Photo: Sir Fazle Hasan Abed at a primary school in Korail slum, Dhaka. 

Innovative Funding for Early Childhood Education

By Zoya Shabir, Strategic Partnerships Programme Officer, BRAC UK and Rod Dubitsky, Senior Advisor and Chief Knowledge Officer, BRAC USA

Innovative Funding for Early Childhood Education

As fairly recent additions to the development acronym pool, Social Impact Bonds (SIBs) and Development Impact Bonds (DIBs) have been a source of increasing global interest and debate. These are funding mechanisms encouraging private sector capital flow to a new form of impact investing through tripartite agreements between three groups: investors who provide upfront capital, service providers who are the implementers working to deliver outcomes, and outcome funders, primarily the public sector (the country’s own government in a SIB, an external government for a DIB) who repay investors their principal plus a financial return once an independent evaluator shows that outcomes have been achieved. A payment by results structure, the risk is transferred from the traditional government or foundation donor to the investors; the idea is that SIBs/DIBs will result in more effective deployment of grant funding because the outcome funder only pays for successful interventions, and ultimately these early preventative measures will result in greater cost savings in public services down the road.

For the most part the SIBs launched thus far have remained within four sectors – social welfare, employment, criminal justice (with the very first SIB targeting recidivism in the UK) and education in that order. Education, especially early childhood education has now been flagged as a prime preventative intervention as research has shown that investing early in a child’s education, health and socio-emotional capacities can improve future labour market outcomes; a reduction of malnutrition can add an estimated 1-2 percentage points to the annual GDP (World Bank 2006). A Preventative measure? Most definitely. A priority for some governments? Not quite yet.

UBS Optimus and Brookings recently co-hosted a conference at the Legoland Headquarters in Billund, Denmark with the specific purpose of discussing the viability of funding Early Childhood Development (ECD) through these mechanisms. Global stakeholders from Utah to Kenya were present to discuss the strengths and challenges of their respective work. Currently most of the SIBs are taking place in the USA and Europe with a smattering in countries such as South Africa. Clearly a SIB faces greater challenges in a developing context as government funding is more limited in these markets for even basic social services such as primary education. In the case of DIBs there are a few in Africa already, but apart from one DIB launched in India to educate girls in Rajasthan there has been a lack of engagement on this subject in South Asia.

During the conference BRAC had the opportunity to present a case for SIBs/DIBs in Bangladesh using one of our own integrated ECD models as a basis for discussion. During the session there was great debate on the potential successes and challenges of this type of structure. In the context of Bangladesh we highlighted the enabling environment and legislation in place to support ECD and pre-primary interventions. For example, BRAC is one of the world’s largest secular providers of private education (graduating over 10 million from pre-primary and primary schools in Bangladesh alone) and our extensive health program reaches over 120 million beneficiaries. There are also many strong players in the ECD field from service providers to academics at universities undertaking rigorous ECD research, such as BRAC University. Bangladesh, as but one example, should be an ideal context for a SIB/DIB structure, but the audience raised some challenging issues:

  • Are investors interested in interventions that may take time to produce desired outcomes? Are the returns high enough that commercial investors could partake? Clearly there needs to be an optimization of investor timing and the timing needed to observe the desired outcomes perhaps by calibrating funding with project periods to reduce their risk.
  • How does one deal with fragile and changing political leadership? Will governments buy in to this idea or are we facing a chicken and egg scenario of needing to present proof of concept before they do? Though this is an issue with traditional funding, investors in DIBs may be more sensitive to political instability relative to traditional funders.
  • How can we ensure that the outcomes are measurable and that cohorts can be accurately monitored over multiple years?
  • What is the ability for these projects to scale? Currently in absolute terms SIBs and DIBs target very small populations. Again, while this is a valid concern, traditional funding also presents question of scale. The difference? A SIB/DIB structure that is paid back in full, by definition, has met successful outcomes and is prime for scaling unlike traditional funding where outcomes are not transparent.

It seems like the jury is still out on this narrative as we are awaiting further updates on existing SIB/DIB pilots. With guidance from Social Finance, Brookings, the UBS Optimus Foundation and others who are at the forefront of the work being done, we are keen to see the pipeline of Impact Bonds grow. From the perspective of a service provider such as BRAC the idea is an appealing one as it casts a wider net to include private sector financing that would otherwise be unavailable. Although this may prove to be a complex process and have high barriers to entry, the ability for there to be variations in structure and flexibility in delivery allows for greater opportunities in times of liquidity constraints from traditional funders.

Currently we see stronger representation and thought leadership from Europe and the USA, though we look forward to seeing growing interest in Asia and Africa from all key players over the next few years if this idea is to gain traction. In the developing markets the impact investment sector is burgeoning but still fragmented and insufficient to provide funding needs for programs that don’t clearly generate revenues. SIBs/DIBs could be the key impact-investing tool but only if leadership from all three groups emerge to provide a degree of standardization and launch velocity. Otherwise the SIB/DIB market may well be waiting for Godot.

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