Linking Finance to Impact: Models for Results-Based Financing in Education

• In Event: Highlighted Session: Innovative Financing for Education: Leveraging Private Capital

Proposal

In response to the chronic shortfall in funding for education, there is a growing interest in turning to innovative financing approaches for the sector. Recently, the Ministers of Education worldwide gathered at the Transforming Education Summit, pledging to mobilize political will for more, better, and innovative education finance (GPE, 2022). Innovative financing approaches are perceived to have the potential to increase the amount of funding from non-traditional sources for education and improve the efficiency and effectiveness of education financing.

More specifically, impact-linked financing is gaining attention in development finance with the potential to bring additional financing from non-traditional actors like private investors and venture philanthropies. Private investors interested in achieving social impact are attracted to investing in private education organisations given the estimations of the size of the industry: USD 16-18 billion in Africa alone (Caerus Capital, 2017) or amounting to USD 4.3 trillion globally (Robertson & Komljenovic, 2016).

There has been a demand for private or market-based education organisations to meet the needs of students, especially through technology-based solutions, which are often unavailable within public education systems. Market-based education organisations have the following attributes that make them attractive to investors – demand is usually greater than supply, prices grow faster than inflation, and they have long-term revenue visibility (Caerus Capital, 2017). However, there are many challenges that market-based education organisations face that do not allow them to access private capital easily – a complex value chain with no standard approach to achieving results, long periods between investment and returns, complex performance metrics, low levels of skills in both education delivery and business management and regulatory complexity and uncertainty.

Innovative financing mechanisms are being explored to facilitate access to private capital for these organisations, especially to support them in reaching marginalised populations where the potential size of financial return may not be attractive to private investors. Impact-Linked Financing Fund for Education (ILFF for Education) facilitates access to finance for high-impact market-based organisations that offer inclusive and equitable education for vulnerable children and youth in MENA and Sub-Saharan Africa. The fund is piloting three mechanisms: 1) Social Impact Incentives, 2) Impact Linked Payment, and 3) Impact Linked Loans. These financing mechanisms aim to increase the efficiency of development funding with a focus on outcomes and impacts rather than inputs and activities. This focus on outcomes is envisioned as a mechanism to improve the actual results of initiatives that attract investors interested in measurable social returns for their financial investments.

This presentation will provide the findings from interviews and document analysis on the theory of change that various stakeholders of the ILFF expect to occur when high-impact market-based organisations receive financing through one of the financial structures. It examines the logic of the expected business model of the organisation when they are incentivised to simultaneously focus on both financial and educational outcomes. The presentation will propose a framework to further analyse whether and how impact-linked financing would facilitate the achievement of education outcomes for vulnerable children.

Author

• Archana Mahesh Mehendale, Tata Institute of Social Sciences