Company

Brazilian higher education sector

Overview

The Brazilian market for postsecondary education is a large, growing, comparatively under-penetrated, and fragmented market, which is predominantly served by the private sector. According to UNESCO, in 2004 Brazil represented the sixth largest postsecondary education market in the world and the largest postsecondary education market in Latin America as measured by enrollment.

From 1997 to 2005, postsecondary education enrollment increased from 1.9 million to 4.5 million according to the MEC, representing a compound annual growth rate of 10.9%. Most of the growth in total enrollment in that period was captured by the private sector, which increased its share in total enrollment from 61% in 1997 to 73% in 2005, and consolidated its role as the main provider of postsecondary education in Brazil. According to Hoper Educacional, in 2004 private postsecondary education institutions in Brazil generated R$14.5 billion in revenues.

Despite the strong growth in postsecondary education enrollment, as of 2004, only 20% of the young adults in the theoretical age group for attending postsecondary institutions were, in fact, attending such institutions, compared to 61% in Argentina and 43% in Chile, according to UNESCO. Refer to figures below.

The MEC estimates that only 11.3% of the 18 to 24 year-old population was enrolled in postsecondary institutions in 2005, well below the government’s 30% target for 2010, as defined in the LDB, which provides the guidelines for the provision of education services in Brazil.

Anhanguera Educacional expects postsecondary education enrollment in Brazil to continue to increase as a result of a number of factors, including career advancement prospects, the significant personal income premium attributed to a postsecondary degree, substantial and growing demand for skilled workers, and increasing availability of education alternatives for the middle and lower income population due to the government’s continued support for private postsecondary education, and specifically, for private investment in postsecondary education. In addition, the gradual decline of interest rates that has taken place in Brazil since 2003 could stimulate the growth of the still incipient student financial aid market.

Prior to 1996, the postsecondary education sector in Brazil faced regulatory constraints upon the entry of new players and the expansion of existing private institutions, as well as insufficient public investment. Consistent with the LDB, the federal government established a framework to support increased private investment in postsecondary education to supplement public education funding, the majority of which is directed towards primary and secondary education. While the government remains committed to supporting publicly funded postsecondary institutions, currently the capacity of these institutions is limited and unable to meet the large majority of demand in Brazil. According to the MEC, enrollment in private postsecondary institutions increased from 1.2 million in 1997 to 3.3 million in 2005, representing a compound annual growth rate of 13.6%.

Additionally, the number of programs offered by private postsecondary institutions grew at a compound annual growth rate of 20% from 1997 to 2005 according to MEC, over 79% faster than the compound annual growth rate of programs offered at publicly funded postsecondary institutions during the same time period.

The increase in the number of private institutions in Brazil’s postsecondary education sector over the past 10 years was led by a proliferation of small-sized institutions, resulting in a very fragmented market with over 2,141 private institutions in 2006 according to the MEC. In 2004 (the most recent available information), student enrollment at the 20 largest private postsecondary education institutions averaged 37,000 (25% of total students enrolled) while the other 1,769 private companies averaged 1,300 students, based on the MEC’s data.

The Company believes that the majority of these small-sized institutions are family-owned, lack economies of scale, have limited access to capital, are generally less able to attract and retain qualified faculty and management professionals, and have limited expertise and resources available for developing new high-quality programs that meet student demand or to open new campuses. Postsecondary enrollment among working young adults has represented a significant portion of the overall growth in postsecondary enrollment.

Characteristics of the Brazilian Postsecondary Education Industry

The Brazilian market for postsecondary education is among the largest in the world and presents the following characteristics:

Large and growing market. According to UNESCO, Brazil has the largest market for postsecondary education in Latin America and the sixth largest in the world in numbers of students. According to the MEC, in 2005, Brazil had a total of 4.5 million students enrolled in postsecondary education, of which 3.3 million attended private schools (including nonprofit and for-profit companies) and the remainder attended public universities. Notwithstanding its dimensions, as of 2004, only 20% of the young adults in the theoretical age group for attending postsecondary institutions were, in fact, attending such institutions in Brazil, compared to 61% in Argentina and 43% in Chile, according to UNESCO. The MEC estimates that in 2005 only 11.3% of the population between 18 and 24 years old was enrolled in postsecondary institutions, well below the federal government’s target of 30% enrollment by 2010, according to the Lei das Diretrizes e Bases da Educação Nacional (Basic Framework Law for National Education), or LDB, which establishes the guidelines for the provision of education services in Brazil.

Government policy permitting growth of private sector. In Brazil, government support for postsecondary education has historically been concentrated in selective public universities serving as centers of excellence and research. These institutions have highly competitive admission standards and limited capacity to expand. Additionally, budgetary constraints limit further public investments in postsecondary education. In light of these constraints, the Brazilian government has implemented policies permitting the growth of private sector postsecondary education institutions, such as the authorization of for-profit companies and the creation of the Programa Universidade para Todos (University for All Program), or Prouni program. In recent years, growth in Brazilian postsecondary education has been concentrated in the private sector, whose share of the overall postsecondary education sector grew from 61% in 1997 to 73% in 2005 at an average annual rate of 10.9% according to INEP. According to Hoper Educacional, a third party consulting and research firm in Brazil, enrollment in private postsecondary institutions is likely to continue growing at an average of 5.7% per year from 2006 to 2010.

Positive growth prospects for the middle and lower income working young adult segment. In addition to demographic trends and the existence of large underserved demand suggested by low penetration levels in postsecondary education in Brazil, additional factors favor continued growth in the middle and lower income working young adult segment of postsecondary education in Brazil, including: greater availability of education opportunities at affordable prices; significant gain in personal income generally resulting from postsecondary education degrees; improved employability in a competitive labor market; and a stable regulatory environment favoring participation of the private postsecondary education service providers to serve middle and lower income working young adults. Anhanguera Educacional believes that increases in enrollment over the next several years will be concentrated in the middle and lower income working young adult segment.

Fragmented industry creates opportunities for efficient providers. The postsecondary education industry in Brazil is still fragmented, creating, the Company believes, an attractive opportunity for efficient providers. In 2004 (the most recent available information), student enrollments at the largest 20 private postsecondary education institutions averaged approximately 37,000 (25% of total students enrolled) while the other 1,769 private companies averaged approximately 1,300 students, based on the MEC’s and Hoper Educational’s data. These smaller, usually single-campus, private companies are generally less able to attract and retain skilled management and faculty. In addition, these companies usually have limited experience and resources available for developing new, good quality program offerings that meet student demand. Anhanguera Educacional believes that institutions serving the middle and lower income segment that are not able to benefit from economies of scale are likely to lose competitiveness over time.

Financial incentives from government. To improve access to educational opportunities by lower income students, the Brazilian government has increased financial aid and incentive programs for postsecondary education. The Prouni program provides free scholarships for low income students in exchange for tax benefits to for-profit education companies. The corresponding tax benefits exempt the revenues derived from bachelor and associate programs from the Programa de Integração Social (Social Integration Program), or PIS, the Contribuição para o Financiamento da Seguridade Social (Social Security Financing Contribution), or Cofins, as well as exempting the net income share proportional to the revenues of these programs from the Imposto de Renda da Pessoa Jurídica (Legal Entities’ Income Tax), or IRPJ and the Contribuição Social sobre o Lucro Líquido (Social Contribution on Net Income), or CSLL.

Regulatory Framework

The Brazilian Constitution sets forth that education is a right of all citizens and a duty of the state and the family. Accordingly, the government is obliged to provide all Brazilian citizens with access to free primary education with compulsory attendance. Under Section 209 of the Brazilian Constitution, private investment in education is permitted so long as companies engaged in rendering education services comply with the applicable rules and regulations, are authorized to operate by the relevant government authorities and have the quality of their programs evaluated by such authorities.

The Brazilian education system is organized under a cooperation regime among federal, state and municipal governments. The federal government is required to (i) organize and coordinate the federal education system (public federal institutions and private postsecondary education institutions); (ii) monitor the maintenance and provide additional funding, if necessary, to remedy public federal institutions’ deficiencies; (iii) create rules and regulations regarding education, supplement the role of public federal institutions and redistribute resources as necessary; and (iv) provide financial and technical support to states, the Federal District and municipalities in order to guarantee equal opportunity and quality of education throughout Brazil. The states and the Federal District are required to provide primary and secondary education, while municipalities are only responsible for providing primary education. The regulation of postsecondary education is carried out jointly by the federal and state governments (state and municipal public institutions).

Additionally, Law No. 9,394, of December 20, 1996, also know as Lei das Diretrizes e Bases da Educação Nacional (Basic Framework Law for National Education, or LDB) provides the guidelines for the provision of education services in Brazil and sets forth the federal government’s duty to:

• coordinate the national education policy;
• define the National Education Plan, in coordination with the states, the Federal District and the municipalities;
• provide technical and financial assistance to the states, the Federal District and the municipalities;
• define, in cooperation with the states, the Federal District and the municipalities, the responsibilities and guidelines for the primary and secondary education in connection with the curricula and minimum contents of the programs, in order to ensure standardized education;
• define, in cooperation with the states and the Federal District, the responsibilities and guidelines for postsecondary education, including the minimum contents of the programs and curricula, in accordance with the academic autonomy of the universities and university centers;
• ensure there is a national evaluation process for postsecondary education institutions, in cooperation with the systems responsible for such level of education;
• institute an evaluation process for the academic performance of primary, secondary and postsecondary education in cooperation with education institutions with a view to improve the quality of education; and
• issue rules and regulations regarding undergraduate and graduate programs.

Organization of Postsecondary Education Institutions

According to the LDB, postsecondary education can be provided by public or private institutions. A private postsecondary education institution must be controlled, managed and supported by an individual or a legal entity responsible for obtaining funds to meet the needs of its supported entities. A supporting entity is legally responsible for all its supported entities.

Private postsecondary education institutions comprise:

• for-profit private postsecondary education institutions created and maintained by one or more individuals or private legal entities;
• community entities organized by a group or individuals or legal entities representing the community, including teachers’ and students’ organizations;
• religious entities organized by a group or individuals or legal entities representing the community, and engaged in the confession and ideological counseling; and
• not-for-profit private institutions, comprising charitable and non-charitable institutions.

Historically, not-for-profit private institutions benefited from favorable tax treatment. The enactment of the Prouni in 2004 leveled the tax treatment between for-profit and nor-for-profit education institutions.

According to their organization and academic prerogatives, postsecondary education institutions can be:

• Colleges: colleges are public or private education institutions offering postsecondary programs in more than one discipline area, maintained by a single supporting entity and with isolated management and direction. Colleges are allowed to offer programs in several levels, namely bachelor’s, associate, specialization and graduate programs (master and doctorate degrees). Colleges do not have minimum requirements regarding faculty qualification or hours of work, and cannot create new campuses, programs or vacancies without prior authorization by the MEC;
• University Centers: university centers are public or private education institutions offering several bachelor’s, associate and graduate programs, and are expected to provide education and qualification opportunities for its professors and work conditions for the education community. At least one-third of the faculty of a university center must hold a master’s or doctoral degree. In addition, at least one-fifth of its faculty must be full-time professors. Within the city their existing campuses are located in, university centers can create, organize and discontinue new postsecondary education courses and programs, as well as reallocate or increase the number of openings, without prior authorization by the MEC. University centers, however, cannot create new campuses outside the city where their headquarters are located; and
• Universities: universities are public or private education institutions offering several postsecondary programs, continuing education and research development. Like university centers, at least one-third of the faculty of a university must hold a master’s or doctoral degree; however, at least one-third of its faculty must be full-time professors. As with university centers, universities have the autonomy to create, organize and discontinue new postsecondary education courses or programs, as well as reallocate and increase the vacancies, within the cities their existing campuses are located in without prior authorization by the MEC. Additionally, only universities are able to request the accreditation by the MEC of new campuses and programs outside the city where their headquarters are located, as long as they are located within the same state.

The Brazilian Constitution affords didactic, scientific and administrative autonomy to universities and university centers so that government authorities cannot interfere in their financial and asset management nor in their scientific, cultural, didactic and curricular activities, provided that the guidelines of Brazilian education are followed.

The LDB provides that the following powers, without prejudice to other powers, are secured to university centers and universities in the exercise of their autonomy:

• to create, organize and discontinue postsecondary education programs on their premises, subject to the applicable regulation;
• to establish the curricula for its courses and programs, subject to the applicable general guidelines;
• to establish plans, programs and projects in connection with scientific research, artistic production and extra-curricular activities;
• to establish the number of student spots available;
• to create and change their by-laws in accordance with the applicable general rules; and
• grant degrees, diplomas and other titles.

Although colleges have administrative autonomy, they do not enjoy academic autonomy, and thus depend on the MEC’s authorization to create postsecondary education programs and courses. Out of its 16 campuses, its campuses located in Leme and Pirassununga are organized as university centers. All its other campuses are organized as colleges.