Innovative Finance for Education

1818 Society Education GroupWashington, DC

November 7, 2011

Nicholas Burnett

What are We Talking About?

The Leading Group (www.leadinggroup.org) identifies three key features of innovative financing for development:

1. Linked to global public goods.2. Complementary and additional to traditional ODA3. More stable and predictable.

• Reflects view that ODA from traditional sources will not be sufficient to meet concessional finance needs of low income countries.

• We follow this but go further to include:• domestic finance, complementary to public spending• idea that the way the finance is both raised and spent is

important.

Outline

•Why the need?• Lessons from other sectors•Possibilities in education• Education Venture Fund

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Why the need?

1. Meet financing gaps – resource mobilization2. Raise profile and visibility of education3. Spend more effectively, efficiently and equitably4. Needs of conflict-affected countries5. Promote innovation in education

Note: We are talking both about:• innovative financing which can be used for any purpose in

education; and• Promoting innovation in education through the use of

innovative financing.Important to keep these two distinct.

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The Need: The EFA financing gap (GMR 2010)

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Additional aid tobasic educationif Gleneaglescommitments are metIn 2010

Current aid to basiceducation

Aidshortfall

$ 11 billion

Estimated current resources$ 12 billion

Additionalresources fromprioritization

EFAfinancing

gap

$ 16 billion

0

5

10

15

20

25

30

35

40

$ 3 billion

$ 4 billion

Average annual resources needed to finance EFA (2009-2015)

US$ 36 billion

Additionalresources fromgrowth

$ 3 billion

$ 2 billion

The Aid Story (GMR Nov 2011)

Possible new sources

• ODA $120 bn; Remittances $300 bn; FDI $800 bn• Most donors cutting aid to education – exceptions

are Australia and DFID• Private flows on the increase – US corporate $0.5 bn,

private foundations $0.5 bn.• New donors potential: BRICS, Sovereign Wealth

Funds (Norway, Gulf)• Impact investing interest: Acumen, Gray Ghost,

others

Lack of Impact Investment Funds Dedicated to Education

8

Source: Dalberg

Increase salience and visibility of education

• Education too low on global agenda (compare security, climate change, public health, etc)

• Education sector has not done a good job of marketing:– Education MDGs most advanced, hence not perceived as of same importance as

maternal mortality, for example.– Lack of a common language and an empirical base for making the case (need a centre for

macroeconomics and education akin to that for health?)– Failure to address head-on the fact that education is both a public and private good

(sterile debates)– Failure to address issue of national sovereignty and sensitivity about education (much

more marked than for health)– Perceived by potential funders (especially foundations) as a conservative sector, lacking a

culture of innovation and risk-taking (ODI paper)– Signs of donor fatigue and endless unproductive wrangling over FTI, possible global fund

etc. does not increase confidence outside the sector

• Innovative finance could serve to improve the profile of education

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Spend more effectively, efficiently and equitably

• EXTERNAL INEFFICIENCY IN ALLOCATIONS– Public spending (including ODA) on higher education– Missing: Spending for youth and adult literacy– Just beginning: Spending for Early Childhood Development

• INTERNAL INEFFICIENCY IN SPENDING– Lack of Learning– Repetition and Dropout– Absenteeism– Leakages and other evidence from expenditure tracking– Transaction costs and other wastage in aid allocations

• INEQUITY IN SPENDING– Primary education spending usually reasonably progressive (Gini curves) but this is not so for secondary and especially higher

education– Lack of spending on key promoters of equity such as literacy and ECD (see above)

• PRIVATE SPENDING– Fees etc.– Tutoring– Tends to be more concentrated on basic education yet should be for higher levels of education?

• NEED FOR PREDICTABILITY AS EDUCATION TAKES A LONG TIME

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Meet the Needs of Conflict-Affected Countries

• About half of out-of-school children are in conflict-affected countries.

• Particular difficulties in these countries to increase or indeed maintain government spending.

• Refugee children pose a special issue with host countries often being reluctant to bear the cost of their education

• All points towards a need for international financing• For several years, INEE has been calling for this

(and specifically for innovative financing) but nothing has happened.

• Not as easy as providing food or health as education is a key element of national identity and warring parties interested in controlling it.

• An urgent need.

Promote innovation in education

• “Not business as usual”• Extremely conservative sector

– Education usually a tool to transmit traditional values?– Who becomes a teacher?– Most senior administrators were teachers– Teachers usually teach the way they were taught

• Very little innovation– Some, of course, e.g. mega-schools

• Little rigorous research and even less policy-relevant research– Contrast health and climate changes where there is a strong

underlying scientific paradigm of research and experimentation• Opportunity in current crisis?

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Outline

•Why the need?• Lessons from other sectors•Possibilities in education• Education Venture Fund

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Lessons from other Sectors

• Leading Group on Innovative Finance for development• Overall resource mobilization for development• Health• [Carbon and Climate Change]• [Agriculture]• [Microfinance]• [Other?]

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The Leading Group on Innovative Finance for Development

• Aimed at promoting discussions and actions about setting up innovative development financing mechanisms.

• Since 2006, brings together 55 countries, 4 observer countries, 15 international organizations and >20 NGOs, including Gates Foundation.

• Major initiatives so far: UNITAID, IFFIm, AMC (all health)• Major current discussions: Tax on financial transactions, voluntary

solidarity contributions, remittances, climate change, education• 2010 decision to launch a new task force on Education with support from

Queen Rania of Jordan (interested parties so far include Brazil, Chile, France, Germany, Jordan, Spain, EC, UNESCO, UNICEF) – R4D has provided technical secretariat function and written its reports

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A Tobin taxon Financial Transactions

• Tax on financial transactions (international, or all)• History: 1972 after major financial crisis, revived again after 1990s crises, again

now – somehow the theory is that those who cause problems should pay for solutions for developing countries?

• French version: small levy on $, £, €, Yen: $33 billion (Total ODA around $120 bn)• Supported by some major countries: African Union, Argentina, Brazil, Cameroon,

European Commission, Ethiopia, France, Germany, Morocco, Mozambique, South Africa, South Korea, Spain, and UN Secretary general.

• G-20 Cannes communique: “We discussed a set of options for innovative financing highlighted by Mr Bill Gates. Some of us have implemented or are prepared to explore some of these options. We acknowledge the initiatives in some of our countries to tax the financial sector for various purposes, including a financial transaction tax, inter alia to support development.”

• But significant opposition likely from US, UK, etc.• HOW TO ENSURE EDUCATION’S SHARE?

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Health Experience and Ideas(most advanced sector)

Under ImplementationResource Mobilization IFFIm AMC UNITAID Debt swaps Voluntary Consumer

Contributions Product RED Massive Good

Expenditure Mechanisms Results-based financing

(RBF)

Future PossibilitiesResource Mobilization Second IFF Second AMC PDPFF

Outline

•Why the need?• Lessons from other sectors•Possibilities in education• Education Venture Fund

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Typology of ideas

Purpose Domestic International

Resource mobilization – public

Many Many

Resource mobilization – private

Many Some

Raise salience of education Very few Few

Improve effectiveness/efficiency

Many Some

Improve equity Few Very few

Support conflict-affected countries

None None

Stimulate innovation in education

None One

Most promising ideas

Major Resource Mobilization

Bonds:1. Global Education e.g. for

GPE/FTI2. Diaspora bonds3. Local currency

development

Debt Swaps4. Some success for MICs5. Not enough debt in LDCs

Modest Resource Mobilization with Other Objectives

Salience:1. Product Red or Similar2. Credit card/internet

purchases3. Sports levies4. Lottery taxes

Innovation:5. Education Venture Fund

Outline

•Why the need?• Lessons from other sectors•Possibilities in education• Education Venture Fund

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The Ed Venture Fund Overview

• What is it? The EdVF is social venture fund to promote innovation by investing in social entrepreneurs and innovators with ground breaking ideas to provide high quality education to children and youth in developing countries

• Why do we need it? Education in developing countries is still largely delivered using traditional teacher led pedagogies in face to face classrooms. This is expensive – inefficient – and will not deliver the quality of education we need

• Traditional aid from bilateral and multilateral agencies is not (generally) well suited to promote innovation: slow moving, input oriented and risk averse

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Objectives

The Ed Venture Fund has three key objectives:

1. To provide access to capital to innovative proposals that have the potential to generate real revenue streams while delivering a high social impact in the education sector

2. To mobilize finance and promote innovation in the education sector

3. To develop standards and models for the industry

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finance mobilizat

ion

Promotes innovation in the education

sector

Leads to improved education

results

Strengthens overall impact of

education investment

(national and international)

Leads to increased support

for education (national and international)

Investment Model

The Ed Venture Fund will have two investment windows totalling $55.0 M

GRANT WINDOW - $20.0 M• The grant window will be used to invest in start ups and promising innovations that have the potential to deliver

high impact as well as generating positive returns for investors over the medium to long term. • The Fund will provide initial grant financing and intensive management support to start up or early stage initiatives.

Once they are able to generate stable revenue and achieve break-even these projects will be transited to the investment window of the Fund, which will provide further financing.

• The grant amount will be relatively small $100,000 - $500,000 and it will allow the entrepreneurs to test the concept. .

FINANCING WINDOW - $35.0 M• Top performing businesses as measured by financial performance at the end of the grant window period will be

provided with financing in the range of $1.0 - $5.0 million, through both equity investments and loans. • On average about 25% of grantees will be provided with follow-on financing. • The criteria for follow-on financing will be established before any grant is disbursed

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Selection Criteria

• The Ed Venture Fund will use the following defined criteria to assess the innovation potential and financial viability of potential investment projects:

– Innovation factor – what potential does the project have for introducing a successful innovation into the education sector?

– Strength of management team – does the team have a track record of success in other projects or sectors?

– Financial viability – does the project have the potential to generate revenue in 2 -3 years and provide a return to investors within 5 - 7 years?

– Potential replicability – if successful, is it likely that the innovation might be replicated elsewhere?

– Social impact – what potential does the project have for delivering a high social impact?

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Charles Leadbetter’ Model

• The Fund will be guided by the model developed by Charles Leadbetter – a leading specialist in the field of social entrepreneurship. The Model - Education Innovation Grid to assess programs working within and outside the formal education sector. The Fund will use this model to provide a framework for defining and assessing the potential impact of each innovation.

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‘Sustaining innovation’In broad terms ‘sustaining innovation’ helps to improve existing approaches to education and makes them more effective.

‘Disruptive innovation’“Disruptive innovation’ refers to interventions that seek to transform the education system by creating learning opportunities that do not necessarily require traditional schools or teachers.

Funds Allocations

• The fund will invest in under-served sectors in education, which will include:– Pre-primary and early childhood education– Innovations in mainstream education– Technical and vocational training– Other projects

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EdVF Current Pipeline / Case Studies

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No.

Description Innovation Factor

Management Strength

Replicability

Social Impact

Financial

Viability

1 This service allows teachers to conveniently teach with customizable lesson plans with rich web resources and students to access a social learning experience with personalized digital textbooks.

Very High Very High Very High Very High High

2 An online, virtual science laboratory for conducting live, interactive, customizable biology, physics, and chemistry experiments with ease, interest and fun for students.

Very High Unknown Very High Very High Moderate

3 This service provides the easiest, most user‐friendly, cheapest option for using mobile phones for data collection and analysis.

Very High High Very High Very High Moderate

4 Service encouraging the use of mobile phones to improve and increase English skills High Unknown Very High High Low5 This service provides a platform for to allow for collaboration between players in

innovation in education in East Africa including Ashoka Fellows, Changemakers grantees, Safaricom, TED talks, Plus! Talks,KEPSHA, HP, and other leading agencies.

Very High High Moderate High Low

6 A non‐profit that gives dignified, digital work to marginalized people around the world. It creates a win‐win situation: women, youth,and refugees benefit from a chance to use their skills and earn life‐changing income, and our customers benefit from a qualified, motivated workforce.

High High Very High Very High Moderate

7 A self sufficient school creates enough income to cover its costs of delivering a high quality education. Schools that provide vocational skills open up opportunities for graduates to earn a living and hold marketable skills for future employment opportunities.

Very High High High Very High High

8 Provides customizable, standards based digital textbooks that can be created by teachers and students by individual subject.

Moderate Unknown Very High Very High Moderate

9 Over 60 million lessons delivered as part of a video‐based, online access to a world education free for anyone, anywhere. Utilizes an extensive school video library, practice exercises, and assessment from any computer with access to the web

Very High Very High Very High Very High Low

10 This project’s vision is to transform disadvantaged communities in South Africa through mathematics and science focused education initiatives. The Company partners with specific communities and provides children from these communities with the opportunity to gain access to tertiary study opportunities, be successful in their chosen career path and develop as socially responsible citizens.

High High Low Very High Low

11 Managers of the project take the school as the basic unit of change to improve coverage, quality and equity in low income schools. They shifted the conventional teaching approach, teacher‐centered, to a participatory and cooperative, child‐centered approach.

Moderate Very High Moderate Very High Low

Ed Venture Fund Fills the Gap in Impacts Investment Space

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Source: Dalberg