Keynote 3: Innovative Finance in Education

1. Keynote 3: Innovative Finance in Education CABRI Education Dialogue Serena Guarnaschelli, Dalberg Global Development Advisors 26 February 2013

2. Objectives • Share knowledge about current practices in innovative finance • Align financing mechanisms with current challenges for education • Provide recommendations for next steps

3. Overview of Innovative Finance Overview of Current Financing Models for Education in Africa Analysis of Innovative Finance Models for Education in Africa

4. PRELIMINARY Innovative Finance encompasses a wide range of initiatives, such as global taxes, social bonds and blended funds Description Examples Type Mobilize extra funding either through mandatory (tax) or voluntary (philanthropic) contributions • Taxes and levies • Voluntary contributions and donations • Debt swaps • Lotteries Airline Solidarity Contribution/Tax applied when passengers purchase tickets Channels Connect financial markets with the benefits of development and structures and institutions that correct informational asymmetries and capture efficiencies • Bonds • Equity funds • Guarantees • Insurance • Private-Private and Public-Private Partnerships • Blended investments vehicles Offers the opportunity to invest in “green” projects that help mitigate climate change Instruments and Vehicles Aims to develop investable infrastructure projects that improve Brazilian development

5. PRELIMINARY Over the past ten years innovative fundraising mechanisms raised US$ 60 bn with a focus on environment, health and infrastructure… Observed activity Sample mechanisms Sample initiatives • Investment funds • Guarantee funds • Partnerships (Information and policy) • The African Enterprise Challenge Fund • AGRA/Standard Bank • Transfarm Africa Agriculture Medium • Global Partnership for Education • 1Goal Campaign • Affordable Learning Fund • Partnerships (Information and coordination) • Investment funds Low Education Energy and environment • Bonds • Investment funds • Green Bonds • Adaptation Fund High • Airline Solidarity Tax • IFFIm • Global Fund • GAVI Alliance • Levies • Bonds • Performance based funds Health High • Asian Infrastructure Fund • Infrastructure Bonds • EBP • Investment funds • Bonds • PPPs High Infrastructure Note: The estimation of market sizes, by sector, is complicated by a lack of common definitions and methodologies, and by the highly diverse nature of initiatives across sectors. The World Bank estimates that innovative fundraising generated US$ 57.1 billion in official flows between 2000 and 2008

6. PRELIMINARY … and generated valuable lessons for the design and implementation of new mechanisms Mechanism Initiative Explanation Bonds to frontload future ODA commitments International coordination, strong execution, scale IFFIm (US$ 3.6 bn) Highly rated fixed-income products that support sustainable development Use of standard risk/return profiles from existing issuance programmes, high transparency Green Bonds (US$ 3 bn) Grants and interest-free loans awarded to the private sector through competitive rounds Strong and sustained business engagement based on private-sector principles The African Enterprise Challenge Fund (US$ 150m) Lack of political commitment, unclear impact on economic activity Tax on foreign exchange transactions Tobin tax Branding, communication and operational problems Micro-fundraising scheme MassiveGood

7. Overview of Innovative Finance Overview of Current Financing Models for Education in Africa Analysis of Innovative Finance Models for Education in Africa

8. Public funding and public use of funds are the dominant paradigm for educating children both in developed and in developing countries Spending on Education in Africa Source: UNESCO %, by education level 100 100 100 100 100% 51% 56% Public and other private expenditures 70% 78% 49% 44% Household Contributions 30% 22% Primary Education Lower Secondary Education Upper Secondary Education Tertiary Education

9. Within categories of spending, the vast majority of public spending is on teacher salaries Salaries Costs Source: UNESCO %,of current expenditure , by education level (2008 or more recent year) Lower Secondary Education Upper Secondary Education Technical and Vocational Education Primary Education Tertiary Education

10. Private sector funding for education in Africa is dominated by household expenditures on education Sources of Education Financing for Madagascar and Benin Source: UNESCO-IEP % 0% 100% 3% 7% Income generated by schools 5% 1% 4% External subsidies 0% External loans NGOs and private organizations Households 10% 1% Local administrations 56% Government 52% Madagascar, 1993 Benin, 1998

11. Private equity funds are emerging to capitalize on this spending and in anticipation of increased enrolment in the future. Bubble size = ~$400M fund size Education-dedicated Portfolios • Private donors and investors in education Multi-sector Portfolios Upper-middle income Africinvest First Education Holding Fanisi Venture Capital Fund Kaizen PE Richard Chandler Corporation Middle income Sequoia Capital SONG Investment Management Company International Finance Corporation (IFC) Edu. Portfolio TARGETED BENEFICIARIES Open Society Foundations GroFin Africa Fund Partnership for Higher Edu. in Africa Low income Echoing Green Omidyar Network Fund  Dell Foundation Deutsche Bank Foundations Gray Ghost Ventures Acumen Fund MacArthur Foundation Most vulnerable Ford Foundation  Hewlett Foundation Carnegie Corporation Grant-making investors Impact-first investors Financial-first investors Note: Only funds disbursed to non-government actors in developing countries are included in this analysis. Analysis presented is meant to offer representative sample of grantors and impact investors, not to present a comprehensive view of all education impact investment activity. Many multi-sector portfolios include only 1 or 2 education deals. Foundation education portfolios for 2009 inclusive of both US and international grants. Source: Foundation Center - Top Education Grants 2009; Fund / investor websites, investor interviews; Dalberg analysis.

12. Overview of Innovative Finance Overview of Current Financing Models for Education in Africa Analysis of Innovative Finance Models for Education in Africa

13. Within education, innovative financing mechanisms are being used to mobilize additional resources and improve the use of existing resources Items in bold will be discussed in the following sides Example Mechanisms Cash on Delivery (COD) The Education Venture Fund (EdVF) Indian School Finance Company (ISFC) The 2010 FIFA World Cup Legacy Trust Diaspora Bonds Stakeholders International donors Impact Investors (including both equity and debt based approaches) Philanthropic organizations Diaspora community Innovative Finance to Mobilize Resources Bridge Academies (Low-cost private education) Vouchers programs Pay-for-performance Schools Families and students Teachers Innovative Finance to Use Resources More Efficiently

14. Mobilize Resources: The Education Venture Fund (EdVF) Objectives • To provide access to capital for innovative “dual-purpose” projects • To mobilize finance and promote innovation in the education sector • To develop standards and models for the industry Funding Source Impact investing and philanthropic capital Status Currently fundraising Size and Scale $55 million fund ($20 million grants and $35 million investments) Feasibility The management is currently fundraising for the project. As the fund has not invested in projects yet, the impact cannot be evaluated to date. Relevance and Acceptance The Fund’s focus areas are South Africa, Tanzania, Uganda, Rwanda and Ethiopia. Source: Results for Development; Dalberg analysis.

15. Use Resources More Effectively: Bridge Academies Objectives • To launch a large-scale network of high-quality, ultra low-cost, for-profit primary schools • To give every child access to high quality education Funding Source • Private equity funds and venture capitalists • High impact philanthropy • School tuition Status Launched in 2009 Size and Scale • 83 schools across Kenya catering for 26,000 pupils. • $4 per child per month Feasibility • Franchise-like model with standard curriculum, materials, training programs, technology, etc. • BIA recruits school managers and teachers from the communities it serves. Relevance and Acceptance Will vary depending on attitudes toward public education Source: Bridge Academies; Dalberg analysis.

16. Use Resources More Effectively: Education Vouchers in Colombia Objectives • To expand private provision of public services • To increase secondary school enrolment rates Funding Source • Government Status Implemented in 1991 Size and Scale • More than 125,000 pupils • Vouchers cover more than half the average cost of private secondary school. Feasibility • Operated in all large cities in the country • Targeted low-income neighbourhoods • Targeted students who attended public primary schools • Requires a private school infrastructure Relevance and Acceptance Voucher holders had substantially higher high school graduation rates and test scores Source: World Bank. "Innovative Finance for Development Solutions.“;Dalberg analysis.

17. Key findings from review of case studies • Successful innovative finance mechanisms must be closely aligned with the challenges of the country in which they operate. • Three potential ways for governments to mobilize funds: • A philanthropic program (FIFA 2010 Trust Fund) • A bond or results based pay mechanism (Diaspora Bonds or Cash on Delivery) • Impact investment (The Education Venture Fund (EdVF) and the Indian School Finance Company (ISFC)) • Results-based-aid mechanisms and impact investing hold the most promise • Very few proven innovative finance models for education in Africa • Implementing new innovative finance models will require political coordination and support

18. Recommendations How can policymakers support innovative finance? • Align mechanisms with country specific challenges • Assess political will to make changes • Ensure appropriate regulatory environment • Develop and promote public private partnerships How can civil society support innovative finance? • Experiment with new approaches • Provide feedback to policy makers • Partner with the private sector How can the private sector support innovative finance? • Demonstrate that low-cost private education is higher quality • Develop and promote public private partnerships to scale solutions

19. Questions and Discussion ?

20. Additional Cases

21. Mobilize Resources: Cash on Delivery (COD) Objectives • To provide additional funding to developing countries in return for achieving progress against pre-agreed targets Funding Source • Official and private donors Status In pilot stage Size and Scale • COD Aid needs to be additional and complementary to existing aid flows Feasibility • DFID is currently piloting a Result Based Aid Project in the education sector in Ethiopia, which shares many features with the COD model. • Concerns that COD could create incentives for fraud Relevance and Acceptance A focus on outcomes and a hands off approach Source: Center for Global Development;Dalberg analysis.

22. Mobilize Resources: Indian School Finance Company (ISFC) Objectives • To provide loans to affordable private schools • To build a network of affordable education solution providers Funding Source • Impact investors and capital markets Status Founded in 2008 and currently operates in seven Indian cities Size and Scale • 240 loans totaling $4.2 million by the end of 2010 • 33,000 additional students attending private schools • 950 new school jobs. Feasibility • ISFC estimates that approximately 45,000 private schools for the low-income segment exist in India • Loans are typically used for infrastructure investments (such as new classrooms, computer labs, and furniture), which allow an increase in enrolment and revenue Relevance and Acceptance A focus on outcomes and a hands off approach Source: ISFC;Dalberg analysis.

23. Mobilize Resources: 2010 FIFA World Cup Legacy Trust Objectives • To support education and healthcare initiatives of NGOs that use football as a vehicle for community development • To promote football within South Africa Funding Source • Revenues of the 2010 FIFA World Cup Status Selecting projects for funding Size and Scale • $100 million, $80 million of which is allocated directly to social community projects • A one time event focused on South Africa Feasibility • The trust will be administered by the international auditing company Ernst and Young while the trustees, consisting of representatives from FIFA, SAFA, the government and the private sector, will evaluate which public-benefit projects are funded Relevance and Acceptance Education is one of four focus areas Source: FIFA Legacy Trust Fund;Dalberg analysis.

24. Mobilize Resources: Diaspora Bonds Objectives • To raise large scale funding from overseas diaspora for the support of national budgets and the filling of financing gaps in development programs Funding Source • International diaspora of country issuing the bond Status Not implemented for education Size and Scale • World Bank estimates suggest that annual diaspora savings of SSA could be in the range of $5 to $10 billion. Feasibility • Credit enhancements for diaspora bonds may be required • Diaspora would shift resources from remittances to diaspora bonds Relevance and Acceptance May include conditions on management of educational investments and include incentives for countries to produce the desired results Source: Leading Group for Innovative Finance for Development;Dalberg analysis.

25. Use Resources More Effectively: Performance-based pay for teachers in OECD countries Objectives • To reward and motivate teachers who perform well rather than paying all teachers equally • To link spending on schools and outcomes Funding Source • Public and private funding for schools Status About half of OECD countries Size and Scale • Unknown Feasibility • Requires consent of the teachers unions • Requires accepted approach to measure performance Relevance and Acceptance Unknown Source: OECD;Dalberg analysis.