To help developing countries and regions become more self-sustaining, a means of attracting alternative education funding is needed. Given the large populations of developing countries, education in those countries will have an immediate impact not only on individual countries but also on a global scale.
Providing education-based resources should not be the sole responsibility of the public sector. The private sector should also play a part in securing greater funding for education, which generates many positive economic and social spillover effects. But how can interested parties such as states, nonprofit organizations (NPOs), and intergovernmental organizations (IGOs) collaborate with private sector entities to secure scarce funding for education projects?.
OECD data demonstrate a clear downward trend in total official development assistance (ODA) to the education sector from donors. For example, in 2009, education aid commitments amounted to $15.7 billion, compared with $13.1 billion in 2012, a $2.6 billion decrease in just three years.
Moreover, education ODA as a share of total aid has consistently lagged behind health and population programs, while also similarly reflecting a downward trend. For example, in 2009, ODA for health and population programs represented 12.2 percent of total aid, compared with 8.7 percent for education in the same year. While aid for health and population programs increased from 12.2 percent in 2009 to 12.9 percent in 2012 (increasing steadily every year), the opposite trend occurred in the area of education, which received 7.7 percent of total aid in 2012 as compared to 8.7 percent in 2009, the percentage decreasing steadily every year.
If the targets for education in the post-2015 development agenda are to be met, greater educational funding is needed, not less. Why not, then, simply issue bonds as a remedy? In short, bonds issued by sovereign issuers would increase debt to gross domestic product (GDP) ratios, which in turn could negatively impact credit ratings for the country in question, thus raising the price of financing overall for the sovereign issuer. Even at the IGO level, a crowding-out effect exists in which a critical issue arises: What sectors will be funded with scarce donor funds? If the OECD data pattern extends to bond issuances, education financing may again face relatively less funding as compared with other social programs.
One innovation solution exists through a market-based public-private partnership (PPP) known as development impact bonds (DIBs), which are a subset of the social finance field as well as the finance, law, and development fields.
DIB Transaction Components and Participants:
In broad terms, the main legal DIB stakeholders (social and financial networks) include:
• Social impact investors
• Government (or IGO)
• Service provider
• Constituents (assistance project, program, or persons)
• Local community/society at large
From a legal purview, DIBs are a series of interrelated contracts that secure funding in an innovative, market-based manner. From a social finance purview, DIBs are a bond-driven funding mechanism between public and private sector parties. In the DIB structure, two parties take opposite positions in regard to “success metrics”—with one party providing education financing if the designated project is deemed successful, and a counterparty providing education financing if the project is deemed as not successful—relating to a socially beneficial/development-oriented project.
Integrating such key development finance technologies and tools can create next generation DIB funding structures for education development projects and programs. These DIB funding structures can mitigate market risk, improve liquidity, and foster greater participation in both the public and private sectors for participants aspiring to provide education financing as part of the post-2015 development agenda.