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Monday, 4 February 2019

Mohamed El Kalla — CEO, CIRA

Mohamed El Kalla is on a mission not just to transform education, but to integrate sustainable practices in business. His company’s emphasis is on the middle class, not the financial elite, and that focus has driven the company’s strategy of becoming an anchor provider of educational services in new cities being developed by the government. It also sees CIRA become an early adopter of new technologies — and actively its classrooms and admissions. The company, which went public on the EGX last year, is online here. Outside of CIRA, Mohamed is a founder of the first professional consultancy in Egypt focused on CSR, social auditing, human resource benchmarking, and ethical supply chain management.

2018 was the year of recognition. CIRA has always been a fast-growing company. The problem is not many people knew CIRA or its products or the magnitude of its impact. It was always bound to dedicated investors or people dedicated to the sector. 2018 saw CIRA get recognized by the investing community, including fund managers. This recognition also translated into more awareness of the importance of the business of education in Egypt. CIRA drew the attention to the fact that there is a huge demand gap and a growing role for the private sector. Furthermore, it drew attention to the fact that there is a need to discuss private education not only for the people who able to pay, but for the middle class, the marginalized class, and the people who cannot afford to pay.

2019 will be a year of aggressive growth. Once you recognize problems within a sector, everybody pays attention. Given the level of recognition in 2018, and the understanding of the problems at the government level and the private sector level, we see a lot of aggressive growth in 2019, both in the way we do education and by access to education across the country. There is a total recognition that the system is not working and there needs to be reform. There is a recognition that there is growing demand concentrated among those with income limitations.

How will this growth play out? Some in the industry are now looking to grow, others are interested in entering the business. You can see that with the investment coming into the sector, whether it’s through more dedicated funds entering or with more companies veering into this direction. We’re seeing a lot of startups looking at the sector, and we’re seeing a lot of dedicated players teaming up with larger funds. We’re seeing much more structure and aggressive growth. The sector has been restrained for a very long time under the model of contained family-owned businesses. Furthermore, we’re seeing a lot of disruption coming into the sector, both in K-12 education and higher education.

One of the biggest challenges in 2019 is dealing with the inflation in the costs of construction, which is the main barrier now. The higher the costs, the higher the CAPEX, the more limited we are in being able to provide our services to lower income segments. We have our costs increasing 20% but incomes are only increasing by 10%. That’s the challenge that we need to work around and it needs innovation.

These problems are evident in the sector as a whole, whether in private education or on the public schooling side.

We are working on how to grow with cost-saving materials. At the same time, we are using our economy of scale to arrive at an equation whereby we are improving our margins while at the same time shielding the consumer from that inflation. A bit of cost control through innovation and scale, combined with a sacrifice on the margin for the sake of the consumer. This is something CIRA has been very good at.

The opportunity in 2019 will in urban areas outside of Cairo and Alexandria, so in places like Upper Egypt and the Delta region. With the development underway in the new cities, and the migration of economic activity to them, there will be social mobility in these areas. The traditional trend for someone looking for a better life in Upper Egypt and the Delta is to either move to Cairo and Alex or get a piece of agricultural land and convert it to residential. But the younger generation is starting to move to the new cities. We see this in New Alamein, New Assiut and New Minya.

As for the wider economy in 2019, we don’t see a lot of change over 2018, honestly. The two key challenges remain curbing inflation and increasing foreign direct investment outside the energy and gas sectors. I would definitely add to that the issue of interest rates. An ideal 2019 for me is less inflation, lower interest rates, and higher FDI.

That said, the growth potential for Egypt is much higher compared to other markets. Egypt has a key fundamental advantage over other economies, which is the demographics. This population growth is creating a real economy.

Of course CIRA has been constrained by high interest rates. When we went for the IPO we had developed a plan for growth over the next five years. We’ve had to limit what we can actually do to only a two- to three-year portion of the plan because we are very worried about debt service. Had there been a much lower interest rate, we would have had a much faster growth strategy.

We think it’s a must for interest rates to go down in 2019. We don’t think the rate cuts will be delayed any further. Any further delay will risk undoing all the government has done to improve the economy over the past three or four years.

If they do come down, we’re going to fast-track our growth plans significantly. My plan is to create 25,000 seats across higher education and K-12. If rates go down, it will help me reach this goal in three years instead of five. We’re already planning to invest EGP 1 bn: EGP 650 mn in higher education and EGP 350 mn in K-12.

Our approach to compensation is to have salaries keep pace with inflation. And we always give performance-based raises.

Did you know we are one of the nation’s biggest employers of women? We are. We have c. 3.2k women in a workforce of more than 4k — a huge figure for an Egyptian company. There’s plenty of women looking for work in these new urban communities, almost double that of Cairo. So there is always a market for new jobs.

We believe in hiring locally — we do not funnel talent in from Cairo and Alex. Local ownership is very important in our business, where our emphasis is on building not just schools, but schools that become centers of communities.

We gave out EGP 23 mn in scholarships last year. That’s scholarships for bright students from income-challenged households to enroll in higher education.

We are working on several M&A transactions now, actually, at both the K-12 and the higher education levels.

As for greenfield activity, we’re working hand-in-hand with the government in new urban areas. We want to become an anchor for educational services in these new areas.

There is a need for regulatory reform as it is currently outdated. There has been reform on the content side, but regulatory reform is the missing component, specifically in the K-12 level. A lot of things need to change: The way schools are accredited and licensed and the way they are monitored has not been changed since the past century.

There is something in the works for private schooling that is likely to come out in 2019. It is our hope that the new law will match the new vision. We have voiced to the government our concerns and our recommendations, but I wouldn’t say the private sector has had a hand in shaping it.

Healthcare and education, will outperform this year. And surprisingly, tourism. We are really optimistic about the tourism sector next year.

The automotive industry will see a lot of challenges this year.

We are investing extensively in education technology (edtech) startups. We’re right in the center of the wave in terms of innovation in the sector, whether locally or globally. I’m not talking about online access (which is what everybody thinks edtech is about). It’s about the way we teach on the grassroots level. I’m talking about the tools we teach with and the way students access and process information, whether it’s on content creation, or the tutoring, or the classroom experience side. We’re trying to update, not eliminate the classroom.

If we were to start a new business today, we would start it in the area of skill development outside of schools, such as robotics, coding, public speaking, and financial literacy. If you look at universities in the United States, every summer has a massive student engagement program where these practical skills are being taught.

The most common question we get from investors: Why can’t you grow faster? Sustainable growth (which takes time) is the key to any education endeavor, is my answer.

What you haven’t yet asked is how does CIRA see success besides growth in numbers? That touches on an important part of the business, which is that CIRA is a social entrepreneurship venture. We see success in the quality of products we’re putting out and we see success in the success of students. We keep track of the successes of our students, whether it is in the local or global level. This is a metric we measure, and we call them the student success models.

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