North of Johannesburg in the slum district of Diepsloot, children play in the garbage-strewn grounds of a local school before spilling out across a busy road unsupervised to return home. It’s a common sight in many impoverished communities in South Africa and symptomatic of an education system that ranks among the worst in the world.

Aluwani Mantsho, who works as an administrator, is one of thousands of parents who’ve turned their backs on the state system, choosing instead to send her two children to a private school run by Curro Holdings, which charges annual fees of as much as R54 000. “We don’t mind making the sacrifice so that the kids are getting the best education,” said Mantsho, overlooking the clean, fenced-in grounds complete with jungle gym play equipment.

This sentiment has seen business boom for the nation’s listed education companies as the public system buckles. Shares in Curro, an independent basic education provider that runs over 180 schools in Southern Africa, have risen 23% this year. Competitor Advtech has fared even better, rallying 38% and near a record high as the stocks outperform a 0.3% gain in the benchmark FTSE/JSE Africa All Share Index.

A lack of resources, crumbling infrastructure, overcrowded classrooms and corruption are all weighing on educational outcomes, with a 2021 international study of reading literacy standards among fourth graders placing South Africa last out of 43 countries. The nation is also beset by widespread power cuts, a flailing rail and ports network, unemployment at more than 30% and gaping inequality that have all curbed growth in the economy.

“As the state fails — as it does in many industries in the last 20 to 30 years — the private sector picks up where the government falls away,” said Anthony Clark, an analyst at Small Talk Daily Research. He forecasts continued growth in the private education sector.

Advtech runs 110 school campuses across nine different brands. They include Crawford International North Coast College in KwaZulu-Natal, one of the most expensive in the country, where annual fees for tuition and boarding can be as much as R279 000. That’s about the same cost as an MBA at one of South Africa’s top universities. For their money, fee payers get an average pupil-to-teacher ratio of about 25 per class, well-maintained facilities and a variety of extracurricular activities and sports.

Post-school study

“Due to the growth in demand, we continue to grow our offering to ensure we can increase access to quality education to as many young students as possible,” Advtech CEO Roy Douglas said in an e-mailed response to questions.

Things aren’t going as well for South Africa’s sole tertiary education stock, Stadio Holdings. Shares in the company, which runs nine tertiary institutions, are up just 0.4% this year.

Clark noted that the tough economy and higher interest rates may have affected demand for post-school study. As of 2019, only 7% of South African adults had a tertiary education, according to the Organisation for Economic Cooperation and Development.

Read: Poor maths, science education hampering innovation in SA

An October report by South Africa’s Office of the auditor-general paints a bleak picture of the state education sector. It found that early childhood development infrastructure was inadequately maintained, with some sites posing health risks. The average pupil-to-teacher ratio was 40. In one school, 215 pupils were enrolled across two classes with some having to sit on the floor “as the furniture was not enough to accommodate all of them”.

After debt-service costs, education is the government’s biggest expense. It accounts for 14% of the R2.2-trillion consolidated state expenditure, according to the 2023 budget review. That’s more than the OECD’s 2020 4.4% average. Nevertheless, South Africa’s population with a tertiary education is the lowest across all OECD and partner countries, according to the latest education with a glance report.

That’s a problem for the economy.

“Poor education outcomes exacerbate South Africa’s skills mismatch,” said Bloomberg Economist Yvonne Mhango. “It implies the children matriculating from our schools are not employable, and a dent cannot be made in the country’s persistently high unemployment rate.”

Clark is optimistic about the outlook for the three education stocks over the next 12-24 months. Curro, Advtech and Stadio reported growth in the number of pupils ranging from 3-9%, with fee increases of up to 14%. “It is clear from results seen in the 2022 full-year and 2023 first half that the private education sector has become to many parents a necessity, rather than a luxury,” he said. — Khuleko Siwele, with Amogelang Mbatha and René Vollgraaff, (c) 2023 Bloomberg LP