Financial Innovation Goes to School

PARIS – Later this month, the United Nations will discuss a high-level report on global development priorities for the period following the Millennium Development Goals (MDGs), which expire in 2015. Quality education is one of the global priorities that world leaders will be taking up.

While global health outcomes – a key focus of the MDGs – have improved dramatically in recent years, progress on education worldwide has not been nearly as satisfactory. There are many reasons for this, including the complexity of education investments, weak global governance, and – of course – money. The three largest global health-financing institutions (the Global Fund to Fight AIDS, Tuberculosis, and Malaria, the GAVI Alliance, and UNITAID) will have spent more than $55 billion by 2015, with roughly $7 billion coming from innovative financing mechanisms such as vaccine bonds, the airline levy, and debt swaps.

Despite unequivocal evidence of its positive social and economic impact, education – particularly at the preschool and primary levels – suffers from chronic under-investment. The Global Partnership for Education (GPE) has raised less than 10% of what has gone into global health, and to date no significant innovative financing mechanisms have emerged. With almost a billion children lacking access to quality education, more funding clearly is needed.

Barriers to education investment include a very long gap between interventions and outcomes, the difficulty of measuring results, and public-sector domination. The health sector faces fewer obstacles, because it is characterized by immediate threats to human life, easily measurable outcomes, a high degree of sustainability, and a vibrant private sector.

Moreover, the existence of global public-private partnerships – such as the Global Fund, the GAVI Alliance, or UNITAID – offers an institutional underpinning for effective advocacy and global health diplomacy. Efforts to improve global education outcomes, by contrast, are handicapped by complexities along the entire value chain of investment and lack well-funded financing institutions capable of driving global education diplomacy. So what are the options?

We propose an education investment bank to be established with the cooperation of the GPE and major international investment banks, capitalized in part by proceeds from a financial-transaction tax (FTT), such as that proposed for the European Union.

An FTT is most suitable for such a venture for two reasons. First, the tax itself is a result of – and, as some may see it, a punishment for – the “bad” financial innovation that brought the global economy to its knees in 2008, hitting the world’s poorest people the hardest. It seems only fair to tax the financial sector in order to nurture “good” innovation that funds social infrastructure such as education.

Second, an education investment bank would be transformative in terms of tapping new assets, leveraging capital, and creating more opportunities. In developing countries alone, pension funds, insurance companies, and mutual funds hold assets worth more than $6 trillion, and these assets are growing at an annual rate of 15%. Why not mobilize some of this money for education?

Despite the rise of private education in many low-income countries, investment opportunities in public-private models and private education remain limited. Currently, there are few clear opportunities for investors, especially in terms of transaction size and scale.

In almost all countries, the state still shoulders the brunt of the burden of education funding. Some efforts at innovative education financing are being mounted, such as the recently launched social-impact bond for education in the Indian state of Rajasthan; but scaling up such vehicles will require greater institutional capacity and a far larger and more liquid market. An education investment bank can play a vital role in catalyzing both.

The type of institution that we have in mind should be a stand-alone organization operating as a registered investment bank and subject to capitalization, regulatory, statutory, and other requirements. Its activities should include raising capital (equity and debt) for global education; providing investment-banking services to governments, businesses, and multilateral agencies in cooperation with local banks; and offering consulting and advisory services for public-private partnerships, privatization, decentralization, loans, and concessionary finance negotiations.

Such a bank should go still further, assisting in and advising on economic reforms aimed at enhancing and developing the education sector. It would also oversee mergers and acquisitions in the education sector, establish its own private-equity and venture-capital education investment funds, and operate as a fund of funds.

One of the most important roles of an education investment bank lies in transforming the scattered strands of research and ideas related to financing global education into actual transactions. Indeed, there is substantial transaction-flow potential for a portfolio that seeks investment opportunities in providing infrastructure, human capital, services, and technologies for education.

Ensuring high-quality education, especially for the poorest children on our planet, is a matter of fairness. But innovation in sustainable education financing is lagging behind as investment in other social infrastructure increases. And yet, despite considerable challenges, there are feasible options for developing the mechanisms needed to generate additional funding and ensure access to the education opportunities that all children deserve. An education investment bank is the place to start.