Sweden is debating the effects of its program for school privatization, which began under a conservative government in 1992.

The following article, translated from Swedish, was written by Lars Anell. Anell is an economist with a degree from the Stockholm School of Economics. He has worked at the Ministry of Finance and the Ministry of Foreign Affairs. He was head of the development agency SAREC 1980-83, and was on the Prime Minister’s Committee under Olof Palme. In the years 1994–2001, he was responsible for social issues at Volvo. He has also been chairman of FAS, the Research Council for Working Life and Social Sciences, as well as UN Ambassador and EU Ambassador. Lars Anell is currently Chairman of the Board of the Arena Group.”

The article has lessons for the U.S. First, the bold promises of privatization are seldom, if ever, realized. Second, once privatization takes root, its economic and political beneficiaries strongly defend it, regardless of the consequences for students and society.

Lars Anell writes:

The author of the book Barnexperimentet, Per Kornhall, wrote an article in Dagens Nyheter in 2012 under the heading The principle of a good school for everyone no longer applies in Sweden. He had then decided to leave the National Agency for Education but was formally still employed there – and realized that he had probably crossed the line of what an official should say in public. When he entered the coffee room on Monday morning, the employees raised a spontaneous applause. Those who worked with school issues knew that the activities no longer met the school law’s requirements for an equivalent school. But politically, nothing happened. There was no debate at all

There is a short narrative about how this came about. When joint-stock companies were allowed to run tax-financed schools in the early 1990s, they received compensation that corresponded to 85 percent of the municipal cost per student. An inquiry found this too generous and suggested a level of 75 percent. Instead, a Social Democratic government gave the school entrepreneurs more than what they could have dreamt of – 100 percent. This story is not entirely true. Many would probably say that it is misleading. On the other hand, it is obvious that no one thought about the consequences of allowing schools run for profit.

Stage 1

In September 1991, Ingvar Carlsson’s Social Democratic government commissioned the school director in Stockholm, Mr Sven-Åke Johansson, to investigate “certain issues concerning fees at independent schools.” At this time, there were no for-profit schools. The assignment essentially concerned Waldorf schools, Montessori-inspired and confessional schools that were largely financed by fees and parents’ voluntary efforts. In total, less than 1 percent of pupils with compulsory school attendance were in the schools affected.

The investigator emphasized that the basis for assessing student costs was shaky. Questionnaires were “incomplete and forms not properly filled in.” All schools concerned were dependent on extensive voluntary efforts, but “only a small number of schools in the survey have been able to assess this value.”

If you took the actual cost per pupil, it stayed at SEK 28,000 – 40 percent less than the municipal schools´ average cost. After trying to estimate the value of parents´ voluntary contributions, the investigator calculated that the student cost in independent schools was 13 percent lower.

An interesting aspect is that the investigator took a clear political position. The activities at the independent schools were characterized by a lack of money, low salaries and large non-profit efforts. “Now we notice,” writes the lone investigator, “a clear will to change these unfair conditions. The change is justified and positive. “

However, the investigator was bypassed by Carl Bildt´s right-of center government, which took office after the 1991 election. The new Minister of Education, Ms Beatrice Ask, proposed, in bill 1991/92:95, that municipalities should be allowed to reduce the compensation to private for-profit schools by 15 percent.

The investigator nevertheless completed his assignment and pointed out that the municipalities responsibility for the whole system justified a larger deduction. Most independent schools would fully cover their costs with a public subsidy of 75 – 85 percent of the municipal average cost. He also pointed out that the establishment of independent schools inevitably led to increased costs – especially for premises.

The central conclusion in this context is:

“The basic and statutory grant percentage for independent schools must be set so that competition between municipal and independent schools takes place on equal terms. According to my analysis, its lowest limit can then not exceed 75 percent of the municipality’s average cost per pupil.”

But this conclusion must be qualified. The investigator was tasked to design a system that would free non-profit schools from the obligation to charge fees to finance the activities. He also suggested that these schools should continue to be able to charge certain student fees.

Stage 2

The above-mentioned bill 1991/92:95 on Freedom of choice and independent schools is surprisingly short, which is due to the fact that there was no basis whatsoever to refer to. The ongoing inquiry is mentioned in passing but its report was not yet available. The dramatic change in the Swedish school system, unparalleled in the surrounding world, which this bill portended was not preceded by any preparation and was not met by any organized political opposition.

As said, one explanation is that there were no profit-driven schools yet – dreaming was allowed. And Swedish pupils still scored exceptionally well in international competition.

It is quite clear that Ms Ask, wanted to see more alternatives to the municipal school in order to increase the opportunity for students and parents to choose freely. This would also increase parental involvement and municipalities’ sensitivity to citizens’ wishes. Above all, there was a need for new ideas and pedagogical creativity. “It can be about parent cooperatives, focus on special subjects or schools in sparsely populated areas that can get a new chance under new leadership.” Ms Ask said that this would lead to “better incentives for cost-effectiveness” so that we get “a more efficient use of resources within the overall school system.”

She emphasizes commitments that independent schools can avoid (health care, school transport, home language teaching, especially resource-intensive students and the obligation to take care of students who have left an independent school) but still maintains that the student grant may not be reduced by more than 15 percent. But nowhere is it said that a municipality must adapt the grant to the independent school’s lower cost. It is worth adding that neither Mr Johansson’s 75 nor Ms Ask’s 85 percent are based on any reported analysis.

We must continue to keep in mind that this bill was presented when all independent schools were non-profit and still had the right to charge tuition fees. Ms Ask announces that she intends to return to the Riksdag in the matter. Bill 1991/92: 95 is therefore in many ways a signal of what is yet to come.

However, two sentences are worth remembering:

“My aim is to control the activities of independent schools as little as possible. At the same time, however, there are strong reasons to make it clear that, as they receive general grants similar to the public school system, they must not contribute to economic and social segregation “

The Bildt Government´s second bill on freedom of choice in schools (1992/93: 230) is a somewhat more comprehensive document that is based on an internal paper (Ds 1992: 115) and a public report on grants and student fees (SOU 1992: 38).

The paper dealt with opportunities to choose a school, financial conditions for independent upper secondary schools and opportunities to outsource all or part of an education to another principal. The proposal is that “municipalities and county councils may enter into agreements with a joint-stock company, a trading company, an economic association, a non-profit association or a foundation to perform some of the tasks for which the municipalities and county councils are responsible according to the Education Act.” However, the public responsibility for the school system may not be transferred. The municipality must have full control and a municipal employee must “perform some of the principal’s tasks that involve the exercise of authority, e.g. the issuance of grades. ” Swedish Employers´ Association and the Swedish Association of Local Authorities were in favor of outsourcing schools, but most other consultative bodies were negative. The National Audit Office pointed out that the memorandum did not contain any impact assessment or even a discussion of whether there was a need for contracting solutions.

In the above-mentioned public report, reference was made to the Riksdag decision that the minimum contribution to independent schools shall be 85 per cent of the municipality’s student costs. ” This means that “there is a risk that the independent schools will have more favorable conditions for running activities than the municipal schools.” To create equal conditions, the level should be 75 percent. Only a few of many institutions that provided comments (Nacka and Västerås municipalities and the National Association for Waldorf Pedagogy) wanted to keep a minimum contribution corresponding to 85 percent of the municipality’s own costs. Virtually everyone else wanted to reduce it to 75 percent – some municipalities (Haninge, Hudiksvall and Sundsvall) wanted to go even further. Several consultative bodies pointed to the risk that municipal schools will be disadvantaged.

The bill is interesting in several ways. The ideological attitude is that more independent schools is positive in all dimensions – above all, it leads to pedagogical renewal and increased freedom of choice – and problem-free for all concerned. Even increased bureaucracy is welcomed – “the municipal accounting systems have become more sophisticated when the municipalities have been forced to produce different types of costs and average costs for the school system.” The fact that parents and pupils will be forced “to make an active choice of school” is seen as progress. For some unknown reason it is asserted that competition between several principals is expected to give “the municipalities completely new opportunities to achieve coordination and synergy benefits.”

Against this background, it is interesting that the actual proposals are so timid. “I am not prepared to propose a general opportunity to outsource primary schools,” writes Ms Ask. However, it will be possible for the government to grant an application from a municipality to contract out a school to another principal.” As regards upper secondary schools, the area that will primarily be relevant is vocational training related to relevant companies. Education in economics, technology and aesthetic subjects may also be considered if the teaching has a “vocational character.” In other respects, special reasons are required for the government to approve an independent school.

Most surprising is that the principal and her duties cannot be relinquished. The municipality’s control is thus guaranteed by the requirement to appoint a head-master for independent schools. This means that the term grades are set by teachers, while the principal is responsible for the grade documents issued in the municipality’s name.

The consultative bodies’ solid support for lowering the minimum level for the student allowance to 75 per cent is rejected. But the only argument is that the decision of 85 percent was made less than a year ago.

This bill was written when the expansion of independent schools had begun. In just one year, the number of students had doubled. But there are no thoughts at all about what this development could lead to. The language is toned down. In the internal paper there was talk of joint-stock companies. The bill calls the contractors natural and legal persons and the word profit is never mentioned. But there was nothing that presaged the coming of a capitalist school market.

Stage 3

After the 1994 election, responsibility for the country’s education system again fell to a government led by Ingvar Carlsson. The first measure was to give municipalities the opportunity to reduce the student grant to independent schools by a maximum of 25 percent of their own average cost (Bill 1994/95: 157). The Minister of Education, Ms Ylva Johansson, bases this position entirely on the investigation Mr Johansson made three years earlier. Nothing is said about the risk that independent schools will still receive more than the full cost. The municipalities are not forced to stay at the minimum level.

One year later, in bill 1995/96: 200, the minimum level is replaced by the rule that a student in an independent school must receive a grant according to the same principles that apply to the municipality’s own schools based on the school’s commitment and students’ needs. This opens the way for a powerful overcompensation of independent schools.

The bill is based on two investigations. The report Equal education on equal terms is permeated, like all other documents from this time, by the notion that independent schools are a complement that enriches the municipal school system by increasing diversity and pedagogical creativity. Equal conditions for schools with different principals are seen as “a prerequisite for all parents and students to have freedom of choice and not just financially strong groups.”

The report emphasizes the teachers’ competence as a prerequisite for a school to be able to respond to the requirements of the School Act and the goals of the curriculum. No special admission principles should be applied, but the Education Act should not force an independent school to accept a student “if the reception would lead to significant organizational or financial problems.” The municipality’s contribution shall be based on “the school’s commitment and the students’ needs on the same grounds and according to the same principles” that apply to its own compulsory school. A municipality must be able to prevent the establishment of an independent school if it has “significant negative consequences for other students” or if it “can have serious effects on the municipality’s compulsory school activities as a whole.”

The report Independent upper secondary schools (SOU 1995: 113) initially states that independent schools often “received grants that were higher than the amounts prescribed by the government” and emphasized that equal conditions are a prerequisite for equivalent education. It is then determined that “nationally prescribed amounts” shall no longer occur. Municipalities must calculate the student allowance on the basis of the school’s actual costs, based on the school’s commitments and the students’ needs. The calculation shall be made on the same basis and according to the same principles that the municipality applies in terms of costs for students who attend a corresponding program in a municipal school. “

Bill 1995/96: 200 is dominated, like all other texts, by promises of a good and equal education for all students, regardless of where they live, socio-economic conditions and the school’s owner. This will be achieved through competition on equal terms between municipal and independent schools. “Diversity itself is positive and does not stand in opposition to equality and good quality. On the contrary, diversity is usually a prerequisite for development and pedagogical renewal.” Great emphasis is placed on the influence of parents and students over school and teaching, while the role of teachers is given a less prominent place.

Ms Johansson, followed the inquiry’s (SOU 1995:109) advice regarding the size of school fees. The current order was considered to have been too rigid. The proposal was thus that grants should be given “according to the same principles that are applied to the municipality’s own” schools “based on the school’s commitment and the students’ needs.” If the establishment of a school can have significant negative consequences for a municipality’s school system, the National Agency for Education may refuse to pay grants.

A key aspect that was only touched on by a few consultative bodies was that the municipalities have dual roles – they finance and compete with independent schools. Surely there was a risk that a municipality would favour its own schools? I do not see that Ms Johansson answered this question. The only thing said is “that the municipalities develop clear rules for their resource allocation that can be evaluated.”

This bill sets out the basics for calculating school fees, which does not mean that all schools should receive the same amount. According to the public report A common concern (SOU 2020: 46), however, an agreement with the Green Party led to the level of compensation being raised to 100 percent in 1997. This laid the foundation for the sharp overcompensation and competitive advantage for profit-driven schools that still applies.

It is worth mentioning that the Bildt government’s proposal was to outsource teaching. This indicates an agreement between the municipalities and the contractor in which the assignment to be performed is specified. The Social Democrats did not argue against the idea of independent schools but opposed it being done on a contract basis. In reality, the joint-stock companies that established themselves came to enjoy almost total freedom from oversight.

In the rearview mirror:

With the fragile authority of hindsight, it is easy to judge these bills, investigations and memoranda as clueless and vacuous – and full of hopes that proved pious. If you want to find a single insight into possible consequences, you have to look in the rich harvest of comments from consultative bodies – and even there they are thin on the ground. It must therefore be repeated that even in the mid-1990s, only a few percent of the students went to what could still be called independent schools. And most of them applied an alternative pedagogy. There were not yet any school companies with the venture capitalist’s required rate of return and tax domicile in Luxembourg.

It is only in the rearview mirror that we see that it was unfortunate to abandon the model with a recommended minimum level for grants to independent schools. Judging by the consultation responses to the report Grants and student fees (SOU 1992:38), there was solid support for a compensation level of 75 percent. The argument in Bill 1995/96:200 that it means “an overly rigid allocation of resources, without regard to the needs of the students or the commitment of the schools” is not true. It is not a standard rigidly applied but a guaranteed minimum level for the entrepreneur who wants to establish an independent school and takes into account the fact that municipalities have a greater and more costly responsibility. From this floor, municipalities have all the flexibility in the world to adapt the grant to the commitment of independent schools in addition to the minimum requirements.

Another fundamental condition is that the market to be exposed to competition is autonomous in the sense that effects do not spill over into the surrounding society. If we accept that human capital is a nation’s most important asset – a rule of thumb says that it is worth five times more than other physical production resources – then the school market is by far the least autonomous. This is also a reason to nationalize the school. The state has an extraordinarily strong reason to guarantee that that all young people receive a solid education and opportunities to realize their full potential. This incentive is not at all as strong in municipalities that lose all their young people to universities in larger cities.

Why did we not see it coming?

In fact, it should have been possible to see what would happen. It is extremely attractive to sell goods and services to public authorities. The customer is not only flushed with cash but legally obliged to buy; the cost of capital is low; it is easy to enter the market; the risk is almost non-existent; advance payment is common and the cost of product development is negligible. In the early 1990s, the “school market” in Sweden was opened to virtually anyone who could rent a square room for thirty students. The state abdicated and during the first fifteen years, in practice, all applicants were approved.

The main players in this market were municipalities; a number of companies of varying size that ran schools for profit as well as students and parents who were free to choose school. Students brought with them a voucher of a fixed value. Crucial to the success of private actors was therefore to fill the classrooms. They could choose between two strategies. The hope expressed in the government’s bills was that they would invest in high quality and pedagogical renewal at the same time as competition would guarantee a wise management of resources. This strategy requires investment over a longer period of time. The company must be able to recruit the best teachers; provide attractive premises; have a well-equipped library and access to various types of support staff. It may work, but it requires at least two things. There must be an independent body that evaluates and informs about the high quality and customers must demand a good education and not primarily be interested in good grades. A faster way is to keep costs down. If this strategy is chosen, the quality-adjusted teacher density will be lower; the school library may be missing; premises and schoolyards are less efficient and the nurse is seldom seen. The most important thing for frugal school entrepreneurs is to be able to select students. If it succeeds, the dividend will be doubled. Caring and problem-free students with highly educated parents create an attractive study environment that attracts other students and teachers while keeping costs down. A troubled boy with reading and writing difficulties costs more than school fees. For a school that invests in reducing costs, it becomes almost inevitable to dog-whistle that high grades can be obtained without too much work.

That competition would lead to grade inflation should not have come as a surprise. It arises in all markets where schools have a financial incentive to compete for students. This is very true for many American universities. Michael Parkin states in his textbook Macroeconomics that “grade inflation, well documented in many schools, is particularly characteristic of Ivy League universities.” The cost of studying at the top universities is very high. It is then natural that the customer wants value for money and the universities have every reason to oblige. At Princeton, the situation became so alarming that management was forced to decide that only a third of the students could be considered for the highest grade. It is actually quite obvious that schools-for-profit will provide high grades if that is what the customer demands. Swedish parents and students are very keen to get good grades – they may be worth millions – and Swedish for-profit schools have at least as strong arguments as American universities to satisfy the customer’s wishes. However, we are alone in letting the taxpayer foot the bill.

If high grades become a desirable benefit for students and parents (regardless of whether they reflect knowledge and skills), we should expect that this demand is primarily met in municipalities where private and municipal schools compete. Profit-driven schools must fill the classrooms and the municipal ones must keep up. The high grades are then not necessarily a result of increased knowledge but of the competition itself. The effect is likely to be visibly greater in upper secondary schools than in primary schools.

We can now see the results. The quality-adjusted teacher density is and has always been much higher in municipal schools and the difference is greatest at upper secondary school level. The cost of students is clearly lower in schools run by joint-stock companies. These companies have been extremely successful in selecting students from socio-economically strong backgrounds. Admission on the basis of queuing time practically excludes newly arrived young people.

High school diplomas are worth many millions because they provide access to attractive higher education. All indications show that parents and students prioritize grades over education and educational experiments. Children of highly educated parents manage even if the school’s teaching is mediocre. Teachers complain about late evening calls from aggressive parents. Complaints are almost always about grades – rarely about substandard education. It is therefore inevitable that competition drives joy ratings. At the same time as Swedish students’ performance according to all measurements has fallen since the mid-1990s, the grades have skyrocketed. The tendency to give joy ratings is greater in profit-driven schools and in municipalities where competition with municipal schools is stronger.

When the state handed over the responsibility of education to the municipalities, several school politicians warned of what would happen. What no one seems to have expected is that many municipal politicians would abandon their own schools and wholeheartedly invest in attracting profit-driven schools to establish themselves. The large school groups, especially the International English School, have not only been overcompensated by the regular school fees. In many cases, they have also received bespoke subsidies from municipalities.

Who gets the money and what did we get for it?

Despite the fact that schools run by joint-stock companies since almost thirty years have received 10 – 25 percent more than they have earned, they apparently have a hard time making ends meet. The standard answer from the National Association of Independent Schools is that the profit margin is a modest 3,5 percent. This is reminiscent of the old story of the CEO who asked his auditor what the profit was and got the counter-question: What do you want it to be? When Mr Ilmar Reepalu was commissioned to investigate a profit ceiling of 7 percent, we were told that the industry would wither away if this became a reality. The finance company in Luxembourg, Paradigm Capital, which in 2020 bought out the International English School from the stock exchange for just over SEK 3 billion, is not known for investing in low-yielding assets. The capital that forms the basis for the percentage is a highly malleable entity. The traditional way to hide an uncomfortably large profit is to buy services from other companies in the group (which are often in a more attractive tax jurisdiction) at a premium. For instance, school companies can pay high rents for the premises they have in many cases acquired for a song from a friendly-minded municipality. High executive salaries also lower profits. Managers in private companies have a remuneration that the country’s prime minister does not even dare to dream of. Ann-Marie Lindgren reports, in her well-documented paper Every wasted tax crown, that the CEO salaries in the six largest health and care companies in 2019 averaged 7 million or 580,000 a month. In the same year, the directors general who led three authorities with supervisory responsibility for healthcare (the National Board of Health and Welfare, the Swedish Public Health Agency and the Swedish Health and Care Inspectorate) together received a monthly salary of approximately 370,000.

We can also be sure that the money does not go to high teacher salaries and student care. In both these respects, private schools have clearly lower costs. Many municipalities have also used the opportunity to subsidize rents. Mr Tobias Johansson-Berg, professor of business administration, has recently suggested that instead of limiting profits, school companies should open their books and openly show what money is used for.

But more important, of course, is the added value we are promised as a result of competition between municipal schools and those run as joint-stock companies. The award-winning journalist Mr Kristoffer Örstadius has for several years studied results and grades in Swedish schools. In a popular article, he anonymised some schools’ PISA results and was able to show that the students in the acclaimed English school in Bromma had clearly worse results in mathematics than those who went to the municipal low-performing Petrus Magni school in Vadstena – but the girls and boys in Bromma received better grades. His latest fact-checked article in Dagens Nyheter (2022-02-18) is mainly about primary schools and is based on a comparison between the schools’ final grades and the national tests. It then turns out that “the grades are…systematically more generous in independent schools than in municipal schools. The difference is significant in all school subjects with national tests except Swedish” An interesting circumstance is that the independent schools that are run as joint-stock companies are more likely to give joy ratings than those that are run in the form of foundations. It is also clear that national tests have a restraining effect. In uncontrolled subjects such as art, music and home economics, all inhibitions are thrown to the winds as far as grade inflation is concerned in private schools – especially in the three largest groups.

Örstadius refers to several studies that show that independent upper secondary schools give more generous grades than municipal ones. But despite its lower grade point average, “municipal” students perform better in the first year of university than students from high schools that are run as joint-stock companies. This is in line with the conclusion of a study from the National Agency for Education, From upper secondary school to university, which studied the students who went directly from high schools to the university in the academic year 2014/15:

“The students who have attended an independent upper secondary school have lower performance – despite the fact that this group generally has slightly higher grades from upper secondary school. This difference applies to students at different levels of grade points, and to each of the college preparatory programs.”

The School Commission stated, like many others, that the Swedish schools no longer provide equivalent education for all pupils. Above all, the young people who have the worst conditions have been left in the lurch. The growing segregation is essentially due to other factors, but the promised reduction has not materialized. That competition would contribute to cooperation and synergy was never credible. Home and School associations no longer have a meaningful role in municipalities with a fragmented school system. The pedagogical renewal is not visible. If we accept that higher education credits are an adequate way of measuring the quality of the school, the experiment that began in 1991/92 seems to have produced negative added value.

Towards a brighter future?

The legal institution of limited companies was created in order to give entrepreneurs the opportunity to run profitable businesses with limited personal risk. As long as we allow these companies to sell educational services in Sweden, it will be difficult and expensive to steer development in the right direction with rules and controls. The incentives to provide customers with joy ratings and keep costs down by choosing “cheap” students are compellingly strong. When the “children’s experiment” (Barnexperimentet) began shortly after the school was communalized, the state largely relinquished responsibility for the activities. For a short time, even the activities of private schools were classified. As the need for transparency and control increases, a chorus of teachers testifies to the documentation hysteria that has befallen them.

Nationalizing the school is a step in the right direction, even if part of the business is still run by profit-motivated joint-stock companies. Education from an early age to university studies is society’s most important “production” of genuine public benefit. As shown, the state has a clearly stronger interest than municipalities in giving students a solid foundation for a future professional career and competence to pursue university studies. No matter how a grant system is designed, it must be equal in all municipalities according to the Education Act.

It is of course possible to let university entrance exams determine who gets admission to university studies. However, it will be expensive and opportunistic. The training would focus on passing a test. But above all, we would lose the information value of the grades. An old-fashioned high school diploma – a teacher’s assessment after following their students for three years – has proved to be an excellent and broad proof of competence. The focus should preferably be on strengthening the legitimacy of the grades.

Magnus Henrekson et. al. mention, in the book Kunskapssyn och pedagogi the possibility of having anonymised tests corrected by independent assessors. One such system – the International Baccalaurate Diploma Program – is available in 127 countries and offers tuition at 30 upper secondary schools in Sweden. It is expensive but possible.

Penalty fees against schools that obviously issue joy grades are not appealing. Neither is it possible to tolerate that some schools raise the grades and steal university places from young people who have earned them. In a state system, it would be easier to solve this problem for the simple reason that the state really wants to do something about it.

A simpler alternative is to set the minimum subsidy at 75 percent of the average municipal school fee (it was enough once upon a time) and pay private schools for reported extra costs. This would require the open accounting of the school groups that professor Johansson-Berg advocates.

All these proposals will be met with furious criticism from the school groups’ advocates. It is then important to remember that the experiment was never aimed at creating profitable joint-stock companies that ran schools, but at developing a school system that give all children and young people a chance to “realize the desire of their best moods.”

The program that the present Minister of Education, Ms Lina Axelsson Kihlbom, recently announced is very promising. It addresses a number of issues. Student admission should be fair. The school’s focus on knowledge must be strengthened. We will have better conditions for security and study peace – and the teachers will decide in the classroom. Municipalities should be given the opportunity to reduce the compensation to profit-driven schools because they have a lower cost responsibility. It is all well and good but what happens if municipalities want to overcompensate the school groups?