Edison’s Mess Is No Referendum on Privatization

June 9, 2002 • Commentary
This article originally appeared in the Washington Times as “Sputtering School Reform,” on June 9, 2002.

These are dark days for Edison Schools, the nation’s largest private management company for public schools. In recent weeks Edison has been fired by one of its original charter schools, the nationally recognized Boston Renaissance School. It has undercut expectations by receiving a contract to run 20 of Philadelphia’s troubled schools — after predicting a contract for twice as many. And it has settled an SEC investigation into its accounting practices by accepting unfavorable adjustments to its revenue numbers for the past several quarters.

In response to all this, Edison’s stock price has plummeted to less than 10 percent of its previous value. Due to its low stock price Edison has had to heap insult upon injury, warning of its possible delisting by Nasdaq, and of its potential inability to secure sufficient funds to open promised new schools in Philadelphia.

Detractors of privatization are eagerly piling on, publishing story after op‐​ed about Edison’s woes. Edison’s failure would prove, they maintain, that private contracting has been a failed fad — that private companies cannot do more with less, and that the stability of politically driven school management is preferable to the uncertainty of private management.

Edison’s skewering by the press has been so energetic that one Merrill Lynch analyst commented, “We have never seen a company attract so much negative publicity, especially when [the company’s business objective] is such a noble one.” The analyst concluded, “It will be difficult [for Edison] to get out of the way of the news flow.”

After all, both friends and enemies have long regarded Edison as the acid test for contract school management. Defenders of the public school status quo, motivated either by an immovable belief in the goodness of government or by the more banal desire to protect teachers from accountability, have elevated Edison to the status of Leviathan in pitched battle against public institutional culture.

School reformers, by contrast, have tended to ideologically over‐​invest in Edison. Founder Chris Whittle typically characterized Edison as “the vanguard of an important movement.” Privatizers have unwisely allowed a single company to become emblematic of their cause.

In terms of educational performance, Edison’s record is mixed, but fairly good. It can point to rising scores in most of its schools, though some of these increases may be attributable to other factors. While a few cities such as Boston and Dallas have reconsidered their contracts due to lagging scores, most of Edison’s 100‐​plus schools apparently remain well satisfied.

More troubling is Edison’s financial management. Administrative costs continue to outpace revenues in an equity market considerably less tolerant of operating losses than that which Edison enjoyed in its early years. Also of concern are several unprofitable business acquisitions, and large personal loans from the company to its executives.

The jury is still out on Edison’s management performance, as to both its public schools and its private finances. But those awaiting the verdict on Edison’s future should not misconstrue the lesson of failure or success. Edison’s crisis is not a referendum on private contract management of public schools. Edison’s failure would not demonstrate that private contract management is a bad idea.

Rather, Edison’s failure — if indeed it does fail — would illustrate the advantage of private management. Private companies that do not do their jobs well are allowed to fail. School districts that do their jobs poorly may operate indefinitely. Those who doubt the staying power of miserable public management should ask Cleveland City Counsel member Fannie Lewis, who supported school choice there after having tried to improve the city’s notorious public system since 1951. “Any other business that would have lost [so many children] would have gone under by now,” she said.

Edison is aware that its survival depends on its ability to satisfy both investors and school boards. “It is certainly unusual for a school system to go through the scrutiny we go through,” an Edison spokesman Adam Tucker observed. “We have to deliver great services to our schools.”

Edison may fall victim to the vagaries of the equity markets and bad press, but these are dangers we expect private companies to guard against while serving their clients. Hopefully Edison will succeed in doing its job well and on budget. But, if not, the company can be discarded in favor of a more effective alternative. That, after all, is the great virtue of privatization.

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