This short article outlines the existing three approaches by which foreign investments could set up and operate private schools in mainland China. It illustrates the general procedures of each approach, as well as their pros and cons respectively.
This inquiry takes place in the face of the immense complexity of the Chinese educational legal system relating to private schools. Law of P.R.C on the Promotion of Privately-run Schools and its Implementing Regulations stipulated by the State Council are the only two main national governing laws and regulations relating to operation of private schools. Nevertheless, in order to minimize potential competitions against local public schools and to maintain the Party’s propaganda, provincial and city-level governments or education administrations also promulgate local regulations and rules further to limit the number and restrict the establishment of private schools.
Under Chinese Laws, there are mainly 4 types of private schools: (1) Private Higher education, which includes the colleagues and universities, (2) non degree training schools, which do not issue any formal degrees, such as English training institute, computer or music trainings, (3) private schools for children of Aliens under age of 18, (4) private schools local Chinese students on all levels of school before entering colleague. The “Private School” here has the traditional meaning of secondary education, which are the latter two types.
The following three approaches apply to both private schools for alien children and private schools for local Chinese students.1
Generally there are three approaches through which foreign entity may invest in Chinese private schools: (1) Establish a new private school, (2) Cooperate with an existing school, and (3) to purchase an existing school.
- Approach One: Setting up a new Private School
Since private schools could only be set up by Chinese citizens or legal persons, foreigners should first invest to establish a legal person as the sponsor of the school.2 In practice, in the nature of the sponsor entity and the amount of minimum registered capital differ based on local requirements. For instance, the Taizhou Educational Department in Jiangsu Province requires the sponsor has to be sino-foreign owned, yet the foreign investor has a right to repurchase after 20 years.
After the legal person is established as the school sponsor, the sponsor shall apply for the pre-approval from the local education department. With such pre-approval, the sponsor usually has 3 years (Beijing requires 2 years) to construct the school before applying for the official license.3
In practice, the process of registration new school is not difficult. Depending on different districts, it only requires certain amount of registered capital (the minimum in Beijing is RMB 2 million), an appropriate campus with sufficient facilities (desks, chairs, computers, etc.), and enough number of qualified teachers. These precondition seems very easy, however, it is the limited quota that makes it very hard to register new private schools. The government does not allow too many private schools to compete against public schools, neither it allow the too many young students to be affected by any unorthodox education, and thus each district has only few quotas for private schools. Usually, a 3-rd tired city on east coast area is only allowed for one private school. Therefore, even now the foreign investment is no longer restricted to educational industry since 2012; the foreign investors are still facing the quota issue as the domestic investors.
- Approach Two: Cooperation
Cooperation is like "sub-licensing". Although private schools are not allowed to sublicense, they do have some power to set up special departments within the schools. Investors may take advantage of these "departments" and to operate a "sub-school" within a school.
Just like a pre-nuptial agreement can clarify the obligations during marriage and protect your own interests in case of a divorce, a Cooperation Agreement between the investors and private schools is quintessential for a successful cooperation and secure a sound exit plan. There are several factors:
- Bank account. It is recommended to have a bank account as independent as possible. Although the bank account shall be under the school's bank account, investors may use methods such as setting up a co-signed system to try to control the account.
- Management. The investor shall try to secure their power to appoint/hire managers, teachers, select elective curriculums, and operate the department as freely as possible.
- School space. Separated school spaces are highly recommended.
- Student recruitment. Competition may arise here, and thus it is recommended to have independent system. However if the "sub-school" and the school are complimentary to each other in the curriculums or targeting student groups, cooperation will be helpful to advance both.
In addition, the payment of management fee/annual fee, the distribution of tuition fees and other incomes and the share of costs/expenses are also very important.
Nevertheless if investors only intend to act as "consultants" to an existing school, such as assisting the educational skills, introducing new teachers, exploring new markets, etc., then the investors do not need to set up a private school, but only an educational consulting company, which is very easy to incorporate.
- Approach Three: Purchase
Currently, most private school licenses are given to individuals other than legal entities, and usually the principal of the school holds the school license. In this situation, it's almost impossible to directly purchase a school license from an individual.
First, since the license is limited resource, the cost of buying a license is incredibly high. Once we met a license holder who asked for 15 million RMB for the license. Second, changing the name of the license holder is very difficult. The educational department usually takes a long time to approve the changes. Once it took almost 2 years for a private school in suburban area of Beijing to change its license holder.
Sometimes license holder is a sponsoring legal entity. Under such situation the investor may purchase all or part of the sponsor's entity's shares, and become the shareholder of the entity. Then the investor through ownership of the sponsoring entity, may negotiate the power to operate the school, such as appointing principals, selecting curriculums, recruiting students and also hiring new teachers. In this case, the investors may avoid all issues concerning the license and school set-up process.
There is only one issue in practice: we rarely can find one school of which visions and missions can match so well to run a school together. If any investors can find such a choice, it will be the ideal way to start to get involved in Chinese educational system.
Education industry is one of the few areas in China which has very little written regulations but heavily regulated. Before starting any plan, consult with the local government shall be the first step. Based on our experience, every city/district has its own specifications for private schools based on its need and development plans. Usually, meeting with local educational officials may open unexpected doors to Chinese educational system.