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Series: Impact Bonds
Colourful handprints decorate a window of a childcare facility at the Patrick-Henry Village refugee center, a former U.S. military facility in Heidelberg, Germany September 29, 2015. Chancellor Angela Merkel's cabinet agreed a package of measures on Tuesday to help German towns cope with the influx of asylum seekers, as a poll showed her conservatives dipping to a one-year low on concerns about her handling of the crisis.  REUTERS/Ralph Orlowski  - RTS28TB
Report

Ensuring effective outcome-based financing in early childhood development

Recommendations to the International Commission on Financing Global Education Opportunity

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Summary of Recommendations

Financing Early Childhood Development (ECD) interventions should be a top priority for the International Commission on Financing Global Education Opportunity.

Authors

S

Sophie Gardiner

Former Research Analyst - Global Economy and Development, Brookings Institution

K

Katie Smith

Former Research Analyst - Global Economy and Development, Brookings Institution

  • The new Sustainable Development Goals (SDGs) demonstrate the global acknowledgement of the importance of a child’s development in the first five years of life to individuals themselves, societies, and economies.
  • ECD interventions have been shown to have statistically significant effects on years of school attained and student learning; however, effects are often heterogeneous.
  • Despite these heterogeneous effects, ECD interventions may be a relatively promising method to increase school outcomes in comparison with other types of interventions.
  • The information connecting ECD interventions with adult earnings indicates very high potential returns.
  • If quality can be ensured, the case for investing in ECD is strong. Ongoing performance management, outcome evaluation, service provider incentives and coordination across programs will be critical to ensuring all ECD interventions have maximum impacts on children’s development.
  • While domestic resources and international aid have grown significantly over the past decade, they will be insufficient to meet the estimated cost of achieving the SDGs.
  • Private and nontraditional finance for development has risen significantly, and there is increasing recognition of the associated investment opportunities for the private sector in support of the longer-term agenda of the SDGs.

Outcome-based financing mechanisms could benefit ECD interventions that require behavior change, such as breastfeeding, hygiene, and parent education.

  • Payment by Results mechanisms, where some portion of payment for social services is tied to service outputs or outcomes, have become increasingly popular in domestic financing and international development finance.
  • In impact bonds, a form of Payment by Results that often have a stronger focus on outcomes, non-state investors provide upfront capital to service providers and are repaid by an outcome funder contingent on achievement of results.
  • Services that would benefit from the incentives, adaptability, or added accountability may warrant the use of PbR mechanisms rather than input-based financing. In cases where upfront risk capital is needed, involvement of the private sector investor could add value or a particularly intensive concentration on outcomes is needed, then impact bonds may be the most appropriate mechanism.
  • In ECD, outcome-based financing may be best suited to interventions that require behavior change, such as breastfeeding, hygiene, and parent education. (Output-based financing may be best suited to antenatal care, immunizations, feeding and supplementation, and deworming.)
  • Outcome-based financing could help reduce the heterogeneity in efficacy of processdependent ECD interventions, which could lead to increased financing.
  • Outcome-based financing may be particularly well-suited to ECD because there is greater flexibility in provision and because governments are more risk-averse in funding ECD relative to primary and secondary education.
  • Despite its benefits, outcome-based financing is not without costs, so careful consideration should be taken to ensure that the benefits are worthwhile.

Five factors are critical for the feasibility of outcome-based financing for ECD: legal feasibility, political feasibility, outcome funder administrative capacity, service provider capacity, and the existence of committed champions

  • It is important to note that in identifying promising contexts, it is not necessary to consider entire countries; in fact, the chances of success are likely to be improved when working with state or local government.
  • Determining legal feasibility of paying for results is an essential preliminary step in establishing outcome-based financing schemes.
  • The outcome funder’s administrative capacity to design contracts, procure providers, regulate implementation, and disburse outcome funding are critical to the viability of the program.
  • Adequate service providers with sufficient capacity to deliver high-quality services must exist for the program to be feasible. Outcome funders may look to non-state providers to reach the most marginalized, where government capacity is often insufficient.
  • Finding a champion to shepherd the effort in any context is highly important to the successful initiation and implementation of any payment by results financing mechanism and perhaps even more for social impact bond transactions.

Five components will be essential to carry out effective outcome-based financing: comprehensive outcome measurement, outcome benefit and cost data, effective contract management, real-time performance management, and rigorous evaluation

  • Outcomes metrics must be measurable, meaningful, and malleable. Without involvement of ECD experts in outcome metric design, metrics could be too narrow and not cover the full spectrum of child development.
  • Setting the appropriate price for a given outcome is a critical design point in an outcomes-based financing contract and is a combination of the value of the outcome to the individual, society, economy, and government and the price to deliver services to the target population.
  • There is a critical need for more consistent cost data to both budget ECD programs and to ensure that outcome prices in outcome-based financing arrangements cover the cost of service provision.
  • A new ECD costing template developed jointly by the Center for Universal Education and the World Bank’s Strategic Impact Evaluation Fund could be disseminated and used globally across program implementers, public administrators, and program evaluators to create consistent data on ECD costs.
  • Providers must be procured through a competitive, transparent, and accessible process that includes clearly defined, realistic, and objective selection criteria.
  • In determining how much of payment should be tied to outcomes, contract designers should equally account for independence and accountability.
  • Government must have sufficient capacity to effectively implement, manage, regulate, and monitor outcome-based contracts.
  • Live performance management is critical to the success of an outcome-based contract, and of all quality ECD programs more broadly.
  • Experimental or quasi-experimental evaluations should be used where there is a lack of evidence of intervention efficacy.

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