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Highlighted Session: Impact Bonds for Education: Does innovation in financing address equity and quality challenges?

Sun, February 19, 2:45 to 4:15pm EST (2:45 to 4:15pm EST), Grand Hyatt Washington, Floor: Declaration Level (1B), Declaration A

Group Submission Type: Highlighted Paper Session

Proposal

Financing for education is a critical lever for achieving the SDG 4 goals. Recent estimates show that the funding gap to reach SDG 4 in poorer countries has increased to USD 200 billion per year. Over the last decade, several proposals have been discussed using innovative financing instruments and arrangements in education. Still, it is only recently that we are witnessing widespread experimentation on the ground. The new and innovative financing modalities, which often explore avenues to raise financing from private sources or use market-based approaches, have the potential to become a significant source of financing for development.

Within this context, impact bonds (including Social Impact Bonds and Development Impact Bonds) have emerged as an innovative financing instrument that brings private investment to support social development. With the initial experimentation in 2013 in the United States with Utah High-Quality Preschool Program, by 2022, over 30 education impact bonds had either been launched or were under development across the globe. Impact bonds are pay-for-performance agreements where a private investor (who seeks a financial and social return) provides up-front finance to a service provider towards the delivery of a social program, and an outcome payer (government, development agency or philanthropy) subsequently pays the investor a results-based rate of return on this investment. The innovation in financing social development initiatives promises social and financing benefits of impact bonds. The financial instrument is structured to address the efficiency and effectiveness of social programs like education interventions by introducing results-based financing arrangements. The service provider is meant to have more autonomy over service delivery. Service provider autonomy potentially also facilitates innovations in service delivery. The focus on results is meant to encourage the use of data and measurements to assess impact. Provision of upfront operational capital by private investors holds the promise of saving public money by shifting the financial risk of program failure from the public sector to private investors. For the private investors, the financial product would help diversify their portfolio within potential higher than market returns and general reputational benefits in supporting SDGs.

While the promises of impact bonds, especially in education, are still being researched, scholars have identified several challenges with designing and implementing impact bonds. Evaluations of many impact bonds have critiqued the initiatives for very high transaction costs with complicated contracts when the results-based nature of the financial arrangement is meant to enhance efficiency in spending. Private investors seek interventions and service providers with a proven track record to lower the risk of failure, which does not reflect the promise of innovation in impact bonds. Critics have also pointed out that investors and service providers negotiate easy-to-reach output and outcome targets to significantly lower the risk of intervention failure and increase the probability of recouping the financial investment. As a result, the most disadvantaged and marginalised populations may be left behind using impact bonds.

Moreover, many impact bonds have required additional financial incentives or guarantees from philanthropic or government institutions to attract private investors. In general, most impact bonds have yielded positive outcomes and have therefore been successful in achieving the contractual results. However, research is still lacking in understanding whether the achievement of results can be attributed to the financial arrangement or if they would have occurred under any other traditional financing arrangement like grant-funded projects.

Research presented in this panel examines education impact bonds more closely by 1) framing the research agenda to investigate the implementation of impact bonds against its theory of change, 2) providing a literature review of education impact bonds, 3) case studies on Impact Bond Innovation Fund (South Africa) and Quality Education Development Impact Bond (India), examining how the financial structure has facilitated certain service delivery management practices for more and better financing for education to reach the most disadvantaged and marginalised groups.

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