Mobilizing new capital for new learning
Innovative financial mechanisms for Education
- This work was developed in coordination with NEW VENTURES
- With the insights and research from Georgina and Nadza
Expenditure on education in low-income and lower-middle-income countries will have to more than double to $3 trillion by 2030 (from current $1.2 trillion) in order to reach UN SDG 4 (Quality Education).
Young people in developing countries will face the greatest challenges in the years ahead.
In the past, many developing economies achieved growth by moving farm workers into factories.
In the future, new growth models will need to be found, but these will require higher levels of skills than many economies are currently set to offer.
Demographics will exacerbate the challenge. The greatest population increases will occur in countries already lagging furthest behind in education. (Latin America and Africa)
Education financing is dominated by government spending (Note: ‘Other’ encompasses grant funders and private investors)
External financing (i.e. ODA and private financing) will have to cover the majority of the gap for low-income countries.
Official development assistance (ODA) is defined by the OECD Development Assistance Committee (DAC) as government aid that promotes and specifically targets the economic development and welfare of developing countries. The DAC adopted ODA as the “gold standard” of foreign aid in 1969 and it remains the main source of financing for development aid.
Typical financing channels vary by segment (early childhood, K-12, or HE) and geography (developed vs emerging markets), but at the high level they can be summarized as follows:
Infrastructure: Improving access by building schools or improving learning locations.
Service Models: Improving access, quality, and outcomes through incentive programs, online platforms, and vocational training.
Educational Financing: Invest in financial institutions that can provide financing at low cost to prospective students and families.
Edtech: Invest in tech platforms or apps that help achieve various educational outcomes.
Ecosystem building: Support capacity building in the education space.
Financing as usual would not work anymore
Reduced government spending in the countries than need it most: Of the estimated annual spending on education of US$4.7 trillion worldwide, 65% of the total is spent in high income countries and only 0.5% of the total is spent in low income countries, even though the two groups have a roughly equal number of school-age children.
Share of official development assistance (ODA) spent on education declined by about a quarter between 2002 and 2016, from 13 percent down to 10 percent, while ODA spending on health and infrastructure increased.
Governments and donors often have competing objectives for education funding.
Use of funds by traditional institutions is dispersed, not optimized and devoted to areas where the transformation is limited, slow or even inexistent.
Foundations provide valuable flexible and concessionary funding (i.e. grants) to early stage, experimental projects targeting the most vulnerable — but grants are limited and can crowd out more sustainable investments that could help prove the investability of a sector (and therefore catalyze further capital flows).
A significant amount of money needs to be unlocked and catalyzed into education for low income. countries. It needs to be aligned for a cohesive and integrated approach to aim for systematic transformation.
There is a need to catalyze private funding
Innovative financial mechanisms have been presented as one way of mobilizing new capital.
Advocates point to global health as an example of a sector that has embraced the approach — for example, through the Global Fund to Fight AIDS, Tuberculosis and Malaria; the Global Alliance for Vaccines and Immunisation; and the International Finance Facility for Immunisation.
The health sector has raised $7 billion through innovative finance since 2000, according to the Education Commission.
By comparison, the education sector is far behind, having raised an estimated $500 million at most through such mechanisms.
In impact investing…
Education remains a small (but growing) sector of focus, estimated at $7 billion (3%) of impact investing of AUM in 2020.
Close to half of surveyed impact investors have invested in education, but average ticket sizes remain low. Investing in early stage which will take too long to scale and accelerate the sector for other investors.
Investors exist and are closer than ever. But they are fragmented and focused at both ends of the spectrum: either at large proven initiatives that reach the digital ready, or with grants that try to minimize negative impacts at the bottom.
There is a HUGE opportunity by unlocking in the middle that can catalyze innovative business models.
Mobilize new capital for new learning
A comprehensive set of innovative financing solutions which aim at uniting disperse mechanisms to achieve systemic change and to catalyze and unlock new capital flows into the education space.
We can achieve systemic change if we change our mindset. Instead of focusing at a single subset or a specific financial solution, or a small set of investor profiles, we should aim at engaging the entire financial spectrum across a number of symbiotic financial endeavors.
- Focus on impact for de development of impact funds
- Unlocking impact first investors
- Develop a blended capital fund to catalyze the private sector targeting the raising global edtech ecosystem.
- Aggregating a lab of projects into a large investment vehicle
- Develop risk mitigating mechanisms
- Scaling infrastructure and financing by working with institutional investors
- Building a strong ecosystem for research, impact measurement and other academic endeavors