European Education Training & Youth Forum 2015Brussels, 19-20 October

Thinking ahead on financing education & training

Stephen Wright

Signposts

• Introduction (me, & INTEGRATE)• (How to make) Capital investment

to support Education & Training• PPPs• Infrastructure as a new investment

class

• A lifetime in market & investment appraisal (energy, industry, social sectors, environment)

• 20+ years with the European Investment Bank: set up & ran for a decade the advice function for the education & health sectors

• Set up a think-tank on the interface between the infrastructure & services in health => consultancy (WHO, WB, EU MS)

• Research Director for a new think-tank (“INTEGRATE”) on long-term investment in social infrastructure

My credentials

Quiet conversations

2012 2013 2014 2015

Financial (pension funds, PF Associations, World Pensions Council, mutual funds, insurance companies, National Development Banks, EIB, social impact investors, asset managers, consultants)

Institutional (European Commission, Line-Directorates, European Parliament, EU Presidencies)

Demand (Public Authorities, PA Associations, syndicates, civil society)

“INTEGRATE”: think-tank, advocacy & consultancy for social investment

From conversation to action – INTEGRATE’s current focuses

ELTIF (Regulation)

“High-Level Task Force” on social investment

Juncker Plan: “Investment Platform” & ”Advisory Hub”

Pathfinder regions

The service economy: it needs different sorts of capital stock than before

Signposts

• Introduction (me, & INTEGRATE)• (How to make) Capital

investment in Education & Training

• PPPs• Infrastructure as a new investment

class

An integrated view of investing in education capital (all are difficult to value compared to “economic” infra)

• What is “investment” anyway? It’s not just spending that you approve of!

• Human capital (direct): “…people’s knowledge, skills, health & values…” (Becker). In practice, difficult to invest directly in it (student loans, teacher training… - but what else?)

• Physical capital (indirect): infrastructure (buildings & equipment). In education, only useful if it supports the development of human capital

• Research, Development, Innovation…

Human capital is owned by the individual:

• The student should pay for private HE benefits received

• Societally, it’s better if “money follows the student”

• With fees, extra financial resources are generated for the sector

• Raised internal efficiency (reduced drop-out & time taken for degree)

• Increased student mobility

Student lending: the theory

But (in EU) expansion of student lending is controversial

• “Philistinism” - commercial subject bias• Debt aversion, especially of the

disadvantaged: lack of collateral (for debt) or profit share (for equity)

• Parental guarantee is effectively needed• Income-contingent loans are theoretically

more attractive than a mortgage – but complex, with high default ratios, & what to do about migrating students?

What about the impact of physical school stock on educational attainment (how to measure)?

Physicalschool stock

Pupil behaviour

Teacher behaviour

Schoolfacilities

School learning environment

Educationalattainment

Job opportunities

Standards of building Utilisation

Attendance Exclusion Vandalism

ICT usage Service management

Pupil scoresIncomeUnemployment rate

Turnover Absenteeism IllnessMotivation

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The Juncker Plan (“Investment Plan for Europe”): €315 bn, multiply-leveraged from a €21bn down-payment

Eight main categories:a) RDIb) Energy & climatec) Transportd) SME + mid-cape) ICTf) Environment & resourcesg) Human capital, culture & health

Let’s ensure a) & g) get enough of it!Realistically, mostly infrastructure, & mostly PPPs

Signposts

• Introduction (me, & INTEGRATE)• (How to make) Capital investment

in Education & Training• PPPs• Infrastructure as a new investment

class

Interest rates are low - & most countries do have fiscal space to borrow & invest

Anyone with a green traffic light should be OK to invest in infrastructure (wisely), from state sourcesBut most countries aren’t spending enough on infra – partly, but not only, a Stability & Growth Pact issue

Source: IMF

Who pays for public investment?

A PPP effectively converts asset ownership into service purchase

In a PPP, the private Partner pays upfront for the capital investment, & settles the ongoing operational costs. But eventually the state pays 100% of the cost of the project (unless there is a serious default by the contractor, & even then…)

For a project, a state can borrow from the capital/banking markets itself, or get a PPP Partner to do that borrowing. Either way, the state pays for the debt

Public investment by the state, or via PPP? What PPP is usually not

“Private sector is more efficient”

Perhaps, but not always

“Private finance is cheaper”No, because of risk premium (a government almost always borrows cheaper than a private firm in its jurisdiction)

“Borrowing is off-balance sheet” Not economically, unless risk transfer is very profound; the long-term burden remains with the state. Eurostat rules tend discourage this

PPPs & their governance

Two big issues with PPPs:• Through-life flexibility. The closer the

link between the infrastructure & the services delivered, the more that the contract has to allow for change (where are schools in this?)

• Profit-sharing. The private Partner takes some risk ex ante, but it may turn out well for him (NPDO?)

Signposts

• Introduction (me, & INTEGRATE)• (How to make) Capital investment

in Education & Training• PPPs• Infrastructure as a new

investment class

Infrastructure as a “new” asset class

• Traditionally, the bulk capital providers to PPPs were the commercial banks• Banks’ balance sheets are now being restricted• Also, banks are the wrong funders for long-term

projects; they borrow short & lend long (maturity transformation or liquidity mismatch?!)

• There is a growing effort to bring in the Long-Term Institutions (Pension Funds, (Life) Insurers, Sovereign Wealth Funds, Endowments) - infrastructure as a separate class of investment from equities, real estate, government/commercial bonds

• Irrespective of the source of capital, a PPP investor does not legally own an asset, he only owns a contract

Finding the potential

There’s cash out there: how to access it?

Barriers to institutional investors’ infrastructure allocation

For good fiduciary reasons, long-term investors need a positive real rate of return - from the state, as payer

1. How to ensure that appropriate quantities of Juncker Plan money go to social capital, including Education & Training?

2. How to maximise direct investment in human capital?

3. In practice, JP is going to be, mostly, infrastructure PPPs. How to ensure good governance?

4. How to structure a PPP payment stream which is attractive to long-term investing institutions (above zero real rate of return) but affordable (to the state as payer)?

Concluding questions: