This week’s double Fast Moving Consumer Goods (FMCG) article is, well, not about FMCG but important in our series about the sector. The first part of this two-part article looks at education which is an investment opportunity that will support all growth in Africa, including FMCG. The second part will look at energy.

The Demand for Education

The macroeconomic argument for investment in the education sector is clear. Sub-Saharan Africa has a population greater than 800 million which is growing at 2.3 percent per year and of which 40 percent are under the age of 15. According to a recent United Nations Educational, Scientific and Cultural Organization (UNESCO) report, Sub-Saharan Africa spends 5 percent of gross domestic product (GDP) on education thus being the second highest regional proportion after North America and Europe at 5.3 percent. Overall education accounts for more than 18 percent of all public spending in Sub-Saharan Africa compared to 15 percent in other regions. Despite these commendable efforts, many Sub-Saharan African countries struggle to move children through the educational system, let alone provide good quality education at the primary lev
el and beyond. According to the same UNESCO report, the number of school age children will rise as the population of 5 to 14 year-olds is expected to grow more than 34 percent over the next 20 years, therefore increasing the need for educational spending.

A man teaching pupils in Africa

Education in Africa.
Photo credit: Flickr

On the ground, the demand for high quality education is palpable. Across the region, booming economies are creating middle class families and middle class paying employment opportunities. Yet, these same countries do not have affordable educational offerings to meet the demands of its populations. In Ethiopia and Mozambique, where GDP growth will surpass 7 to 8 percent, the literacy rate sits around 42 and 56 percent respectively. In Nigeria, soon to be Africa’s second largest economy, the literacy rate is just above 60 percent. In all three countries, families are moving into the middle class and looking to ensure that their kids continue to move in the same direction. In order to achieve that “middle class” dream, many Africans look to send their children to private schools that can provide better, yet affordable, education compared to government schools.

Accordingly, there is a growing thirst for private schooling that can both incorporate local curriculum and components of internationally recognized programs such as International Baccalaureate (IB) and A Levels (United Kingdom system). In many countries, middle class families are willing to pay for private education that may cost 5 to 10 times the price of the government school because only then can their children gain access to the world’s best colleges and universities. In Mozambique, some families are willing to pay $20,000-plus as compared to the government school fees of few hundred dollars. With long waiting lists, private schools are looking to expand rapidly. This expansion generally involves purchasing or building larger facilities, recruiting international staff and acquiring educational materials among other things.

Private Equity Investment in Africa’s Education

Private equity investors can play a role by providing capital for facility expansion which is core to most families’ concerns. Unlike the United States (U.S.), where many families take for granted the consistent location of schools, school site locations can often change, without much advance notice, as most schools rent their facilities. In purchasing a permanent facility as well as equipping it with modern installations, private schools attract the best students as well as higher fees. Private equity investors also play a role by recruiting stronger faculty, including principals, and purchasing the best material at an affordable rate through their international networks. These three changes to the business are only small components of the value added by private equity investors.

In Nigeria and Kenya, the penetration of private schools is around 40 percent and growing. In other markets, such as Ethiopia, Tanzania, and Mozambique, penetration rates are barely noticeable despite emerging economies that demand an equally emerging skilled labor force. Beyond penetration rates, when only accounting for non-international schools that provide at least six grade levels (kindergarten/pre-1st grade to 6th grade or 7th to 12th grade), these penetration rates become negligible. Generally, international schools, such as the American school and British school, will charge up to $24,000 per year and largely only service their affiliated expat population in the foreign country. Additionally, many private schools supply one to three grades which require families to find a new school at least 3 to 4 times during the student’s primary schooling years.

While the primary school market presents a big opportunity, the college and university level is more a hidden gem. In many African emerging economies, jobs go unfilled because the local labor force does not provide workers with the needed education and experience beyond basic primary education to perform them. Many countries have maintained universities that are not up to international standards and could use the assistance of private investors. At same time, this type of investment raises concerns about the effects of for-profit institutions upon the quality of education and reputation. Regardless, this is something that will always have to be considered at every stage of the investment process at the primary level through the university level but cannot be the grand argument against investing in the education sector.

Along with colleges and universities, there is an emerging market for management institutes and vocational training. “The case for management institutes may be stronger than the case for colleges and universities” said one local Mozambican investor “because the need for workers with specific skills (financial, nursing, etc.) is more prevalent and relevant than the need for generally college educated persons.” The same sentiment was conveyed from local players in the Tanzanian and Angolan markets. These types of skilled workers usually are desired by neighboring countries, providing a constantly growing consumer market for the these type of educational services.

Nursing, energy and education itself are good examples of sectors in need of more skilled workers. In many Sub-Saharan African countries, there are about only 2 – 3 nurses for every 1,000 persons which is about 10-11 times fewer than countries in the European Union and the U.S. According to UNESCO, the gap for teachers across Sub-Saharan Africa is more than 1.1 million. At the recent French Energy Forum in Johannesburg, Lawrence Jones, Vice President for Regulatory Affairs, Policy and Industry Relations for the French energy and railways solutions group Alstom, emphasized the need for those with engineering skills if the energy industry was to reach its full potential.

While an array of challenges (including regulatory and cultural) will definitely come with investing in education, the opportunity for growth, impact and return is hard to ignore. “If we are talking poverty reduction, then private schooling may not necessarily be the answer,” says one private equity investor in East Africa, “but if we are talking about filling a gap and addressing a middle class need, then this is a big opportunity that goes beyond simply making money on education. Economies are asking for the skilled labor force that is not there at the moment and only education can bridge that gap as well as ensure middle income families can provide their children the best education possible.”