Late last month, when George Mason University’s campus in the Persian Gulf emirate of Ras al Khaymah became the first American educational venture in the region to collapse, its administrators immediately blamed the international economic meltdown.

In a region whose higher-education scene is quickly gaining a reputation for being as hazardous as it may be lucrative, is George Mason’s failure the beginning of the end for American-style higher education in the petrodollar-rich countries of the Middle East?

“Of course there is still a demand for American and other international higher education here,” says Ayoub Kazim, executive director of Dubai’s Knowledge Village and International Academic City, which are home to dozens of foreign-university operations. “But we have to differentiate between what happened at George Mason and what’s happening everywhere else. The various models, the approaches, are very different.”

Every American university that has established a venture in the gulf does so with a local partner. Those partners may be investors who are motivated by the opportunity to profit from the educational needs of the region. At the other end of the spectrum are the ruling families of the region’s city-states, who dip into their considerable wealth not to make money but because they want to develop their economies and societies.

It is no surprise that what motivates a university’s local partner—not to mention how deep its pockets are—is key to the venture’s success.

But George Mason’s experience also shows the importance of a mechanism that guarantees that academic standards are controlled by the home campus, and of offering courses that students are going to want.

To be sure, since it opened in Ras al Khaymah, George Mason’s campus has been beset by problems revolving around administration, academics, and identity. Student recruitment has been particularly difficult, and in hindsight administrators say they should have controlled marketing, rather than leaving it to local partners. This year only about 180 students enrolled at the campus, far fewer than the 2,000 students its planners hoped would enroll by 2011.

Peter N. Stearns, George Mason’s provost, maintains that with time, those institutional challenges would have been solved. “We were in this for the long run,” he says. “The problem is we weren’t allowed the long run.”

New Demands

Two months ago, as the global economic meltdown was gaining pace, Edrak, the private educational company that was George Mason’s partner and paid the campus’s operating budget, told administrators in Fairfax, Va., that it wanted to make some serious changes.

For the 2008-9 academic year, Edrak has provided George Mason with between $7-million and $8-million to operate a campus for some 180 students. But for 2009-10, Edrak was prepared to provide only about $6.5-million, yet it expected George Mason to enroll 300 students, Mr. Stearns said.

Edrak also demanded that George Mason allow it to hire a new academic dean for the campus who would report to the company, not to the university. Previously, the campus’s chief academic officer, the vice president, reported to Mr. Stearns.

Those budgetary constraints meant the university wouldn’t be able to continue providing students in Ras al Khaymah with the kind of education that would meet the standards of George Mason’s home campus, Mr. Stearns said. And the proposed shift in academic control, he added, would neither satisfy expectations on Mason’s home campus nor make the grade with its accreditor, the Southern Association of Colleges and Schools' Commission on Colleges.

“The changes in our agreement, which were sought by our partners in Ras al Khaymah, would have put the university’s accreditation in jeopardy, and that is unacceptable under any circumstances,” Mr. Stearns told the university’s Board of Visitors as he recommended they withdraw the university from the venture, which he had originally championed.

Mr. Stearns says that, initially, Edrak’s investors—the identity of whom even he does not know, he says—had planned that the George Mason campus, which opened in 2005, would not break even for its first five years. Edrak did not respond to requests for comment.

“In my honest opinion, there was some change of mind as to when the profit would begin,” Mr. Stearns said, adding that he suspects the investors’ change of mind has been prompted by the economic crisis.

Gambling on Success

As the economic crisis persists, the fear is that other American colleges that have set up operations in the region will begin to fail as their local partners—especially those expecting a profit—begin to feel the heat.

The risk is perhaps greatest in Dubai, which has grown at a breakneck pace in recent years but finds itself reeling in the downturn. Unlike its neighbors, Dubai doesn’t have vast oil or gas reserves to fall back on. With scant consumer and investor confidence in the city-state, four in 10 expatriate workers are preparing to leave the country, according to a recent survey.

That places the more than 30 foreign campuses in Dubai at serious risk, especially because many planned to fill their seats with the children of expatriates. The native Emirati population is far too small to sustain these campuses on its own.

Dubai’s approach to higher education has been to match largely middle-tier foreign universities with local investors. Many of these arrangements offer specialized programs for a particular audience that function as pipelines into the local labor market. An Indian university branch campus, for example, might serve a predominantly Indian expatriate population.

“Many of these partners in Dubai are gamblers,” says Daniel J. Guhr, managing director of the Illuminate Consulting Group, which advises universities on internationalization. “The attitude is that if you create 10 institutions and five fail, you’re still far better off than if you had none, as long as you’re not one of the five who fail.”

Only a few American colleges have decided to establish campuses in Dubai, the most prominent of which is Michigan State University, which began operating last fall in International Academic City. The Dubai campus offers undergraduate degrees in business administration, construction management, computer engineering, early-childhood education, telecommunications and media management, and youth development.

It also offers a handful of graduate programs. This year slightly more than 50 students have enrolled; the university expects that figure to double this fall. Michigan State’s local partner, Tecom Investments, extended the university a line of credit at a very low interest rate to cover construction and operational costs during the start-up period. Once the Dubai venture breaks even, and Michigan State pays back its loan, Tecom will collect rental fees and nothing more, says John K. Hudzik, vice president of global engagement and strategic projects at Michigan State.

The expectation is that the Dubai project will eventually sustain itself with tuition fees alone.

“Tecom has nothing at all to do with the academic side of the operation,” says Mr. Hudzik. “That has always been one of our conditions, that we are 100 percent in control of the academic programs.”

Because of the economic downturn, Michigan State expects to break even in Dubai two years later than it originally projected, probably in its fourth or fifth year, Mr. Hudzik says, rather than in its second or third.

That said, Michigan State must still pay back its line of credit, which means it must ensure that there is an adequate demand for its programs. George Mason had chronic problems attracting enough students in Ras al Khaymah. Its nursing program, for example, shut down after only two students enrolled.

But while George Mason left what little market analysis it did to local partners, Michigan State is doing its own due diligence. Mr. Hudzik said, for example, that Michigan chose its programs to align with some of Dubai’s long-term economic-development goals.

Still, Mr. Hudzik acknowledges that risk can never be fully eliminated.

“You do the best you can to run a series of due-diligence tests,” Mr. Hudzik said. “But there’s no way to ensure anything.”

Mr. Hudzik also said the university selected only those programs that have the strength to duplicate what they do in East Lansing on the other side of the world.

“Without naming them, every university has programs that are weaker than others,” he said. “We did have several programs that expressed serious interest in Dubai that we turned down, even though there may have been a market for what they offer.”

Still Flush With Cash

Only in Abu Dhabi and Qatar, the two city-states in the Persian Gulf that boast the region’s largest per capita wealth, have U.S. branch campuses been able to remove profit from the equation altogether.

In both emirates, senior members of the ruling families have provided the funds and the political will to establish flashy branch campuses of American colleges.

The most-watched venture is in Abu Dhabi, where New York University plans to establish an ambitious liberal-arts campus. NYU officials declined to be interviewed for this article, issuing instead a written statement saying, “Recruitment of the first class of undergraduates at NYU Abu Dhabi, which will commence studies in the fall of 2010, is well under way.”

The university, which received $50-million from the government up front, in addition to payment for construction and operating expenses, opened the NYUAD Institute last fall, which offers conferences, lectures, and other cultural activities, as a precursor to the full campus.

In Qatar, a foundation controlled by the ruling al-Thani family has paid for six American institutions—Carnegie Mellon, Cornell, Georgetown, Northwestern, Texas A&M, and Virginia Commonwealth Universities—to open and operate campuses in a development called Education City.

“This is not about making money,” says Charles E. Thorpe, dean of Carnegie Mellon University in Qatar. “We collect tuition and turn it over to the Qatar Foundation. They pay our operating costs.”

Mr. Thorpe won’t disclose what the campus’s operating budget is, but the fact that it employs 47 faculty members for just 183 students suggests that operating costs significantly outpace tuition revenue. It would be cheaper, Mr. Thorpe notes, to pack all 183 students off to Carnegie Mellon’s campus in Pittsburgh.

“It’s incredibly costly to do undergraduate education this way—probably more expensive than anywhere in the world,” Mr. Guhr, the consultant, said. “But they’re trying, relentlessly, to drive things from the top.”

With Education City, he says, the Qatar Foundation isn’t just educating students. It is using Education City as a catalyst to transform the country’s economy, build a culture of research, and put the tiny emirate on the map.

And although the price of oil and gas has dropped, Mr. Thorpe points out that Qatar’s economy is still booming relative to the rest of the world’s. In 2009 the country’s GDP is expected to grow by some 11 percent, compared with 42.3 percent in 2008.

“There are no cutbacks here,” he says.

Still, he adds, even Qatar is taking a more deliberate approach to growth. In Carnegie Mellon’s annual budget negotiations with the foundation, the university decided to hold off on establishing a graduate program, perhaps in software engineering or information systems. “We’ve done a market survey, we think there will be strong demand,” Mr. Thorpe later wrote in an e-mail message. “But it doesn’t hurt to slow down for a year and do a little more detailed planning before we launch.”