* Sweden adopted some of most radical school reforms
* Private equity involvement now under fire
* Bankruptcies, falling standards made country rethink
STOCKHOLM, Dec 10 (Reuters) - When one of the biggest private education firms in Sweden went bankrupt earlier this year, it left 11,000 students in the lurch and made Stockholm rethink its pioneering market reform of the state schools system.
School shutdowns and deteriorating results have taken the shine off an education model admired and emulated around the world, in Britain in particular.
"I think we have had too much blind faith in that more private schools would guarantee greater educational quality," said Tomas Tobé, head of the parliament's education committee and spokesman on education for the ruling Moderate party.
In a country with the fastest growing economic inequality of any OECD nation, basic aspects of the deregulated school market are now being re-considered, raising questions over private sector involvement in other areas like health.
Two-decades into its free-market experiment, about a quarter of once staunchly Socialist Sweden's secondary school students now attend publically-funded but privately run schools, almost twice the global average.
Nearly half of those study at schools fully or partly owned by private equity firms.
Ahead of elections next year, politicians of all stripes are questioning the role of such firms, accused of putting profits first with practices like letting students decide when they have learned enough and keeping no record of their grades.
The opposition Green Party - like the Moderates long-time supporters of privately run schools but now backing the clamp-down - issued a public apology in a Swedish daily last month headlined "Forgive us, our policy led our schools astray".
In the early 1990's, parents were given tax-funded vouchers to pay for a school of their choice. Private schools were allowed for the first time and could even turn a profit.
Britain has taken on board many feature of the system, although it has stopped short of allowing publically-funded schools to make a profit, and Swedish school corporations have expanded as far afield as India.
This year's demise of JB Education, owned by Danish private equity firm Axcel, was the biggest, but not the only bankruptcy in Sweden's reformed education sector.
It stripped almost 1,000 staff of their jobs and left more than 1 billion crowns ($150 million) of debts, mainly to banks and suppliers, as well as abandoning its students.
"I was furious," said Margarete Grugel, 56, whose 16-year-old daughter Tina had one week left of her first term of a hair styling course at the JB school in Jonkoping when it folded.
"Tina was absolutely shattered by it."
Axcel acknowledges mistakes were made.
"Of course we could have been better at managing the schools," senior communication advisor Joachim Sperling said.
"Many of the schools were in bad shape and even though we knew that from the start, we did not manage to deal with the challenges in due time."
It is a cautionary tale in a market estimated to have been worth more than $400 billion worldwide in a 2010 report by the International Finance Corporation.
With annual turnover in Sweden of roughly 20 billion crowns ($3 billion), according to a recent parliamentary study, education should be an attractive prospect.
But while some of the early players sold quickly at a profit, nowadays it is no cash cow.
One in four secondary schools is lossmaking and since 2008, the risk of insolvency has shot up 188 percent and is 25 percent above the average for Swedish corporations, said UC, a business and credit information firm.
"Few sectors can show as bad figures as this," it said.
Part of the problem stems from demographics, with overall secondary school numbers in sharp decline since 2008 and unlikely to recover to the past peak for a generation or more.
A lax regulatory environment is also to blame.
Sweden replaced one of the world's most tightly regulated school systems with one of the most deregulated, leading to scandals like the 2011 case of the convicted paedophile who set up several schools quite legally.
"I've often said it's been easier to start an independent school than set up a hot-dog stand," said Eva-Lis Siren, head of Lararforbundet, Sweden's biggest teachers union.
"In the push toward freedom of choice, one lost sight of quality control."
The private schools brought in many practices once found exclusively in the corporate world, such as performance-based bonuses for staff and advertising in Stockholm's subway system, while competition has put teachers under pressure to award higher grades and market their schools.
The idea that private equity firms and large corporations would run hundreds of schools was a far cry from the individual, locally-run schools envisaged at the start.
"This was something that was not ... even considered in one's wildest dreams," said Staffan Lundh, who handled school issues in the prime minister's office at the time and now leads evaluation at the National Agency for Education (NAE).
While it is difficult to say how, or even whether, private involvement and falling standards are linked, the NAE says there are indications the market-driven reforms have contributed to widen the gaps in school performances.
The Organisation of Economic Co-operation and Development's (OECD) benchmark Programme for International Student Assessment (PISA) study paints a bleak picture, with Sweden now ranking below Russia in maths.
A quarter of 15-year-old boys cannot understand a basic factual text, said Anna Ekstrom, head of the NAE, while an NAE study last year showed a growing gap between students, with more and more failing to qualify for secondary education.
"In my mind, this no longer only pertains to Sweden's position as a knowledge-based nation, but also to our democratic development," Ekstrom said.
Part of the problem stems from introducing choice. As the best students flock to certain schools, standards suffer at the schools they leave behind.
Quality is also an issue.
Last year, Sweden's Schools Inspectorate said JB was not doing enough to ensure quality and help students achieve more than passing grades.
It also criticised Praktiska Sverige AB, which runs schools for almost 5,000 students, for the number of temporary teachers without educational degrees and lack of access to adequate libraries and school nurses.
It closed one Praktiska Sverige-run school and demanded it address shortcomings at all its more than 30 other schools by early 2014. Praktiska says the criticism is based on outdated information and that it is considering a legal appeal.
Housed among the stately buildings in the banking heartland of central Stockholm are the offices of EQT, one of Northern Europe's leading private equity firms with about 20 billion euros ($27 billion) in raised capital.
EQT owns Sweden's biggest school corporation, AcadeMedia, which has almost 50,000 youngsters in its schools and pre-schools. Other private equity firms such as FSN Capital, The Riverside Company, TA Associates and Bure Equity, as well as Investor AB, the investment vehicle of the Wallenberg family, own all or parts of school chains.
AcadeMedia runs a modest, 390 million crown profit on a turnover of about 5 billion crowns. It does not have the same high-profile quality issues that afflicted JB, but it recognises a hardening regulatory environment.
"I think we are in a phase where the good ones are being separated from the bad ones," AcadeMedia Chief Executive Marcus Stromberg said. "I think we will see a continued consolidation of the sector. I sincerely hope we won't see any more bankruptcies, but you can't guarantee it."
Centre-right School Minister Jan Bjorklund will early next year propose legislation to parliament forcing operators to run schools for a minimum period, likely to be 10 years.
The legislation, backed by the centre-right government and opposition Social Democrats, will not apply to existing owners but in time is likely to squeeze out private equity players, who tend to have 5-7 year investment horizons.
"I can be completely honest and say that this requirement is aimed squarely at the private equity firms," said Ibrahim Baylan, an MP and Social Democrat educational spokesman.
Rules on financial staying power and quality, such as access to libraries and counselling, are also being strengthened.
Harry Klagsbrun, a partner at EQT and a board member at AcadeMedia, says the focus on private equity and the length of ownership of schools makes little sense.
"You can own a business forever but still make very short-sighted decisions, or fail to make decisions that are beneficial in the long term," he said. "And you can own a company five years and really build it for the future."
Few Swedish politicians harbour any ideas of going back to the old system that gave parents and kids little choice.
But a GP/Sifo poll of 1,000 people this year showed 58 percent broadly in favour of forbidding profits in tax-financed areas such as education. In the wake of the furore over schools, many are questioning how much free market is too much.
School minister Bjorklund, leader of the second biggest party in the four-party coalition government, has said private equity owners should also be forbidden within the healthcare sector, including care of the elderly.
The mother of former JB student Tina will vote with her feet when her son starts secondary school. "I don't want him to go to an independent school," she said. "Because you never really know what kind of finances the school has."