will early nextyear propose legislation to parliament forcing operators to runschools for a minimum period, likely to be 10 years.
The legislation, backed by the centre-right government andopposition Social Democrats, will not apply to existing ownersbut in time is likely to squeeze out private equity players, whotend to have 5-7 year investment horizons.
"I can be completely honest and say that this requirement isaimed squarely at the private equity firms," said IbrahimBaylan, an MP and Social Democrat educational spokesman.
Rules on financial staying power and quality, such as accessto libraries and counselling, are also being strengthened.
Harry Klagsbrun, a partner at EQT and a board member atAcadeMedia, says the focus on private equity and the length ofownership of schools makes little sense.
"You can own a business forever but still make veryshort-sighted decisions, or fail to make decisions that arebeneficial in the long term," he said. "And you can own acompany five years and really build it for the future."
Few Swedish politicians harbour any ideas of going back tothe old system that gave parents and kids little choice.
But a GP/Sifo poll of 1,000 people this year showed 58percent broadly in favour of forbidding profits in tax-financedareas such as education. In the wake of the furore over schools,many are questioning how much free market is too much.
School minister Bjorklund, leader of the second biggestparty in the four-party coalition government, has said privateequity owners should also be forbidden within the healthcaresector, including care of the elderly.
The mother of former JB student Tina will vote with her feetwhen her son starts secondary school. "I don't want him to go toan independent school," she said. "Because you never really knowwhat kind of finances the school has."
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