How results-based financing can help improve education, health and employment

COVID-19 presents the world with unprecedented health, social and economic crises that have severe implications for development. Once again, the most vulnerable in our societies have been the worst hit.

For fiscally constrained governments pursuing the short-term objective of ensuring a fairer and faster recovery from the crisis and the medium-term aspiration of building more sustainable economies, promoting stronger associations with the private sector will be crucial to scale much needed interventions in areas including health, education and job creation.

But to foster the recovery, the public sector will not only need to invest more, but to invest better, rejecting traditional low-scale and ineffective input-based spending.

Under results-based financing programmes, the principal sets financial or other incentives for an agent to deliver predefined outputs or outcomes and rewards the achievement of these results upon verification. For governments, the increasing adoption of such solutions, particularly where social-mission organizations have delivered the frontline services, is probably the single greatest evolutionary step they need to take to transition to impact economies.

Performance-based contracts, outcomes funds, career impact bonds and other results-based finance (RBF) tools, can help national and local governments draw private investors into economic projects to maximize the delivery of social results. There are growing numbers of examples that show how this can help labour market development efforts, creating quality jobs for young people and other groups who were already disadvantaged before the crisis.

Getting young people into work is a persistent challenge across developed and emerging markets. It starts with access to education but relies heavily on arming teenagers and young adults with both hard and social skills that help them to access and navigate challenging and increasingly dynamic job markets. In 2018, the International Labour Organization (ILO) estimated that young women and men were three times more likely to be unemployed than adults, with some 21% of the world’s youth not in employment, education or training. The issue is acute in emerging markets including South Africa, India and Brazil, but also worryingly high in OECD countries, such as Italy, Spain and the US.

The COVID-19 crisis added fuel to the fire. In the second quarter of 2020, the ILO estimated that 17.3% of working hours (equivalent to 495 million full-time jobs) were lost to workplace closures. Such measures had a disproportionate impact on young people: in the US, only 7% of 15-24-year-olds were able to work from home compared to almost a third of people aged 25 and over; while in the UK, 45% of the most at risk jobs were held by people under the age of 35. The number of under 25s not in employment, education and training is expected to rise by 2 million to 6.7 million in Europe, while youth unemployment is forecast to rise to over 25% in Latin America and the Caribbean.

Without adequate intervention millions of jobs could be lost permanently. Workers will be worse off in the short-term and economies will suffer in the long-term owing to a loss of skills, lower productivity and reduced growth.

Performance-based contracts are an effective way of helping governments address the challenges of unemployment. They are an evolution from traditional interventions that fund inputs, such as hours of training, to focus on the achievement of measurable outcomes, such as job placements, retention and increased wages. These instruments can transfer the upfront costs and risks of initiatives to private investors and link their financial rewards – or payments from the commissioning body – to pre-agreed and measurable targets.

Innovative solutions, like the career impact bonds launched in the US, transfer upfront training costs to impact investors instead of students. The General Assembly Career Impact Bond aims to give 1,000 individuals, who have limited means or have had contact with the criminal justice system, training in software engineering and user experience (UX) interface design, equipping them with in-demand skills to secure and hold down high-value jobs in IT. The individuals involved in such projects pay back the costs of training only when they get secure employment.

Despite the growing evidence supporting the merit of results-based finance solutions (including from the more than 200 social and development impact bonds launched worldwide), they remain far from mainstream. Overcoming some of the main barriers for adoption, such as the limited willingness of many funders to commission on a results basis, will be critical to reach a much-needed scale. For instance, the need for senior champions in governments and donor organizations that can understand the challenge and push change down through organizations is increasingly clear. Data and tracking are essential to monitor and verify results, which may prove more challenging in emerging markets with imperfect data environments.

For governments, a change of mentality at both the national and local levels will be needed. This evolution will involve a shift in accountability, with a greater focus on the expected outcomes of government spending. It would also force governments and stakeholders to think more holistically, finding context-specific solutions to the whole problem, and incentivizing a data-driven approach to policy-making. Finally, it would create powerful new partnerships and ways of working between donors, governments, foundations and service providers.

The Education Outcomes Fund and the Global Steering Group for Impact Investment will shortly together publish a guide for the GSG’s National Advisory Boards that highlights the opportunity in results-based finance for education, health and employment. Our aim is to shine a light on this emerging area of finance which we think will be critical to foster economies driven by impact.

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