For-profit free schools in Sweden have long been a shining example for free market evangelists in education. But their future is under threat after the country’s government has launched a major review of the institutions.

The majority of Sweden’s free schools - which have helped to inform education policy in England - are run by businesses, but politicians in a newly formed coalition are looking to effectively remove the profit motive.

As part of a wider review of public services, the country’s school system will come under fresh scrutiny after slipping down the influential Programme for International Student Assessment (Pisa) league tables in recent years. Under its proposals, the government intends to bring in legislation by 2016 that would force private companies to reinvest all profits back into their schools.

Sweden has led the world in encouraging businesses to establish schools and remains the only country with a nationwide network of for-profit providers. Other regions, including parts of the US, have experimented only on a local basis.

The changes will be watched intently by politicians and policymakers, not least in England, where Labour has accused the Conservatives of wanting to bring profit-making into free schools if the party wins the next general election.

Free schools were introduced in Sweden in 1992. The country later experienced significant success in international educational league tables. But in the most recent Pisa results, published last December, it was below average in reading, science and maths. The apparent slump in standards has led to a rethink of how schools are operated, with growing calls from the Left to abandon profit-making.

Susanne Wiborg, an expert in Swedish and English education policies from the University of London’s Institute of Education, said the plans signalled an “important” shift.

“The Swedish free school experiment shows that allowing for-profit providers into the school market has not led to increased performance and improved schools, but instead permitted another vested interest into education in the pursuit of aims above those of children’s education, namely profit,” Dr Wiborg said. “The profit motive may soon be history. The government plans to require the for-profit free schools to reinvest their surpluses into the schools. This will force the free schools to re-evaluate their fundamental premise of making money.”

Free schools have attracted hundreds of millions of kronor from international private equity firms and venture capitalists, which have viewed the country’s privatised state sector as a worthwhile investment.

But cracks began to appear in the set-up last year when one of the country’s biggest free school operators, J B Education, was forced to close after its investors suffered heavy financial losses in the global recession.

Despite this, another of Sweden’s biggest free school chains, Kunskapsskolan - which also runs three academies in England - said the move to abolish profit-making was about politics rather than improving education.

Odd Eiken, executive vice president of Kunskapsskolan Education, told TES that the government review was an attempt by the majority Social Democratic Party to appeal to the smaller Left Party in a bid to ensure its budget was voted through. Failure to achieve this could lead to another general election and a change in government.

“Obviously we don’t think [the decision to remove for-profit] is a very smart idea,” Mr Eiken said. “It is also very difficult to implement. Schools, particularly the smaller `mom-and-pop’ type schools, won’t be able to survive if you take away the opportunity to make a return on their investment.”

Mr Eiken also pointed to the fact that most profits were already ploughed back into education. Since free schools were introduced, private investors have pumped 1.8 billion kronor (pound;155 million) in equity into schools, generating nearly 391 million kronor in profits. Of that, 31 million kronor has been paid to investors and 360 million kronor has been reinvested.

“Taxpayers have actually got investments of 1.8 billion kronor at a cost of 31 million kronor,” he said. “From a taxpayer’s or a state perspective that seems a pretty good deal, especially considering the alternative that these investments had been financed with taxes or government borrowing on the capital market and taking the risk.”

Gabriel Heller Sahlgren, research director at the right-leaning UK thinktank Centre for Market Reform of Education, said that profit margins in Sweden’s free schools were typically around 2 or 3 per cent, so were not “excessive”.

But he warned that the Swedish government’s proposals could result in schools being closed if the legislation was passed in 2016. “Venture capitalists would just pull out if they weren’t able to make a return, which would mean schools would be shut down,” Mr Sahlgren said. “In fact, schools could even be shut down before the legislation is brought in because this kind of thing makes venture capitalists nervous.”

About 20 per cent of teenagers in Sweden are now taught in free schools but studies on their success paint a mixed picture. Recent research from Stockholm University finds that although the schools can produce short-term improvements, there is little medium- to long-term benefit and some evidence of an increase in social segregation (bit.lySchoolPrivatisation).

With the for-profit model in the balance, the question now is whether the system can rebound from this latest threat and answer its critics.

Land of the free? US for-profits

Sweden was the pioneer in allowing free schools to be run by profit-making businesses, but pockets of the US have also embraced the free market method.

A handful of money-making charter schools have been established in New York, although not-for-profits remain the preferred option. In states such as Arizona, Michigan and Florida, for-profits dominate the education system. In Michigan, some two-thirds of schools are run by profit-making educational management organisations.

An investigation into Arizona’s charter schools by the state’s main newspaper, The Arizona Republic, found that corruption among charter schools was rife and that people were running the schools for “personal gain”.