Love in a cold climate – international expansion and the impact of foreign government

In light of the new Labour Government's targeting of independent schools in respect to charging VAT and removing Business Rates Relief in the recent budget, independent schools would be within their rights to consider their own government hostile to their interests. Indeed, in the face of such a climate, the option of raising finance through international expansion looks increasingly attractive. But the budget is a salutary reminder that, even in our own pastures green, the whims of government, be they democratically elected or not, can dramatically affect a school's fortunes. 

Whether you are considering establishing your first international school or are a seasoned player in the market, a critical consideration will be ensuring that your investment – financial, reputational and in your know-how – is not put at risk by a change to government policy or the cooling of diplomatic relations between the UK and your host country. 

It may go without saying that difficulties with host governments and bureaucrats can be minimised by avoiding establishing schools in countries with unstable or known-to-be hostile governments, but no matter how much due diligence you do, opening schools abroad in countries which are often culturally and politically different to the UK, brings with it a degree of risk which cannot be entirely mitigated. 

Learning by example: the Chinese story

China is a useful case study. Over the past 15 years, a rapid rise in the establishment of international schools enabled UK international school companies to successfully reap significant profits from their overseas ventures. However, particularly since 2021, China has become considerably less attractive, primarily because of a change in government legislation which means that profitable UK school partnerships are really only feasible for schools offering non-compulsory age schooling or those catering only for foreign passport holders. 

When listed, the legislative changes are stark. In 2018, schools offering compulsory education (grades 1 -9) were forced to be non-profit, with fees being subject to local government supervision. Then in 2021, the Implementation of the Law of the People’s Republic of China on the Promotion of Privately-run Schools came into force. This particularly affected bilingual schools offering education to both foreign and Chinese nationals. These schools can no longer use the name of an overseas educational institution in their name, nor the words 'international' or 'world'.  Board members must be Chinese nationals and foreign funded enterprises established in China, or social organisations with a foreign entity as their ultimate controller, are prohibited from founding or controlling private schools offering compulsory age education. Similarly, foreign teaching materials are banned for grades 1 – 9 so British schools offering education in those year groups have had to focus on British style co-curricular and pastoral offerings until grade 10 when they can make a profit and offer iGCSEs, A Level and IB. In addition, a patriotic education must now be integrated into all subjects alongside ideology and political theory courses since the start of 2024. And anti-espionage laws with broad wording have caused some unease for foreign businesses more generally. 

This change to the regulatory landscape coincided with a cooling in diplomatic relations between the UK and China, a slowing economy and the disruption and particularly tight legislative environment of the Covid era. This has led to a decline in the number of foreign students, while Chinese parents question the benefits of an expensive private education for compulsory school aged children when the curriculum is the same as free public schools, particularly as public schools are permitted to set up their own international departments. It has also had a marked effect on teacher recruitment, as it has been increasingly difficult to attract teachers to live and work in China. 

International schools which only enrol foreign nationals have experienced a drop in student numbers. The demographic of these schools may be set to change, with a rise in students from Belt and Road Initiative countries taking their place, potentially demanding a less traditionally British style of education.

The day-to-day impact on the operation of these schools has been severe. Several schools have closed or merged, including Dulwich College International's preschool in Shenzhen, Victoria Kid House in Guangzhou and Eton-House international kindergarten. We have heard reports of schools struggling to get their licences or having had their student numbers capped and some international and bilingual school operators are trying to sell their assets in China. 

Japan, Vietnam and the Middle East have all become more attractive to investors in place of China, with Japan actively incentivising foreign investors with options for loan grants, tax breaks and simple company registration and visa procedures. 

However, it is worth bearing in mind that so-called 'friendly' political environments can be very culturally different from the UK. For example, schools with a religious character (particularly where this is enshrined in their charitable objects), will need to be careful if they wish to open a school in a country with strict laws requiring a syllabus based on a different faith. In Saudi Arabia, for example, all international schools must teach Islamic studies to both their Saudi and foreign students in Arabic and English respectively and the public practice of any religion other than Islam is not lawful. Even though most projects of the type we consider in this article are operated through a trading subsidiary, schools looking to operate in jurisdictions with these types of requirements would need to think carefully about what their objects permit and whether there are any barriers to sub-licensing their resources for this purpose.    

Keeping one step ahead

The reversal of fortunes of foreign international school providers in China does highlight how important it is, when you are considering establishing an international school, to think about what would happen if the legislative environment made it increasingly difficult to make a profit or operate a British style school in your chosen territory. 

What you are actually able to do about the problem will depend on the terms negotiated with your local partner and, where relevant, the international schools themselves. 

In terms of a list of useful points to consider before entering into a collaboration with a local partner to establish an international school, you will want to ensure the following:

• thorough due diligence has been conducted on your proposed local partner, so you can be confident not only in an alignment in your values, but also that the partner has the requisite skills and contacts required to establish and operate a school and, in particular, has good standing and positive relationships with the decision makers, local government, bureaucrats and government departments that are needed to obtain the licences and authorisations required to proceed. 
• thorough due diligence has been conducted on the country of your choice. While you won't be able to predict legislative changes and global political relationships for decades to come, you should be comfortable that your assets (particularly if charitable assets are being invested) are not being put at undue risk. Each country has its own registration and licensing processes, depending on the type of school that's to be set up, so you will need to be comfortable that you and your local partner understand what will be required and if there are any showstoppers to be aware of at the outset. 
• you will need to be comfortable that you know your market. Are you targeting the expat community or the local population? Certain countries, such as China and Japan, have laws around permitting the enrolment of its citizens into international schools, 
• assuming, as in the majority of cases, that your school will structure the arrangement as a collaboration or franchise with intellectual property licensing (as opposed to operating the school abroad yourself), the collaboration agreement with your local partner should cover what would happen if the government became hostile towards foreign investment or began to censor or restrict British style teaching in their country to the extent that profits fell or the UK school's input could no longer be meaningful or in line with its values. For example, the UK school company could require the partner to rectify the problems within a set timeframe, and if they were unable to do so, the school would be given the power to step in, if appropriate, sending a group of suitably qualified inspectors to visit the school and make recommendations. Where this cannot fix the problem, which may be more existential in this case, then the UK school company must have the power to either force the school to close or remove its association with the school or schools involved. This may, in practice, involve the termination of the intellectual property sub-licences between the local partner and the relevant schools, or where the relationship with the local partner is no longer tenable, the collaboration agreement itself. If the situation wasn't quite so dire, clear arrangements on how commercial terms might be re-negotiated can be helpful should the need arise to use them. 
• that the UK school company and the local partner has agreed on who will shoulder the costs of the venture, including when things go wrong, and whether there will be any limitation of liability and indemnities between the parties. Often, the local partner is expected to fund the project, with the UK school not bearing any financial risk, with any profit shortfalls at the international school being underwritten by the local partner. However, much like the commercial terms of the arrangement, what can be agreed will depend on the relative power balance between the parties.
• your collaboration agreement should contain warranties, ensuring that the local partner will comply with all local laws. This ensures the UK school company has recourse, should it suffer any damage because the local partner failed to comply with any new (or existing) law.  
• similarly, your agreement should contain robust dispute resolution procedures and set out the arrangements where the parties can no longer fulfil their obligations under the agreement for reasons outside of their control. For example, if the UK school company is owed a management fee and/or a percentage profit share for the year to date, can it rely on its agreement to extract this money if the local partner is unwilling to pay?
• you should be clear what governing law and jurisdiction will apply to your agreements. Ideally, from the UK school company's perspective, it is preferable to have recourse to the laws of England and Wales and the English courts where possible. If you would prefer to avoid going through the courts, arbitration is a more private (though expensive) alternative option. It should, however, be acknowledged that seeking recourse for breach of contract or warranty is challenging, particularly if you are trying to enforce an English law judgment overseas and therefore, good dispute resolution procedures are particularly valuable - along with choosing the right local partner!
• where you are starting an international venture for the first time, it can be helpful to consider all structuring options. Having a named international school through a collaboration arrangement (let alone operating a school directly) is a significant undertaking and you can consider learning more about a particular country by supporting a specialist department in a pre-existing school first, or offering a digital-only service initially, if such opportunities are available to you. 

While it is impossible to predict whether your international school will still be welcome in the long term, you can structure your arrangements with your local partner to ensure that should the relationship no longer be profitable (in every sense of the word), you can exit gracefully, minimising any damage to your reputation or financial position. 

Ultimately, establishing an international school should be an exciting and profitable adventure. However, lessons from the past decade do show that it pays to be prepared. 

If you would like to discuss any of the topics covered by this article, please contact Emma Flower or your usual Withers contact.