Recently, as part of the Center for Universal Education’s annual symposium, we brought together individuals from around the world for a workshop to discuss the use of innovative finance to achieve systems change, with the end goal of improving learning outcomes in line with Sustainable Development Goal 4. This post highlights insights discussed at the workshop.
Utilizing outcome-based schemes for education has the potential to encourage spending on what is important, as well as improve execution in delivery. Social and development impact bonds are a form of outcome-based financing which harnesses private capital to leverage donor or public funding to spend on interventions that work. A related and relatively new phenomenon, Outcome Funds for Education, may further help address issues of fragmentation and inequities in funding. Given the nascence of these tools, there is much to be learned and there are some tough challenges to be reckoned with.
According to the Education Commission, at current trends, more than 1.5 billion adults—comparable to nearly the entire population of China—will have no more than primary education by 2030. Compounding the problem, half of the world’s jobs—around 2 billion—are expected to disappear due to automation by 2030. This is a veritable crisis, which will require more funding as well as more effective and more efficient spending.
In recent years, use of Payment by Results (PbR) financing mechanisms has been increasing in the education sector in developing countries to address both effectiveness and efficiency. These have used contingent payments for either service providers or domestic governments, with the aim of raising transparency and achieving results. Impact bonds, now being used in seven initiatives (across multiple sectors) in low- and middle-income countries, utilize this same mechanism but shift the financial risk from service providers and governments to investors seeking a financial and a social return. Donors and governments, or so-called ‘outcome funders’ in this mechanism, only pay for the successful achievement of outcomes.
Our workshop brought together four impact bond initiatives focusing on education in developing countries. While globally there are 8 impact bonds for education (plus 11 for ECD other than education), the only contracted impact bond in the developing world for education, is one focusing on enrollment and achievement for girls in the state of Rajasthan, India. UBS Optimus Foundation CEO, Phyllis Costanza explained how the foundation, as an investor in this program, is able to support Educate Girls, an NGO, not only in the achievement of outcomes but also to build up the capacity of this organization to better track successes and learn from failures. Lily Han, Senior Investment Principal at D. Capital Partners, shared the experience of an impact bond in design for early childhood development outcomes in the Western Cape of South Africa. This impact bond, when contracted, will bring domestic government outcome funders to the table as well as domestic impact investors. A lengthy design process for this impact bond has brought important lessons to the field—understanding of the tool, sustained champions in government, and sufficient capacity of service providers are all crucial to their timely implementation and success.
Two new initiatives seek to raise $1 billion each for the achievement of education outcomes using the impact bond mechanism. Amel Karboul, CEO of the Education Outcomes Fund for Africa and the Middle East, explained that the goal of the Outcomes Fund is to scale the potential of impact bonds. To date, the majority of impact bonds have been small, bespoke deals reaching no more than 600 individuals. Outcome funds originated in the U.K. where a total of seven such funds for employment and welfare outcomes have been implemented. The Education Commission and the Global Steering Group for Impact Investing (GSG), which back this initiative, see this as one prong among several in the education financing landscape. The Outcomes Fund will work with governments in identifying their top education priorities, tap into the potential of non-state providers, and seek to build their capacity. The India Education Outcomes Fund, also backed by the GSG and to be launched this year, will focus on improving the quality of education, particularly for poor and low-income students.
As interest increases in outcome-based financing mechanisms, it will be paramount that partners looking to engage ask some key questions before embarking upon this journey. A sound understanding of the problem that needs to be solved and a theory of change around how outcome-based financing might address the problem should be at the fore.
Decisionmakers in this space need to ask several key questions before engaging in an impact bond. First, do we need to pay for outcomes? Paying for outcomes only makes sense if paying for inputs doesn’t achieve those outcomes. Focusing attention on outcomes in the delivery of a parenting program which is highly human behavior dependent (both on the service provider side and the beneficiary side) likely makes more sense than in an immunization program, where you know that a child is immunized once the vaccine has been administered. Second, what might be the value-add of upfront risk capital? Impact bonds (beyond traditional PbR) may make sense if service providers need upfront risk capital and/or they need assistance in building performance management capacity. Finally, a series of context-specific questions must be asked related to legal and political feasibility, the capacity of the service providers and the outcome funders, the availability of data, investor appetite, and the presence of committed champions.
We do see great potential to improve the effectiveness of spending using these new financing tools. We also see the possibility of broad ecosystem benefits such as improved collaboration and enhanced performance management capacity of service providers. Nevertheless, there are a great deal of unanswered questions in this nascent field, and our recommendation to potential partners is to consider all the available options before diving into an impact bond—they are just one potential solution among many!