The coronavirus pandemic has re-emphasized the need to develop innovative solutions to unprecedented problems in health, education, and other sectors. The learning crisis in education is reaching catastrophic levels, the consequences of which are disproportionately felt in populations that are already marginalized. Learning levels were already lagging prior to the pandemic. Then, beginning in March of 2020, the COVID-19 pandemic meant that schools closed for an average of 224 instruction days globally; with schools in low- and middle-income countries being closed for longer on average. An estimated 65 percent of governments in low- and middle-income countries cut funding for education during the pandemic. School closures, together with fiscal shortages, preexisting structural deficiencies, and lack of equitable access to alternative forms of learning have contributed to this dire situation, which is mirrored in indicators of learning levels. It is estimated that many of the gains in education outcomes made over the last 20 years have been lost. As we emerge from the uncertain times of the pandemic, the education community has a unique opportunity to explore innovative and alternative ways to avert the continuation of the global learning crisis, instead of conducting business as usual. Urgent action to streamline such efforts is critical to not only reversing the harm caused by the pandemic, but also emerging into a “better normal.”
Considering fiscal constraints and reduced funding for education, it is imperative to harness lessons from initiatives that work. A culture where the incentives and interests of each actor involved in the process are aligned is crucial to effectively using limited resources and maximizing the welfare of the targeted populations. Impact bonds, which are the focus of this report, present one such alternative. An impact bond is a form of results-based financing in which one or more investors, often impact investors, provide risk capital to deliver social services, and are paid their principal plus some return for actual outcomes achieved. In theory, this arrangement tackles the moral hazard problem common in development finance and ensures that everybody is working to achieve agreed-upon results. In a social impact bond (SIB), the repayment is made by a government which represents the target beneficiary group, while in a development impact bond (DIB), the repayment is made by a third party, such as a donor organization, multilateral or bilateral aid agency, or a philanthropic foundation.
Given the gaps in development outcomes and funding that exist in low- and middle-income countries, impact bonds have been considered a tool for using scarce resources more flexibly. More rigorous research is needed to establish the mechanism’s impact on social outcomes, but available evidence from the past does suggest a shift towards a results-oriented approach and increased collaborative efforts. There are 235 impact bonds globally as of October 1, 2022, with 23 of these in developing countries. While most of the 235 projects target social welfare and employment objectives, 37 focus on driving results in education.
In 2018, the largest impact bond in the education sector, the Quality Education India Development Impact Bond (QEI DIB), was launched. This impact bond was comprised of four education providers, each running their own interventions to improve the quality of learning outcomes. The program wrapped up in 2022, after four years of implementation in which the second half took place despite COVID-19 challenges. In this report, informed by a survey and interviews of the stakeholders in the DIB, we explore key lessons based on their experiences with the purpose of informing current and future stakeholders in outcomes-based financing.