We’re seeing more capital expenditures thinking in education (as I first pointed out in 2010).  You may recall from Finance 101 that CapEx capital expenditures are funds invested to produce future benefit–positive cash flows (costs savings or net revenues) resulting in a return on investment higher than the cost of capital.

For example, a new school furnace that costs $50,000 and is estimated to save $15,000 per year produces a reasonable rate of return on the investment over five years.  The simple spreadsheet below, it shows a 15% Internal Rate of Return (IRR).  If the school district’s cost of capital is 5% (i.e., coupon rate on its bonds), the 15% return is moderately attractive–if there’s no risk involved.  The project produces an estimated $14,231 in Net Present Value; that means considering the district’s cost of capital the project produces real value.

rate 5%
Year 0 -50000
Year 1 15000
Year 2 15000
Year 3 15000
Year 4 15000
Year 5 15000
IRR 15%
NPV $14,231

 

School districts aren’t well-positioned to make productivity seeking CapEx. They raise money to build schools and receive money to operate schools, but most can’t raise money to invest in productivity improvement. If a school doesn’t have money in the facilities fund for a new furnace, they may be able to get a vendor (or power company) to pay for make the investment and share in the savings.  They could also lease the equipment and use the savings to pay the lease.

Districts don’t have a good way to pay for computers and other short-term assets.  Schools and districts have paid for computers using grants and year-end surpluses–not really funding streams you can count on.

Some districts (like my hometown of Ann Arbor) are using long term facilities bonds to pay for computers that will last a couple years–this is a really bad idea.  It dramatically increases the cost of ownership.  It’s like taking out a home equity loan, going to Hawaii, and paying for vacation for the next 30 years.

Computers have historically been thought of an an extra classroom feature not a productivity seeing CapEx like the example above.  As a result, American schools have purchases almost 20 million computers will little benefit to show.

Blended learning is changing they way educators view technology–it is more frequently thought of as part of a school model that works better for students and extends the reach of effective teachers (to borrow language from OpportunityCulture.org).  But these school models cost money to implement–computer purchases, training, and facilities updates all come before any savings are realized.  These big investments can’t be made without a source of funding and a plan to recoup some of the investment with schools that work better and cost no more (or even less where necessary) to operate.  It’s time to start thinking about investing in productivity.

Following are 4 ways schools and districts can pay for the adoption of blended learning models and the development of high access environments (i.e., 1:1 computing):

1. Substitution. As Marguerite Roza said at SXSWedu last week, it’s sometimes possible to use savings to pay for innovations.  In other cases direct substitutions are possible–like a open content on a tablet instead of a textbook.

2. Phasing. As we noted in Funding the Shift, phasing in blended learning over three years reduces the capital requirements in each year (i.e., computers and training) to a level that may be covered by budget substitutions.  The Moorseville, NC case study in Funding Shift details this approach.

3. Leasing. To plunge in all at once, leasing is a strategy to cover the cost of the CapEx.  However, this approach will increase the total cost of ownership.

4. Grants. Since districts can’t easily borrow money or sell equity to pay for productivity seeking investments, grants (and operating surpluses) are really helpful, they’re just hard to come by.

Taking a CapEx approach to blended learning means:

  • asking, “What’s the return on investment from planned computer purchases?”;
  • matching funding strategy with the asset life (and avoiding large scale use of long term debt to pay for tablets and computers); and
  • planning (and managing) for efficiencies in school staffing models.

For more, see our Blended Learning Implementation Guide.

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