Despite boasting one of the world’s 15 largest economies and preferred access to the U.S. market, Mexico still struggles to meet some of its citizens’ basic needs. Yet there is good news: Although about 47% of Mexicans continue to endure some type of poverty, the historic wide gap between rich and poor has been narrowing steadily (Mexico’s Gini Coefficient decreased from 51.9 to 48.1 between 2000 and 2005), and an increasing number of young Mexicans are now demanding access to higher education. According to Rodolfo Tuirán, Undersecretary of Higher Education at the Ministry of Education, the percentage of low-income students attending higher education has been increasing recently: While in 2004 only around 13% of total students were low-income, that number reached 20% in 2008.      

Indeed, many of these new students are “pioneers,” a term used by Manuel Gil Anton, a sociologist at the Autonomous Metropolitan University of Mexico, to refer to Mexicans who are the first members of their families — or even their small towns — to ever set foot in a university classroom.

The government remains by far the major provider of tertiary education in the country, handling around two million students — or 67% of total enrollment (roughly three million students). But since the early 1980s, it has limited the creation of additional places in certain traditional careers, claiming that Mexico already has too many lawyers, business majors and accountants. Instead, the government set up new technical schools and universities, some of which sit half-empty today.

Yet for the majority of those Mexicans now aspiring to enter college — and for their families and social circles — the traditional careers are the only ones worth pursuing, which means these prospective students must compete with wealthier and better-prepared candidates for the few places available in public universities. Although the dynamism of the public sector has increased in the past four years, demand has far outstripped supply. According to Anton, most pioneers have two options: either not attend university at all or seek admission to a demand-absorbing university. In response to this situation, private, for-profit institutions — specifically targeting lower-income segments of the population — have opened all over the country, filling a social gap left by the government while also earning high profits.

Institutions such as Universidad ICEL, Insurgentes, Univer, and Londres were set up by entrepreneurs or university professors who saw an opportunity in the lack of educational offerings provided by the government or by private universities, which targeted more affluent segments of society. The new budget universities offer no-frills undergraduate and sometimes master’s degrees at low price points, starting as low as 1,500 pesos per month (about US$125).

This opportunity has also attracted international capital to the sector. For example, private equity-backed Laureate, one of the largest private education providers in the world, has made Mexico its biggest market, with one of its offerings focused exclusively on the lower-middle-class population.

While enrollment growth in the private university system as a whole has been respectable — 6.6% per year between 1997 and 2009 — questions remain regarding the quality of the new educational offerings. Serious schools such as Laureate are able to offer degrees that are valued by the market, but it is unclear whether the same is true for the smaller institutions that have sprung up. Only a fraction of them are properly accredited, and doubts have been raised about the sustainability of their business models and the employability of their graduates in the formal sector. The challenge for the private sector then is to offer education that is both affordable to students and regarded as relevant by the job market. Institutions that can accomplish both have much to gain. But it takes time to build a good reputation.

The private sector first made inroads into Mexico’s higher education system in the mid-1930s when an intense debate was taking place about the role of public universities. According to Adrián Acosta Silva, a public policy professor at the University of Guadalajara, Mexico’s legendary President Lázaro Cardenas (1934-1940) defended the idea that public education should be a tool to advance the socialist ideals of the Mexican Revolution of 1910-1917. Amid such debates, a number of scholars who proposed a more liberal role for academia — or who just wished for more independence — founded the country’s first private institutions, starting with the Autonomous University of Guadalajara in 1935. In the 40 years that followed, 13 private universities were created — including world-class institutions such as the TEC of Monterrey — whose main goals were to boost Mexico’s industrialization process and support a still-fledgling business community. However beneficial these schools had been to Mexico’s economy, they catered to fewer than 100,000 students by the early 1980s.

According to Imarú Arias Ramírez, director for new products for Universidad Valle de Mexico (UVM), the economic crises that swept through Latin America in the 1980s practically froze education spending in Mexico for many years. The country saw its output grow significantly in the late 1980s and throughout the 1990s, the tequila-crisis recession of 1994-95 notwithstanding. But public universities could not keep up with the increasing demand for college education, which paved the way for the establishment of myriad private institutions. Only recently has the federal government ramped up investment in higher education. However, total spending still comes to a paltry 0.65% of GDP, still below the target of 1% set by the General Law of Education).  

According to UNESCO statistics, total coverage by public and private universities combined reached a still modest 28% in 2010, a number dwarfed by Argentina’s 73% and Chile’s 50% (coverage equals the number of college students currently enrolled, regardless of age, divided by the total number of nationals who are college age — 19 to 23). This suggests great growth potential if Mexico’s economy continues to expand. According to Carlos Iván Moreno, advisor to the Ministry of Education, if the federal government sustains the enrollment growth of the past two academic years over this decade (around 160,000 new students a year), placements would reach almost 50% by 2020. Nevertheless, to achieve such a level, Mexico would still have to rely on the private sector for at least one third of the expected growth.

The Accreditation Issue

With the government’s reliance on the private sector to educate such a large segment of the population, regulation is not prohibitively onerous. In fact, accreditation is not mandatory for institutions of higher education in Mexico. This stems from a constitutionally guaranteed right to impart education without government interference. Consequently, the government may accredit institutions of higher education, but it may not obligate such institutions to adhere to its standards. In fact, today only about 10% of private academic programs receive accreditation, according to Fortuna magazine.

The Ministry of Public Education grants accreditation through the Reconocimiento de Validez Oficial de Estudios (RVOE). The RVOE is granted to particular carreras (courses of study)and notto institutions as a whole. It is thus possible — and common — for a university to offer a wide variety of majors, master’s programs, and doctorates, of which only one or two have the RVOE. One of the most significant requirements is having a certain percentage of full-time professors, which are a big expense for universities and companies. The benefits, office space, and incidental expenses associated with their employment represent roughly 70% of their salaries. When low-cost institutions seek to maximize profitability while simultaneously remaining competitively priced, full-time professors are sacrificed.

Cognizant of the costs of full-time professors, the government has balanced the staffing requirements for RVOE accreditation to encourage private investment while, at the same time, maintaining reasonable standards. However, these standards have contributed to an investment bias toward the social sciences. Natural sciences and other courses of study that rely on a large amount of one-on-one instruction require a relatively high percentage of full-time professorial staff (30%). The social sciences, on the other hand, do not require a single full-time professor, which makes these courses much more attractive financially to private universities.

Of the 21,938 RVOE accreditations issued as of June 2009, social sciences and administrative studies represent 59.6% of the total. Fields that require more full-time professors to gain the RVOE are less represented: engineering, 18.3%; education and humanities, 13.8%; and natural sciences, health sciences, and agrarian sciences, the remaining 8.3%.

As noted above, accreditation is not mandatory, and some institutions have no RVOE-accredited courses. The largest risk for a student pursuing a non-accredited degree lies in the simple fact that he or she may not be able to obtain a professional title or license, which is necessary to practice in fields such as law, surgery, and engineering. This situation may also interfere with a student’s ability to pursue an even higher degree, such as a master’s or doctorate.

Alternative accreditations have been developed. Just as private companies have filled the void in public education, private schools have also begun to offer their own form of accreditation. For example, the Federación de Instituciones Mexicanas Particulares de Educación Superior (FIMPES) is a private regulatory body for private education. It generates standards that are more demanding than those of the Ministry of Public Education. Only a few of the lower-cost universities are members of FIMPES and enroll just 16% of students who attend private universities in Mexico. Furthermore, the 109 FIMPES institutions (67 already accredited, 42 about to be) have approximately 400,000 students.

Representative School Profiles

Private institutions that cater to the lower levels of the income pyramid need to keep costs low and do so by one of two methods. First, they employ a very strict fixed-cost management. They tend not to engage in research, which would demand substantive, long-term investments with unclear contributions to profitability. In addition, they generally do not offer programs that require significant investments in facilities, such as medicine or many engineering programs. Law, social sciences, and psychology represent the popular majors at these universities. Unlike their up-market counterparts, low-cost universities place almost no emphasis on extracurricular and sports activities, and have facilities designed primarily to fit as many students as possible.

Second, as mentioned earlier, these institutions carefully manage their main variable cost — professors. They rely mostly on part-time professors, paid hourly, thereby avoiding the costly non-salary benefits associated with full-time employment contracts. Along this line, while professors at more expensive colleges are required to have a degree higher than the one they teach — for instance, professors in a bachelor’s degree program must have at least a master’s degree — there is no such requirement for the low-cost institutions, further reducing costs.

In addition to their distinct cost management, low-cost universities also differ from top-ranked institutions in their marketing strategies and practices. While the latter rely on their brand and prestige to attract students, low-cost schools generally strive to meet the minimum requirements to gain RVOE accreditation, and they count on low-income students — who cannot obtain admissionto a public university and do not have the resources to attend a more expensive and prestigious private university — to have no other choice for higher education. As UVM’s Arias Ramírez noted, “Low-cost universities rely on the fact that low income people see a higher degree as an opportunity to progress economically, which is ultimately one of the things they want most.”

Three institutions illustrate the different educational experiences students may go through, and provide a better understanding of how private universities differ. The first is UVM, which targets middle-class and upper-middle-class students. The second is UNITEC (Universidad Tecnológica de México), which targets middle- to lower-middle-class students. The third is Universidad ICEL, similar to UNITEC in focus but with greater emphasis on lower-class students.

UVM charges its students around 5,570 pesos (US$464) per month. Generally, these students’ parents have also attended college. This implies not only a familial environment that encourages studying, but also sufficient purchasing power to support a child in his or her studies. While students enrolled in less expensive schools usually work part-time, UVM offers its students a wide range of sports and cultural programs on campus. In order to provide this “college experience,” the institution must spend additional money on sports fields, theaters, and so on.

UNITEC’s tuition fees are around 3,710 pesos (US$309) per month. The profile of a typical student is a pioneer who is the first in his or her family to have access to higher education. He or she may thus lack a familial role model. In addition, the immediate family may be unable to provide economic support, and the student will resort to financial help from a wider family network. Given their circumstances, these students are normally very excited by the opportunity to advance academically. They spend more on tuition than do students at one of the most affordable institutions — not for soccer fields or theaters, but rather for prestige, which they hope will offer them greater job opportunities upon graduation. If the right financial-aid products are available to students to fund this kind of education, schools such as UNITEC will most likely sustain interesting growth for many years to come.

Universidad ICEL’s tuition fees range from 1,432pesos to1,868 pesos (US$119 to US$156) per month. It is not uncommon for a student at ICEL to be one of many siblings and to have parents with limited resources. The students here are also pioneers. Their fathers may be taxi drivers while their mothers may be nannies. The families are decidedly socioeconomically disadvantaged, and these students would probably never have attended college if this affordable option did not exist. According to Sylvie Milverton, CFO of UNITEC, students from the lower socioeconomic segments, to whom these low-cost educational offerings are targeted, typically have low expectations of any tertiary education and are pleasantly surprised by such basic standards as punctual professors and the presence of computer labs. In fact, they consider the labs a premium. The students in this segment aim to use their education to move into office jobs or perhaps secretarial or IT positions. The potential of this segment is enormous, but serious purveyors of education targeting low-income students will have to continue to work very hard to offer a relevant education that is valued by the broader job market at a low price point.

The growth of the private university system in Mexico has been handsomely profitable to its shareholders. Managers at these universities mention EBITDA margins of between 25% and 50% and internal rates of return of up to 30%. However, education is a good that provides social value. Thus, in evaluating this sector, both the private profits and the benefits private tertiary education has provided to the lower income segments of Mexican society should be considered.

From a purely quantitative perspective, the private sector has contributed significantly to the expansion of the higher education system. Starting from a much smaller base of 499,455 seats in 1999, private investment added 364,220 seats to the overall capacity of 2.6 million by 2008, compared to 397,737 seats added by the public institutions over the same period. Simply counting seats can be misleading, however, because this does not capture the quality of the education imparted. This matters because students who are charged relatively expensive tuition at private universities expect a pay-off from their investment in the form of better job opportunities and higher salaries. If the quality of education is low, then the value of their degrees and thus the marketability of their skills will also be low.

No systematic statistics exist yet that could analyze the issue of quality at the budget institutions, particularly with regards to salary levels and measurable skills transferred. Anecdotal evidence at least seems to point to a fairly direct link between the perceived quality and real cost of the educational program: The less one pays, the less one gets. The balance shifts at some point on the price spectrum of private universities, and it seems to us that that point is at monthly tuition levels of around 1,240 to 1,860 pesos (US$103 to US$155).

Above the 1,860 pesos (US$155) threshold are private universities that target the lower-middle-class population, such as UNITEC. They still make the national ranking, an important factor for many students in terms of marketability, although they do not always feature all the accreditations. Students are confident, however, that recruiters know the brand and care more about their past experiences with the university’s graduates than the accreditation alone. Administrators at UNITEC noted that first-year salaries for their graduates are around 86,600 pesos (US$7,000) per year, and students can expect to search six months for a full-time job. This places recent graduates at the lowest end of the middle-class salary range and, one could argue, fulfills the students’ aim to improve their standard of living. Universidad ICEL, which sits at the threshold level in terms of monthly tuition, boasts similar starting salaries and search periods, according to one administrator.

Institutions that charge tuition lower than 1,860 pesos (US$155) per month usually do not figure in the rankings and have poor name recognition with recruiters and the general public. In addition, they carry scant accreditation. According to Roberto Rodriguez Gomez, a researcher at UNAM, these institutions are described disparagingly as being “patito“(little duck), a derogatory nickname referring to the supposedly low standards and quality of instruction. One insider noted that some institutions in this segment may engage in student churning to boost enrollment levels — i.e., students are admitted without proper academic background and little regard to whether they will be able to graduate.

While the private education sector has created an alternative to public universities that can deliver a quality, low-cost education to as wide an audience as possible, it seems clear that a private-university education alone is not the magic bullet for increasing university enrollment in Mexico. Even at a minimum standard, quality has its price and is out of reach for many. This does not discount the value private institutions add. However, this section can be only one leg in a multi-pronged public policy strategy on education, augmented by a number of complementary steps:

·         Most obvious — but perhaps most problematic given past history — is for the government to accelerate its expansion of programs to ensure that low-income students who are well prepared to enter a university can do so. Particular emphasis should be put on expanding the offerings in professions that are in demand by the labor market, avoiding the inefficiencies observed in the technical schools.

·         Another approach would be for the finer private institutions to enter the fray and offer more affordable, simplified versions of their value propositions. This is exactly what the TEC of Monterrey did in 2002 with the creation of the Universidad TecMilenio, which now has 33 campuses all over Mexico. At the same time these institutions need to be mindful of their core brand when moving into the affordable market.

·         The Mexican government should step up its policing of private institutions. Although its hands are tied to some extent by the country’s Constitution, it should strive to design sensible incentives and transparency programs that expose underperformers and nudge them toward improvements in quality.

·         Finally, the private sector should work with the government on financing solutions to increase access to private institutions. This last concept is not yet very popular in Mexico, as the market is still uncomfortable with the idea of unsecured borrowing against future income. But this might be changing. UNITEC convinced one commercial lender, FINAI, to provide unsecured loans to UNITEC students at a rate of approximately 1% per month, as long as a cosigner can be provided. This rate serves as a further step in giving low-income students access to higher education.

Education is the most effective long-term tool for changing society for the better. If developing and emerging countries aspire to one day enter the select group of wealthy nations, education must become a priority for both their public and private sectors. From a business perspective, the opportunity is huge. But so is the responsibility that comes with it.

This article was written by Normando Bezerra, Claudia Massei, Nils Schulze-Halberg and Tyler Stypinski, members of the Lauder Class of 2012.