There is an estimated annual financing gap of US$39 billion between current spending and what will be needed to reach quality universal education goals by 2030. An array of new funding mechanisms are striving to bridge this gap, and now more organizations are asking: Can social impact bonds help us scale effectively?
Global experts, like Sir Ronald Cohen and Emily Gustafsson-Wright and others at a recent Brookings hosted event, increasingly view social impact bonds as a promising new funding model, particularly for interventions targeting each childhood development (ECD).
What are Social Impact Bonds?
Impact bonds are a form of results-based financing for socially beneficial programs. Although there are many variations, impact bond contracts generally follow a basic structure. Investors provide upfront capital to a service provider who operates the program. The intervention’s success is evaluated periodically and if agreed-upon metrics are met, then third party funders repay the investor’s principle plus interest. Social impact bonds (SIB) are funded by government entities whereas development impact bonds (DIB) are funded either partially or fully by non-governmental entities, such as private donors or non-governmental organizations.
ECD program financing may be especially well-suited to impact bonds. Existing service providers are often better positioned to administer ECD programs than governmental entities, and SIBs allow governments to support ECD services without becoming directly involved in service provision. Successful ECD programs lead to future cost-avoidance and governments are only liable for repayment if the programs produce results. Thus SIBs descrease the risk of investing in early childhood for governments. At present, ECD services in low and middle income countries are funded by a mix of public and private entities. The multitude of funding sources create unique opportunities for collaboration and innovation in the structuring of impact bond contracts for the ECD sector.
As Dr. Gustafsson-Wright acknowledged in her recent remarks at Brookings, the design of impact bonds for the ECD sector is not without challenges. SIBs are not viable in highly unstable contexts. Investors will require high interest payments to compensate for the added risk of the government potentially being unable to repay the bond. ECD programs can lead to cost-savings for governments, but these savings may benefit a government agency that is unrelated to the agency responsible for bond repayment. This misalignment of incentives can cause disinterest in impact bond financing. ECD programs which are often multi-sectoral and designed to increase life-long success, are not always easily evaluated. A metric must be identified that is measurable within a reasonable timeframe, inexpensive to track, resistant to statistical manipulation, and representative of program success.
Despite this challenges, the promise is there. Impact bonds offer a unique solution to some of the challenges faced in bridging the funding gap in ECD. As more organizations turn to this financing method to meet their needs, it seems likely that Impact Bonds will join the growing list of creative funding models to which innovators in education are increasingly turning.
Additional financing strategies in the education innovation landscape
Some ECD program operators, like the Baalabalaga School, have turned to cross-subsidization to expand their impact. These programs align tuition fees with family income. Tuition payments of wealthier families subsidize payments from families who are otherwise unable to afford tuition. Fees may vary within a single school or a network of schools may charge higher rates at centers in high-income settings, which subsidize the tuition payments of centers in low-income locations. Impact bonds primarily obtain funds from government entities, organizations or major private donors, whereas cross-subsidization funds education for the poorest students through small increases in tuition fees for wealthier parents.
Microloans are typically less than a few hundred dollars and funded by many lenders through small contributions. This is in contrast to impact bonds’ larger scale approach, usually by a single entity. Microloans provide upfront capital to entrepreneurs who typically do not have access to or would not qualify for traditional loans. Projects like Sustainable Investments in Students, Parents and Educational Institutions in Rwanda, facilitate microloans by connecting smalltime lenders with entrepreneurs in need of capital.
Raising Awareness of Voucher Programs
Tuition vouchers are a payment form that may be spent at a school of the family’s choice. Some governments provide vouchers to low income families to increase access to quality programs. Eligible families are often unaware of the voucher program. ARK Education Voucher Program and other organizations are dedicated to informing parents about vouchers available to their children and aiding families in the voucher application process.
A diverse toolkit is needed for the challenges ahead
Programs that assist families in obtaining tuition vouchers are providing invaluable opportunities for the students they serve. Yet such voucher programs, microloans, and cross-subsidization methods are often small in scale.
Increasing the quality and availability of ECD services system-wide requires financing mechanisms with the potential to fund early childhood services on a larger scale. While the use of impact bonds to fund ECD programs will face many challenges, the potential of these new funding relationships is too promising to ignore.
To learn more about Innovative Financing for Education, click here.
To view a recent presentation by Nicholas Burnett on Innovative Financing strategies used to reach Out-Of-School Children, click here.