The turning point for higher education

SUITS THE C-SUITE By Reginald Angelo S. Gripal

Business World (05/09/2016 – p.S1/2)

(Second of two parts)

In last week’s column, we wrote about Republic Act 10533, or the Enhanced Basic Education Act of 2013, otherwise known as the K-12 Basic Education Program, and the potential issues faced by both public and private schools in the implementation of the K-12 program. We now continue with a discussion on measures that private institutions can take in order to address the anticipated challenges.

Some higher educational institutions may be able to find other sources of revenue to maintain their operations during the two-year enrollment drought, such as:

· Exploring the possibility of offering basic education;

· Venturing into new, less traditional and more importantly, less costly, educational approaches, such as home-study programs, online courses or open universities;

· Temporarily transform unusable capacity and rent it out to interested parties;

· Vertical or lateral expansion through mergers or acquisitions to streamline the business and achieve economies of scale; or

· Counterintuitively, but possibly a better option, is to invest, improve and upgrade facilities or open up branches in other areas where there is high demand but low supply of consistent quality education.

However, educational institutions must take note that some of these options — particularly those options involving non-education-related income, places them at risk of being subjected to the regular corporate income tax (RCIT) rate, in lieu of the 10% preferential tax rate under the law. Under the Tax Code, proprietary educational institutions shall pay a tax of 10% on taxable income, provided that gross income from unrelated trade, business or other activity does not exceed 50% of total gross income. Otherwise, the entire taxable income will be subject to 30% RCIT. Although income from education-related activities of non-stock, non-profit institutions may be exempt from income tax, the income from unrelated activities may be subject to RCIT.

Raising tuition fees to cover the reduction in student enrollment may not be a sound primary action plan in light of Commission on Higher Education Memorandum Order No. 13, Series of 1998. Under the “Guidelines on the Procedure to be Followed by Higher Education Institutions (HEIs) Intending to Increase their Tuition Fees, Effective Beginning School Year 1998-1999,” 70% of the proceeds derived from the tuition fee increase for the current school year should be used for the payment of increase in salaries and wages, allowances and other benefits of its teaching and non-teaching personnel and other staff, except for those who are principal stockholders of the HEIs.

EXPENSE REDUCTION MAY BE AN OPTION.

Educational institutions listed on the PSE have reported Instructor and Administrative Salaries Expenses as their main expenditures. For the past 3 school years, these expenses account for between 32% to as high as 61% of total expenses. A direct approach to mitigating the lack of student enrollment is to reduce the current roster of instructors and administrative personnel — which is always a difficult decision to make because of the impact on their families. Colleges and universities that do not offer basic education can derive tuition fee revenues over the course of four years or two years for associate degrees. However, if these institutions offer Senior High School, and are able to entice the students to continue on to the traditional four-year college courses, they would now be able to earn tuition fee revenue from the same number of students, over the course of six years, effectively increasing revenues between 50% to 100% depending on the composition of its students. The downside is increased credit risk especially for institutions with more students availing of installment scheme in paying their tuition fees. In addition, there is a need to train existing instructors on the new curriculum or hire new instructors, as well as make some adjustments to existing facilities to be able to offer the new curriculums.

The bottom line is that institutions that opt to offer Senior High School should be able to balance the need to increase revenue and the related costs of implementing the new program.

There are opportunities which this shift may provide to higher educational institutions, such as increasing net inflows of international students. Because of lower costs compared to schools abroad, and especially since the Philippines’ English language proficiency is very high, more foreign students may consider enrollment in local HEIs. Opportunities for transnational education and/or distance education have also opened up. Some HEIs may also partner with foreign HEIs to collaborate on certain programs or courses which can also be offered in the Philippines and can further enhance the capabilities of local HEIs. Opportunities also arise for HEIs to go global by establishing foreign operations (e.g., branch campuses, twinning programs, dual or joint award programs, franchising, validation or articulation), especially in high growth potential markets such as China, Vietnam and Myanmar, where there is high demand for quality tertiary education.

According to a partial list published by the Department of Education, as of April 7, there are 4,761 private high schools, private and public universities and colleges, and technical-vocational schools that will begin offering Grade 11 in the 2016-2017 school year, the first year of no college entrants. Pilot programs are already in place in some institutions. However, we can only begin to know the full extent of the costs, as well as the opportunities presented by the K-12 program, both in government and the private sector, once 2016-2017 starts.

The K-12 program has the potential to enhance the capabilities of our country’s work force and become a defining achievement for the Aquino administration. And if future administrations become similarly proactive, this may even lead to the implementation of new education programs targeted to make us a brighter and more productive nation.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Reginald Angelo S. Gripal is a Director of SGV & Co.