ASSESSMENT OF GPE’S FINANCING AND FUNDING FRAMEWORK€¦ · BOD/2016/12–DOC 08 B ... This includes an assessment of the proposed funding and financing approaches – as well as

BOD/2016/12–DOC 08 B Board of Directors Meeting

December 1–2, 2016 Siem Reap, Cambodia

Please note: Board papers are deliberative in nature and, in accordance with the GPE Transparency Policy, are not public documents until the Board has considered them at the Board meeting.

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ASSESSMENT OF GPE’S FINANCING AND

FUNDING FRAMEWORK DRAFT REPORT NOVEMBER 4, 2016

CONTENTS

Executive summary ............................................................................................................................ 2

1. Introduction ............................................................................................................................... 5

2. Technical assessment ................................................................................................................ 6

Funding .......................................................................................................................................... 6

Financing ...................................................................................................................................... 11

Contributions and Safeguards Policy ........................................................................................... 14

3. Implications (to be further built out for Feb, 2017 Board meeting) ........................................ 15

Governance .................................................................................................................................. 15

Asset management ...................................................................................................................... 15

Secretariat capacity and operations ............................................................................................ 16

Country-level processes ............................................................................................................... 16

Annexes ........................................................................................................................................... 17

Annex A: Reflections on the current funding model ................................................................... 17

Annex B: Education system development and strengthening .................................................... 23

Annex C: Reinforcing funding mechanisms ................................................................................. 26

Annex D: Financing instrument analysis ...................................................................................... 36

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EXECUTIVE SUMMARY

The purpose of this assessment is to provide the Global Partnership for Education (“GPE”) Board with an independent review of the Financing and Funding Framework (“FFF”). As stated in the Terms of Reference, part of Dalberg Advisors’ mandate is to ensure the FFF can effectively deliver on its objectives and to make specific recommendations on how to strengthen and enhance the proposed framework. This includes an assessment of the proposed funding and financing approaches – as well as how these components come together into a cohesive framework. GPE’s heightened ambitions necessitate an evolution in the Partnership’s approach to funding and financing. GPE 2020 has a larger scope than the 2012-2015 Strategic Plan, increased emphasis on learning outcomes, and a renewed commitment to reaching the most vulnerable children in poor, fragile, and conflict-affected areas. GPE has also committed to playing the leading global role in delivering Sustainable Development Goal (SDG) 4 on quality education. If reforms are successful, the Education Commission calls for funders to capitalize GPE at bold new levels of financing. GPE’s FFF must therefore consider new and differentiated mechanisms to mobilize incremental resources and channel them toward key needs at the global and country levels. Many of the key symptoms of poorly performing education systems – lack of learning, inequalities, and inefficiencies – can be traced back to poorly structured or inefficient funding. As a sector, education lags behind others, such as health, in exploring the range of ways the structure of finance itself can serve as a means to unlock much greater impact. The FFF creates an opportunity for GPE to step into a leadership role on this question, in line with the Education Commission’s recommendations that platforms like GPE take on these financing challenges – and opportunities – in a meaningful way.

APPROACH

Funding: The assessment reviews both enhancements to GPE’s current funding model and new reinforcing funding mechanisms proposed by the FFF. For the current funding model, we assess whether the proposed areas for enhancement sufficiently capitalize on opportunities to optimize GPE’s current funding model (e.g., ESPDG, ESPIG) – as identified by an in-depth diagnostic exercise. For the reinforcing funding features, we assess each proposed mechanism against the criteria established by the SFWG in June 2016 in Oslo. We will assess considerations around eligibility, allocation, and proportionality in advance of the February 2017 Board meeting. Financing: The assessment considers what financing instruments and approaches are best placed to mobilize and deploy additional financing for education. The SFWG completed an initial prioritization of financing instruments in Oslo in June 2016. Dalberg revisited this and completed additional analysis, which resulted in the prioritization of instruments for further consideration within the FFF. In addition, Dalberg considered broader opportunities (e.g., beyond specific instruments) for GPE to mobilize additional financing – including domestic, private, and targeted financing. Together, these analyses informed the overarching financing approaches included in the FFF. FINDINGS Funding: 1. The draft FFF proposes an appropriate set of funding mechanisms that allow for a more

differentiated approach to meet the needs of GPE 2020. The FFF will help GPE address a more diverse range of countries and underlying funding needs required to deliver on ambitious learning, equity, and efficient and effective systems goals. Overall, the process to identify opportunities to optimize the funding model and develop reinforcing features was thorough and comprehensive, as detailed in Section 2 of this document.

Assessment 3: Review of FFF Design Process – as of November 4, 2016

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2. The three areas for enhancement of the current funding model are intended to strengthen GPE’s ability to deliver on GPE 2020. Collectively, they strengthen the data and domestic financing requirements of the funding model and promote alignment across financing partners. They build on previous and current efforts to strengthen GPE’s operating model and they are core to the achievement of GPE 2020 goals. The FFF should therefore address them. However, aspects of each proposed enhancement – including the accountability mechanisms for the data and domestic financing requirements and the levers to promote alignment of international financing – could benefit from further refinement and stress-testing, as discussed in Section 2. We recommend that a strong feature of this next round of design work include further demand analysis with GPE countries and their partners now that credible prototype ideas have been developed.

3. It is also worth noting that while these enhancements to the funding model are essential, they alone will not be sufficient to realize the full potential of GPE’s impact. As we note in the Secretariat Capacity Assessment, commensurate investments must also be made in the upstream planning processes and high-level political commitment to ensure the education sector plans financed by GPE are truly well-developed to address the challenges of learning, equity and efficient and effective systems. Alongside these important changes in the design of the mechanisms, changes in the approach to delivery – notably creating a much stronger approach to mutual accountability – will be essential.

4. The proposed reinforcing funding features collectively bring a more differentiated set of funding tools to better realize GPE’s Strategic Plan in ways that complement the current funding model. These features will introduce funding mechanisms in the areas of Innovation, Knowledge and Good Practice Exchange (KGPE), and Advocacy and Social Accountability. Each of these mechanisms provides a vital way of realizing specific GPE 2020 objectives, beyond the core funding model, and further reinforced by the Education Commission. The KGPE and Advocacy and Social Accountability mechanisms provide a means to enhance the quality and impact of GPE’s work, ensuring that a deep evidence base will guide GPE and robust systems for accountability and transparency will support these efforts. Mobilizing funding for both of these mechanisms may involve higher transaction costs than other mechanisms as they will likely draw from smaller denominations from private foundations and other bespoke funders. Meanwhile, the Innovation funding mechanism will likely attract financing from multiple types of donors, particularly the private sector and traditional sovereign donors. Innovation also reinforces GPE implementation grants by enabling the testing and scaling of new ideas that could improve interventions.

Financing: 1. The draft FFF proposes financing approaches that have high potential to generate significant

new levels of external financing—both to fund GPE directly and to unlock additional financing to support GPE-aligned education investments. This includes GPE grant financing, domestic financing, and other financing unlocked by GPE. Just as GPE will need to evolve its suite of funding offerings to meet its goals under GPE 2020, so will its financing need to expand and pass through the platform in new ways – particularly given the scale of GPE resourcing recommended by the Education Commission. It is important to note the FFF increases not only the scale of finance GPE could mobilize, but also the types of finance GPE could bring to scale. In particular, unlocking finance from MDBs creates opportunities to bring new types of finance for capital improvements to education systems in desperate need of major upgrades.

2. The three financing approaches have the ability to unlock a more diverse array of grant and non-grant financing options. Each approach involves tailored financing instruments (e.g., grants, concessional loans) stemming from the analysis included in this assessment. Specifically, the analysis of financing instruments prioritized crowding-in concessional loans1 and participating in

1 GPE itself would not take on concessional loans. Rather, GPE would work with multilateral development banks and development finance institutions to partner on education financing packages where GPE’s grant resourcing helps to unlock or channel incremental resources toward GPE-aligned sector planning and implementation processes.


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loan buy-downs as the most attractive instruments to complement GPE’s existing grant financing. Both are opportunities to unlock MDB lending for eligible GPE countries at scale, geared around country demand for non-grant financing. The assessment also prioritized risk financing as high-potential given the opportunity to provide rapid, predictable funding to education systems in crisis.2 Although GPE is unlikely to launch a bond or levy in the near-term given high start-up costs, the Partnership could position itself as recipient of financing mobilized through these instruments given its leadership on SDG4. Overall, this prioritization of instruments identified entry points – e.g., executing a loan buy-down with an MDB partner – for the three financing approaches proposed. Beyond specific instruments, analysis of opportunities to mobilize resources from more diverse sources pointed to domestic financing and private financing as high-potential options.

Crosscutting: 1. Given the number of funding and financing recommendations, ensuring an optimal FFF will

require further consideration of how these components come together into one coherent framework. This is particularly relevant for funding, where the FFF puts forward three areas for enhancement and three new funding features. Optimizing the FFF should not involve removing components, as each plays a key role in delivering on GPE goals. Rather, GPE must work to ensure the components are presented – and understood by countries and other funding recipients – as part of an integrated approach to developing, strengthening, and reforming education sectors. Therefore, after the Board considers an initial draft document, we recommend that the FFF itself evolve to include a unified suite of funding mechanisms and corresponding financing approaches.

2. This new FFF has truly transformative potential for GPE, not just because of what it includes today, but more importantly because the architecture that underpins it will allow GPE to continue to evolve its finance and funding offerings in a dynamic and flexible manner. Beyond the impact of the specific components proposed in the draft FFF that will help GPE better realize its goals, we see an equally important impact of the FFF as a tool for the Partnership to innovate and refine mechanisms and instruments in the future. The FFF includes clear logic for how funding and financing should operate, as well as decision criteria for how to consider adding new funding mechanisms or financial instruments, and considerations for realizing synergies across the entire framework. We would urge the Board to think of the FFF as not just a new package of ideas, but rather a new way of thinking, operating, and ultimately delivering impact. This FFF will usher GPE into a much more competitive positioning alongside other leading multilateral funding platforms

IMPLICATIONS

Operationalizing the FFF will have institutional and capacity implications across GPE. It will require additional expertise, staff capacity, and adjustments to GPE structures and processes to implement successfully. Full assessment of these implications will be completed for the February 2017 Board meeting, but some initial findings have emerged. First, from a governance perspective, the Board must ensure it has the appropriate channels to engage key partners – such as diverse actors across the private sector – and strengthen its finance expertise. Second, successful implementation of the FFF will require strengthening and supplementing the Secretariat’s operating capacity – as detailed in the accompanying GPE Secretariat Capacity Assessment report. The FFF will have additional capacity implications that dovetail with our Secretariat Capacity Assessment findings, which will be shared with the Board in advance of the February 2017 Board meeting. Lastly, the Secretariat should further consider the capacity needs of GPE countries implied by the FFF, whether they will be adequately supported through GPE’s operating model, and, if not, what interventions will be necessary to ensure that country-level capacity development can be provided to support the full potential of the FFF.

2 Additional work supported by The Rockefeller Foundation is ongoing.


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1. INTRODUCTION

CONTEXT

In 2015, the Global Partnership for Education (GPE) raised its ambitions by developing a new Strategic Plan (GPE 2020) that aligns with Sustainable Development Goal (SDG) 4 on quality education. GPE 2020 has a larger scope, increased emphasis on learning outcomes, and a renewed commitment to reaching the most vulnerable children in poor, fragile, and conflict-affected areas. Moreover, GPE has committed to play the leading global role in delivering SDG4 – and the Education Commission has recommended bold increases in GPE’s financing, if internal reforms are successful. To achieve these ambitious goals and provide global leadership, GPE must now consider new and differentiated mechanisms to mobilize incremental resources and channel them toward key needs. GPE currently has one unrestricted pool of funds, which is able to provide approximately US$400-500 million in grants each year to developing country partners. Most of these resources are disbursed primarily through the Education Sector Program Implementation Grant (“ESPIG”).3 To deliver GPE 2020 at scale and activities beyond 2020, the Partnership must explore other sources of financing to help complement and increase its grant financing from traditional donors. It must also consider other funding mechanisms able to address critical needs across national education systems. GPE has designed a new Financing and Funding Framework (“FFF”) to guide the next replenishment. To do so, it has sought external expertise to both (a) contribute to key aspects of the FFF design; and (b) provide the Board with an independent assessment of the FFF that is developed. The Board engaged Dalberg Advisors, a strategic and policy advisory firm focused on global development, to ensure the FFF effectively delivers on the established overarching objectives. The engagement began in July 2016 and will continue until the February 2017 Board meeting.

OBJECTIVES

The purpose of this document is to provide external input related to the development of GPE’s FFF. Dalberg has already contributed to key aspects of the FFF design, and this report provides the Board with an independent assessment of the draft FFF that has been developed. As per the Terms of Reference, this Assessment provides Board members with a.) recommendations to further strengthen and refine the design of the FFF and b.) a view into the technical analysis that underpins the recommendations included in the draft FFF. This document accompanies and provides supporting analysis for the “Report of the Strategic Financing Working Group” Board document for discussion at the Nov/Dec 2016 meeting.4 Board members should use it as a supplementary resource on the FFF design process. The two sections center on technical review and analysis of implications of the proposed FFF. First, Section 2 provides an external review of funding and financing approaches under consideration by the GPE Secretariat and SFWG.5 Second, Section 3 discusses initial, high-level governance and capacity implications of the FFF – which Dalberg will further expand upon in advance of the February 2017 Board meeting. This document will be refined leading up to the February 2017 Board meeting in Washington DC. Before then, Dalberg will complete a review of select additional analyses (e.g., related to eligibility, allocation, proportionality, and Contributions and Safeguards Policy) and an in-depth assessment of governance and capacity implications of the final FFF. 3 Other grants include the Education Sector Plan Development Grant (“ESPDG”), the Education Program Development Grant (“EPDG”), the Knowledge and Good Practice Exchange strategy (“GRA”) – discontinued – and the Civil Society Education Fund (“CSEF”)3 4 It also accompanies and provides supporting analysis for the “Financing and Funding Framework” technical working paper 5 For the February 2017 Board meeting, this will include discussion of eligibility and allocation for each funding mechanism, as well as proportionality across the mechanisms. It will also include a review of the CSP.


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2. TECHNICAL ASSESSMENT

This section provides an independent technical review of the draft FFF – with a view toward further strengthening and refining its design and clarifying the analytical process that underpins the recommendations on GPE funding and financing contained in the draft FFF. The sections below analyze and assess three components of the FFF: a.) funding b.) financing, and c.) CSP.6 Each provides an overview of the approach, analysis, and findings related to the specific component.

FUNDING7

The proposed FFF includes two overarching funding components: education system development and strengthening funding mechanisms (i.e., planning, implementation, and results-based funding) and system reinforcing mechanisms. The GPE Secretariat led the process to develop the funding mechanisms within the draft FFF, in close collaboration with Dalberg and the SFWG. The two sub-sections below review each funding component individually, and the section concludes with overarching findings and recommendations. EDUCATION SYSTEM DEVELOPMENT AND STRENGTHENING Context: At its October 2016 meeting in Geneva, the SFWG asked the GPE Secretariat and Dalberg to further consider potential enhancements to the current funding model. Given the majority of GPE funding will flow through implementation grants, the FFF design process is an opportunity to consider possible enhancements to GPE’s approach to funding education sector planning and implementation. Therefore, the proposed FFF includes recommendations related to the enhancement of existing planning and implementation funding mechanisms (e.g., ESPDG, PDG, ESPIG). Analysis: The Secretariat has developed these recommendations through a multi-step process, including:

A thorough diagnostic of the current funding model – including strengths, challenges, and areas for improvement (included in Annex A)

Development of a framework to help enumerate a long-list of potential enhancements to consider, based on the diagnostic

Identification and further development of high-priority enhancements The diagnostic exercise identified opportunities to strengthen the funding model, maximize its impact, and leverage additional resources. Given the diversity of GPE countries and the emphasis on driving progress where the need is greatest, a key challenge has been adapting the funding model to country level capacity and context. It is essential to focus on the trajectory of progress in each country rather than applying a single approach – but there is also a need to reconcile flexibility and adaptation with consistency in the application of requirements and standards. This is particularly relevant to the application of the three funding model requirements: a credible, endorsed education sector plan; commitment from the government and development partners to finance the plan; and availability of data and evidence (or a plan to build this capacity). Beyond requirements, another key challenge has been funding modalities, as GPE’s complex ambition in grants is frequently not well aligned with the modalities that are put in place (e.g., projects). This limits GPE’s aid effectiveness and hinders its risk

6 Forthcoming in February 2017 7 Review of each funding mechanism’s eligibility and allocation and overall proportionality across mechanisms will not be complete until February 2017


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management. Lastly, GPE has continuously worked to strengthen its approach to results-based financing (RBF), inclusive partnership, and quality assurance and risk – but areas for improvement remain. Based on the diagnostic, the Secretariat and Dalberg considered potential areas for enhancement across four broad categories: application of the funding model; potential new features: integration of more diverse financing; and communication, knowledge sharing, and learning. Please see Annex B for a description of each category. Grounded in this framework, the Secretariat generated a long-list of potential areas for enhancement. The SFWG also provided input on this list through its monthly calls in September and October 2016. The figure below summarizes each potential enhancement area – and whether it has been addressed by the proposed FFF.

Challenge area Potential enhancements Addressed by draft FFF

Data and EMIS Enhancements to support countries in securing reliable, quality, and consistent data across the education sector

Yes

Domestic resource mobilization

Enhancements to support the mobilization of government resources to meet the 20% of national expenditure benchmark

Yes

Alignment of international financing

Enhancements to better promote alignment of international financing (including from GPE) for education with national systems. This includes issues related to the funding modality of the GPE grant as well as GPE’s ability to crowd in development partner financing to the ESP/TESP in a harmonized way (part of the funding model’s domestic financing requirement)

Yes, but specific ideas not yet finalized

Continuity during emergencies

Funding to support the continuity of the implementation of ESPs/TESPs in GPE countries who draw down on their MCA or restructure an ESPIG to deal with an acute emergency

Pending further decisions on ECW

Support to refugees and displaced people

Supplementary funding (e.g., beyond an MCA) to promote sector planning and implementation that is inclusive of the needs of refugees and IDPs

Pending further decisions on ECW

Accountability mechanisms

Enhancements to ensure mutual accountability across recipients of GPE implementation grants and their development partners to help countries meet the requirements of the funding model

Yes

Results-based funding (RBF)

Enhancements to strengthen GPE’s approach to RBF, including a more tailored approach across country contexts. For example, the option to adjust the percentage split between requirements-based and results-based funding (e.g., 70%-30%) across GPE countries – depending on capacity

Partially

Support for national capacity building

Enhancements to strengthen national capacity building, with the goal of ensuring it is sufficient to support achievement of equity and learning outcomes prioritized by GPE 2020 – as well as the needs implied by the FFF itself

Partially


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Regional funding approaches

Enhancements to continue use of regional funding approaches, where relevant and appropriate, in a systematic way

No

The proposed FFF addresses challenges in three of these areas: data, domestic financing, and alignment of international financing. Through data and domestic financing, the FFF addresses the issue of strengthened accountability mechanisms. Some of the enhancements may require additional funding to implement (i.e., incentives to align financing, if deemed necessary and appropriate). Other enhancements (i.e., strengthening accountability mechanisms for data and domestic financing requirements) would not have direct funding implications. Rather, they propose an enhanced approach or process to better deliver on GPE 2020 goals through the existing GPE funding model. Lastly, the reinforcing funding features – KGPE, Advocacy and Social Accountability – are designed to provide targeted support to key issues related to data and domestic financing. Findings: Based on this analysis, the three proposed areas for enhancement – data, domestic financing, and alignment of financing – will strengthen GPE’s ability to deliver on GPE 2020. The proposed enhancements collectively strengthen the data and domestic financing requirements of the funding model and promote alignment across financing partners. All of these enhancements are core to the achievement of GPE 2020 goals and should therefore be included in the FFF. However, some aspects of the enhancements – including the specific accountability mechanisms for the data and domestic financing requirements and the levers used to promote alignment of financing – could benefit from further refinement. For alignment of financing, in particular, the SFWG has not yet agreed to the appropriate set of levers needed to address this challenge. Annex B provides a more detailed review of each of these three areas. Overall, we recommend that a strong feature of this next round of design work include even further demand analysis and stress-testing with GPE countries and their partners now that credible prototype idea have been developed. The SFWG also considered enhancements related to GPE’s role in emergencies and protracted crises; however, no decisions will be made until the design of Education Cannot Wait (ECW) has progressed further. Annex B provides a brief review of enhancements discussed in two areas: continuity funding for emergencies and support for countries to include refugees and internally displaced people in the sector planning and implementation process. Other areas discussed by the SFWG are important, but part of continuing efforts to strengthen the operating and funding model rather than concrete changes proposed by the FFF. This includes discussions of how to optimize GPE’s approach to results-based funding (RBF), as discussed in Annex B. In the future, the Board may need to consider larger changes to GPE’s approach to RBF once more evidence is available from the implementation of the funding model. This includes the question of whether GPE should adjust the percentage of a country’s MCA devoted to RBF (currently set at 30%) across country contexts. The Board should be prepared to consider this issue when more evidence is available – and the FFF should give GPE the flexibility to tailor its RBF approach to specific country contexts in the future. In addition to the areas above, regional funding and capacity building require further consideration. First, the FFF does not currently include or recognize regional funding approaches. GPE is already pursing regional funding arrangements across some countries, and the question of whether a more systematic process is needed requires further exploration and analysis. Second, the Board should consider whether the core funding model (e.g., ESPDG, ESPIG) and reinforcing funding features


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sufficiently account for required national capacity building needs implied by GPE’s ambitious learning and equity targets – as well needs stemming from the FFF itself, if approved. REINFORCING FUNDING FEATURES Context The Secretariat is exploring three funding mechanisms to complement education development and strengthening:

(i) Innovation – Run challenge funds focused on scaling innovations through collaborations of innovators across the education ecosystem to advance core GPE 2020 goals

(ii) Knowledge Development and Good Practice (KGPE) – Fund the cross-national exchange of good practice and the development of global and regional public goods

(iii) Advocacy and Social Accountability – Enhance accountability, transparency, and social mobilization for adoption of good policies, technically-sound practice, and political change in support of education

While these constitute proposed new funding mechanisms in the near-term, the FFF will remain flexible to address other priorities in the future. For example, one SFWG member suggested exploring outcomes-based mechanisms – as highlighted in the Education Commission report.8 Dalberg has facilitated the development of these concepts and has provided feedback throughout the process, some of which has already been incorporated into the proposed mechanisms. Analysis Dalberg reviewed Innovation, KGPE, and Advocacy and Social Accountability funding mechanisms along the criteria agreed upon by the SFWG in Oslo, in addition to potential demand. Annex C further illustrates the criteria used for the assessment. For each funding mechanism, we determined a low, moderate, or high assessment for each criterion. This assessment was based on interviews with the GPE Secretariat and experts in relevant topics, desk research, and literature reviews. Key pieces of analysis are highlighted in the following sections. For a detailed breakdown of the assessment of each reinforcing funding mechanism, along with accompanying rationale, please refer to Annex C. We have identified three primary dimensions that provide an overall picture of how the reinforcing funding mechanisms as a package have 1) potential to deliver against GPE 2020, 2) complementary additionality, 3) operational feasibility. For each dimension, we grouped relevant criteria. We then aggregated the low, moderate, or high assessments provided for each criterion within the dimension. Figure 1 below shows the assessment findings along these aggregated dimensions.

8 The report provides two examples that have been proposed to the Education Commission: 1) Education Outcomes Fund to pay for particular specified education results delivered by non-state providers in collaboration with the government; and 2) Global Offer for Learning to pay eligible countries an Assessment Award for applying a qualified test to assess learning by school-age children and publishes its results. The Achievement Award would pay a certain amount for each child of a particular age who has mastered basic skills over a given time period.


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Figure 1: Assessment of reinforcing funding mechanisms

Findings Both KGPE and Advocacy and Social Accountability funding mechanisms have high potential to deliver against GPE 2020. While the Innovation funding mechanism has high potential impact against goals of GPE 2020, there are limitations to its potential to fund at scale. Ultimately, despite the importance of innovation in improving learning outcomes in education and the potential spillover effects in terms of learning, a challenge fund will reach a limited number of countries at the outset. However, the combined package of the reinforcing funding mechanisms is aligned with GPE’s Theory of Change, and if implemented successfully, can deliver meaningful impact. This is consistent with the Education Commission’s strong call for investments in innovation and mutual accountability. Innovation displays particularly high potential to contribute additionality in a manner that complements GPE’s current model. It will likely attract financing from multiple types of donors, particularly the private sector and traditional sovereign donors, thereby mobilizing increased financing toward education. Innovation also adds value in supporting ESPIG programs, enabling the testing and implementation of new ideas that could improve programmatic interventions. Although KGPE and Advocacy and Social Accountability are also complementary to GPE’s current funding model, it is as yet unclear whether these funding mechanisms will attract significant private grant financing, although KGPE has had success with foundations to date. While further exploration of potential funders in these areas is required, realizing the full potential of these respective windows raises the possibility of relying on the GPE unrestricted pooled fund. While this is acceptable and, in some cases, even necessary, the Secretariat will need to consider implications for the allocation of funding. Overall, all three reinforcing funding mechanisms can likely be executed with moderate effort relative to the intended impact. They do imply greater transaction costs and capacity needs, but some of these can be mitigated with careful planning and design. For example, one might outsource the management of an Innovation challenge fund to experienced vendors. Other options might include leveraging existing expertise and capabilities across the Partnership to minimize required investments. Ultimately, the Secretariat will need to set minimum thresholds for the amount of funding that must be disbursed in order for various mechanisms to be viable from the perspective of transaction costs. The Secretariat is currently developing a proportionality analysis that proposes thresholds across the entire FFF.9

9 Our assessment of the operational feasibility will be updated based on finalization of the proportionality assessment.


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OVERALL REFLECTIONS ON FUNDING Going forward, it is important to consider how to communicate the above aspects of GPE’s funding approach in a coherent way. To date, much of the framing has justifiably focused on the “current funding model,” “enhancements” to this approach, and the addition of “new funding mechanisms.” Drawing these distinctions is helpful in order to clearly communicate what GPE is already doing and will continue to do vs. what constitutes a shift or change to members of the Partnership familiar with the current funding model (e.g., the Board). Yet going forward, GPE must also consider how to present its funding approach in a clear and coherent way to other audiences. This includes the current funding model, its proposed enhancements, and proposed reinforcing funding mechanisms. To unify the funding approach, it will be important to reduce complexity, where possible, and move beyond the temporary classifications (e.g., “current” vs. “new”) currently embedded in the draft FFF document. We recommend the FFF use forward-looking, propositional language that effectively defines a single funding model and a suite of approaches to financing. While the funding mechanisms have been developed as part of a coherent whole to collectively advance GPE’s goals, there may still be areas to further streamline. For instance, Innovation and KGPE both involve competitive calls for applications or proposals, so it is important to set clear eligibility criteria when designing the competitions to avoid confusing potential candidates. Furthermore, funding for KGPE public goods must be clearly distinguished from that disbursed to support data strategies within the core funding model (e.g., ESPIG). In addition, it is worth considering how Advocacy and Social Accountability initiatives could coordinate with ECW advocacy and KGPE cross-national exchange efforts. As such, we recommend a further assessment of how to best coordinate and take advantage of these potential overlaps across mechanisms to strengthen the FFF’s approach. In addition, we recommend the Board further reflect on the role of the pooled GPE fund and the types of activities it aims to support. Currently, the GPE Fund supports education sector planning and implementation – as well part of the recently-launched pilot KGPE initiatives. Yet as the distinctions disappear between “current” vs. “new” (per the discussion above), the Board will need to clarify how unrestricted funds are allocated across funding mechanisms, and as a result, where targeted financing is valuable and required, particularly to finance reinforcing funding mechanisms. The development and approval of the CSP will influence this discussion, and the SFWG will further consider this issue in advance of the February 2017 Board meeting.

FINANCING

The proposed FFF includes three overarching financing approaches:

GPE grant financing: Unrestricted and targeted contributions to the pooled GPE Fund, including from historical GPE donors and new sources of grant financing (e.g., foundations)

Domestic financing: Public expenditures allocated toward the implementation of education sector plans and additional financing mobilized from non-state actors (e.g., companies or domestic philanthropies)

Financing unlocked by GPE. Use of GPE grants to leverage additional financing from multilateral development banks (MDBs), other development partners, private sector donors and investors, and capital markets

All three financing approaches will bring additional leverage to GPE’s core funding model centered around planning and implementation grants. A relatively smaller pool of grant financing will support the proposed reinforcing funding features discussed above.


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Each approach involves appropriate financing instruments (e.g., grants, loans) stemming from the analysis discussed below. Dalberg led the process to develop the financing approaches and instruments included in the FFF, in close collaboration with the Secretariat and the SFWG. Therefore, the sub-sections below provide an overview of the analytical approach and findings rather than, e.g., an independent review of work completed by the Secretariat. Context: As GPE evolves, financing will pass through the platform in new ways. Most notably, to truly mobilize resources at scale, the platform must include financing approaches that both (i) mobilize resources for the existing GPE fund to support GPE’s programmatic investments, and (ii) unlock resources through other channels for education sector investments, including coordinated co-financing of GPE-endorsed sector plans. For example, unrestricted contributions to the GPE Fund bring resources directly to GPE. Conversely, MDB financing involves strategic use of the GPE grant pool to unlock financing through other channels (e.g., MDBs). Regardless of whether GPE directly receives or indirectly unlocks financing, financing approaches and instruments will still support core GPE activities: education sector planning, development, strengthening, and reform. Tasked with the mandate to help GPE evolve its financing approach, the SFWG completed an initial prioritization of financing instruments in Oslo in June 2016. Based on four criteria, they reviewed 11 financing options and prioritized seven for further exploration and consideration, as summarized in Error! Reference source not found. in the Annex. As part of this assessment, Dalberg revisited this prioritization and completed additional analysis. Specifically, we assessed seven instruments,10 four of which the SFWG initially prioritized (leveraging loans, loan buy-downs, risk financing, and bonds). Although initially deprioritized, we revisited guarantees, development impact bonds, and levies given high leverage and minimal upfront capital requirements; strong emphasis on results; and the potential to cover recurrent costs, respectively. 11 Analysis: Financing recommendations were developed through a multi-step process, including:

Analysis and prioritization of financing instruments for inclusion in the broader FFF – and distillation of these instruments into broader financing approaches

Beyond specific instruments, analysis of broader approaches capable of securing maximum external financing for the mix of GPE funding mechanisms

To start, analysis of each financing instrument included strategic and feasibility considerations. The strategic analysis considered each instrument’s strengths, challenges, risks, and conditions for success. It also included reflections on lessons learned, best practices, and situations in which use of the instrument is most appropriate. The feasibility analysis assessed each instrument against a number of operational and financial criteria. Please see the annex for the full analysis, informed by extensive benchmarking and conversations with external experts. The instrument analysis prioritized concessional loans and loan buy-downs as the most attractive financing instruments to complement GPE’s existing grant financing. Both are opportunities to unlock MDB lending for eligible GPE countries at scale, assuming country demand for non-grant

10 For the full list, see Error! Reference source not found. in the Annex. 11 We consider challenge-based funding, unfunded quality demand, targeted funding, and matching approaches in other sections of this document.


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financing exists. The analysis also prioritized risk financing as high-potential, pending further analysis on the best options for GPE specifically to pursue.12 Second, the analysis identified levies, bonds, and guarantees as instruments with some potential that GPE could further explore. Bonds and levies are particularly attractive given their ability to mobilize predictable grant financing. The high start-up costs make it unlikely that GPE would lead efforts to launch these instruments in the near-term given; however, GPE could still position itself as a recipient of financing mobilized through an education sector bond or levy given its leadership on SDG4 – and in the sector, more broadly. Lastly, the financing instrument analysis recommended deprioritizing development impact bonds (DIBs) and social impact bonds (SIBs), which require large start-up costs and would be difficult to scale across GPE countries while not necessarily generating significant incremental resources.13 The instrument is also somewhat at odds with GPE’s approach to education systems strengthening given projects would likely need to be very targeted in order to agree to measurable outcome metrics. Figure 2: Summary of financing instrument prioritization

Findings: Overall, the analysis resulted in three recommended financing approaches: GPE grant financing (unrestricted and targeted14), domestic financing, and financing unlocked by GPE. These findings derive from the financing instrument feasibility analysis and prioritization (discussed in the section above), consideration of broader opportunities beyond specific instruments – e.g., opportunities for domestic resources mobilization, private sector resource mobilization, and targeted financing – and conversations with finance experts in and outside of the Partnership. This prioritization of instruments informed these three overarching financing approaches by identifying specific entry points and opportunities to access new sources of financing. First, unrestricted grants will remain the primary instrument to mobilize resources from new and existing donors. The FFF recognizes the role for both unrestricted and targeted grant contributions (subject to the approval of the CSP). Further, the FFF positions GPE as a potential recipient of grant financing mobilized through education sector bonds and levies – if the opportunity were to arise. In the FFF, “GPE grant financing” captures both of these entry points. Second, the instrument analysis prioritized concessional loans and loan buy-downs as high-potential instruments to unlock greater financing from

12 Additional work supported by The Rockefeller Foundation is ongoing 13 While we do not recommend GPE pursue DIBs/SIBs as a means to bring financing to its own platform, individual countries could decide to launch DIBs to support activities within a GPE-endorsed ESP or TESP – which is captured by the FFF’s flexible approach to unlocking private financing & domestic financing at the country level. 14 Targeted financing as an approach will be contingent on the results of the CSP consultation process underway.

Additional analysis to be completed with support from

The Rockefeller Foundation

• Development impact bonds (DIBs)

• Guarantees

• Bonds

• Levies

• Loan buy-downs

• Leveraging concessional loans

• Disaster and political risk financing

Recommended to deprioritize

Prioritized for further consideration within

overall FFF

Has potential, but requires additional exploration


14

MDB partners to support GPE-endorsed ESPs and TESPs. This resulted in the inclusion of a more systematic approach to collaboration with MDBs and development partners within “financing unlocked by GPE.” This category also includes disaster and political risk financing, pending further analysis supported by The Rockefeller Foundation. Beyond specific instruments, recognition of the potential to unlock incremental financing from diverse sources also informed the financing approaches. First, domestic financing commitments from governments already provide the majority of resources directed toward ESPs/TESPs. The FFF seeks to continue this trend and further expand domestic financing contributions beyond public expenditures. Second, the FFF recognizes that achieving the SDGs demands active engagement of public, private, and philanthropic actors. Moreover, the ambition of these goals – and the financing required to achieve them – has elevated the importance of private capital across the development landscape. Similarly, the Addis Ababa Action Agenda highlights the importance of aligning private investment with sustainable development. Therefore, the FFF includes opportunities to unlock private investment in education across GPE countries. These recommendations collectively enable GPE to: a.) leverage new and better-structured forms of financing for education and b.) to become more flexible in accessing and mobilizing new resources for education. For the former, some use of GPE grants will be necessary to unlock additional financing from MDBs, development partners, private sector investors, and insurance markets. We consider this a highly valuable use of resources, given each GPE dollar will unlock a greater multiple of financing for education system strengthening efforts. We also strongly support increased flexibility to allow GPE to pursue opportunities – with corresponding safeguards – to mobilize truly additional resources for education from a changing financial landscape no longer dominated by traditional official development assistance (ODA). These changes are imperative to ensuring GPE remains competitive as a multilateral partnership and funding platform in the post-2015 development agenda. Going forward, the next phase of design work will emphasize stress-testing these financing recommendations and refining them accordingly. Dalberg will continue to solicit input from key stakeholders, including additional conversations with Ministries of Finance, MDBs, and private sector actors in order to solicit input and feedback on the FFF under development. One particular area of focus is further developing the ways that private foundations and the private sector can support GPE’s work at the country and global levels. Currently, the private sector – broadly inclusive of private foundations, individuals, companies, and investors – is relevant within all three proposed financing approaches:

For GPE grant financing, there is an opportunity to mobilize contributions from private foundations interested in supporting the achievement of GPE’s goals in education

For domestic financing, there is an opportunity for GPE to support countries in mobilizing grants from local foundations, companies, and philanthropists

For financing unlocked by GPE, there is an opportunity to help mobilize private investment capital – which involves private sector participation in education sector investments that require a financial return. GPE could help facilitate ESP-aligned private sector investments and/or provide a small amount of grant finance to make private investment viable through a “blended” finance structure.

Further work is required to identify specific approaches for mobilizing financing within each of these categories – which may vary significantly across countries.

CONTRIBUTIONS AND SAFEGUARDS POLICY

Review of the CSP will not be complete until February 2017.


15

3. IMPLICATIONS (to be further built out for Feb, 2017 Board meeting)

Operationalizing the FFF will have institutional and capacity implications across both GPE’s operational footprint and in its governing structure. It will require additional expertise, additional capacity, and adjustments to GPE structures and processes to implement successfully. Specifically, the FFF could impact (i) governance, (ii) asset management, (iii) Secretariat capacity and operations, and (iv) country-level processes. The sections below discuss the high-level implications for each category. Further assessment of governance, institutional, and operational implications will be completed by Dalberg for the Board discussion in February 2017, following Board input and perspectives on the draft FFF at the November/December 2016 Board meeting.

GOVERNANCE

The draft FFF architecture does not imply changes to GPE governance structure. The draft FFF assumes the GPE Board would continue to act as the primary governance and strategic decision-making body for the Partnership, without changing existing structures and processes. Though there may be no changes to governance structures, there may be a need to create new forums to engage key partners at the level of GPE’s governing body. For example, while private sector partners are represented on GPE’s Board, GPE currently has relatively minimal engagement with the types of investors that would actually be involved in blended finance transactions for education investment in GPE countries. GPE could consider creating a committee or working group as a way to engage these potential partners. As an analogue to consider, USAID established a “Partners Forum” for the Private Capital Group for Africa—itself a mechanism to facilitate private investment into African markets—as an advisory panel of leading investors from across the capital spectrum, who advise USAID on ways to leverage private capital in support of USAID’s work. Lastly, successful implementation of the FFF will require a considerable increase in finance expertise within the GPE Board. This FFF will require ongoing design work, refinement, and evolution of the partnership’s capacity to mobilize new and better structured forms of financing to support GPE’s goals. We strongly recommend that the Board establish a representative working group comprised of individuals who have deep technical expertise in education and development finance to support and advise on the next round of FFF technical design, beyond February 2017. This group could build on the existing SFWG, with some members appointed as delegates from their respective organizations who bring deep technical perspectives on finance, where possible. The next stage of the FFF design following the February 2017 Board meeting, particularly on the financial side, will require substantive technical expertise.

ASSET MANAGEMENT

The FFF will likely require adjustments in asset management structures and processes to accommodate more diverse financing and funding approaches. First, while the majority of funding will continue to be comprised of GPE unrestricted funds, the establishment of new financing sources and funding mechanisms will require defining new allocation requirements and processes, including new or altered structure(s) to accept targeted financing. This could entail notional earmarking within the GPE Fund, distinct funding windows within the Fund, or the creation of sub-accounts. Any change in structures will depend on the final CSP and will require approval by the Trustee. The FFF could be implemented without creation of a new legal entity as currently conceived, but the range of benefits and limitations of this arrangement to the implementation of the FFF will be given further consideration before February 2017.


16

Changes in asset management structures should also be aligned to the phased implementation of new financing instruments. Some financing approaches – including co-financing with MDBs through leveraging loans – could be implemented in the near-term without a great deal of change to the current arrangements. Other financing approaches – including co-financing with MDBs through loan buy-downs, and increasing private sector engagement, including using GPE as a delivery channel for levies and education bonds – will be more feasible in the medium term. More concretely, it would be feasible to implement co-financing with MDBs and blended finance over the course of 2018 to 2019, each in three to four interested countries. Lastly, new structures beyond the GPE Fund could become a part of the GPE funding platform. Setting up MDB financing partnerships and risk financing instruments may require creation of new funding vehicles; for example, a trust fund at the IsDB to buy down loans. Such additional funding and financing structures will depend on the specific operational arrangements, and will be the focus of further Secretariat analysis and planning following the finalization of the FFF architecture.

SECRETARIAT CAPACITY AND OPERATIONS

Successful implementation of the FFF will require strengthening the Secretariat’s operating capacity – as detailed in the accompanying GPE Secretariat Capacity Assessment report. The FFF will have additional capacity implications that dovetail on these findings, which will be shared with the Board in advance of the February 2017 Board meeting.

COUNTRY-LEVEL PROCESSES

The FFF will offer a more diverse array of financing sources and more differentiated funding mechanisms to GPE countries. The FFF aims to connect appropriate sources of finance to key needs at the country and global levels, without adding undue transaction costs. However, new approaches to financing and funding will likely have an impact on some country-level processes:

Financing: Interested countries will have the option to work with GPE to access more diverse sources of financing to support the endorsed ESP/TESP in a harmonized and coordinated way, such as more systematic MDB co-financing and domestic resource mobilization beyond public expenditures. This could add some complexity beyond the needs-based GPE implementation grant (e.g., ESPIG). However, GPE could minimize undue transaction costs and/or complexity by ensuring the Secretariat has additional capacity and expertise to support countries with this process. Countries would also pursue additional sources of finance based on their own interest and demand, if they decided that the benefits (e.g., access to incremental financing) outweigh the costs (e.g., increased transaction costs).

Funding: Under the FFF, countries will have access to multiple GPE funding mechanisms beyond the core implementation grant (e.g., ESPIG). A greater number of non-state actors would also be eligible for the new funding features, particularly with regard to Innovation, KGPE, and Advocacy and Social Accountability. The development of an expanded array of funding opportunities may result in increased upfront costs for set up, especially in the cases involving the management challenge funds and competitive calls for proposals. The GPE Secretariat would need to explore ways to reduce such costs, such as streamlining procurement and assessment processes, or outsourcing management activities to a third party and leveraging existing expertise and capacity within the Partnership. GPE will also need to consider whether implementation of the FFF requires additional policy advice and capacity development support for countries – and if so, whether grant agents are currently well-positioned to meet these needs or whether additional measures would be necessary. Dalberg will further assess country capacity needs and the implications of FFF operational implications on LEGs in advance of the February 2017 Board meeting.


17

ANNEXES

ANNEX A: REFLECTIONS ON THE CURRENT FUNDING MODEL15

A. DIAGNOSTIC

GPE’s current funding model has been operational for nearly two years, with six Education

Sector Program Implementation Grants (ESPIGs) awarded: Mozambique, Nepal and Rwanda

in 2015, and Democratic Republic of Congo, Malawi, and the Organization of Eastern

Caribbean States (OECS)16 in 2016. Two additional applications are under consideration for

approval in December 2016 (Ethiopia and Zimbabwe), ten are in the pipeline for the first

round of 2017,17 and as many as 18 applications could be ready for the second round.18 The

funding model specifies requirements for countries to access the 70% ‘fixed part’ of the

Maximum Country Allocation (MCA) for the Education Sector Program Implementation

Grant (ESPIG) and introduces a results-based approach to obtaining the remaining 30%

‘variable part’.

GPE’s approach is centered on sector collaboration within multi-stakeholder national

coordination mechanisms (local education groups). It entails extensive dialogue around sector

analysis, the development of evidence-based and credible national education sector plans

(ESP), assessments of data and learning capacity, the development of strategies to address

capacity gaps, and requirements for domestic education budgets, including the share allocated

to primary education. The model is also intended to leverage donor commitment to endorsed

ESPs, although this has proven difficult to achieve.

In conjunction with the preparation of applications, rich country level dialogue is focused on

analyzing problems and identifying key strategies and actions to accelerate progress in equity,

efficiency, and learning outcomes in basic education: the three triggers for the release of the

variable portion. To access funds, countries must demonstrate progress in agreed-on

indicators in these areas. The approach aims at the system level rather than at the

micro/project level, so that progress toward targets does not have to be driven by the activities

financed by the GPE, but can be achieved more broadly by successful sector strategies.

15 Developed by the GPE Secretariat, with support from Dalberg. 16Due to the small size of the grant divided by four Caribbean island states, the latter was exempt from the results-based variable part requirement, leaving five grants implementing the full funding model. 17 Cambodia, Chad, Cote d’Ivoire, Lesotho, Liberia, Madagascar, Nicaragua, Somalia – Puntland, Somalia –Somaliland, Tanzania – Zanzibar. 18 Afghanistan, Benin, Bhutan, Burkina Faso, Cabo Verde, Comoros, Eritrea, the Gambia, Guinea-Bissau, Haiti, Maldives, Myanmar, Papua New Guinea, Sierra Leone, Somalia – Central South Zone, South Sudan, Togo and potentially a multi country application from Pacific Small Island Developing States (alternatively, separate applications from Kiribati, Federal States of Micronesia, Marshall Islands, Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu).


18

Given the diversity of contexts and the emphasis on driving progress where the need is

greatest, a key challenge is to adapt the funding model to country level capacity and context.

It is essential to focus on the trajectory of progress in each country rather than applying a ‘one

size fits all’ approach, but there is also a need to reconcile flexibility and adaptation with

consistency in the application of requirements and standards.

B. PROPOSED IMPROVEMENTS

In conjunction with the efforts around the Funding and Financing Framework, key areas for

strengthening the funding model have been identified, as well as potential ways to maximize

its impact and leverage additional resources. More resources for ESPIGs could both increase

GPE’s reach to a larger number of countries and could financing support to each country

through larger grant allocations. There are three categories of efforts to consider:

1. Knowledge sharing and learning: improved communication, clarification and guidance

around the key components of the funding model.

ESP Requirement: Continuous efforts are made by the Secretariat and key partners

to strengthen sector analysis and planning, including a strengthened quality assurance

mechanism to drive more robust, implementation-ready sector plans while capturing

knowledge and experiences. However, more efforts are needed to leverage the broader

partnership around these efforts and to strengthen ties between development partners’

head-offices and country level staff.

Domestic Financing: As part of the work on the GPE Results Framework, the

Secretariat has developed a methodology for more sophisticated, up-to-date

information on domestic financing and is working on guidance for domestic finance

sector dialogue. Beyond this, the link between volume and efficiency of education

spending needs to be better articulated and the accountability mechanism to ensure

commitments are delivered needs to be strengthened. Currently, LEGs are expected to

monitor domestic financing through annual Joint Sector Reviews and discuss whether

there are significant discrepancies between what was agreed around the requirements

and the actions that were taken. The results of JRSs are monitored by the Secretariat.

In cases where countries fail to deliver on commitments, the Secretariat updates the

Country Grants and Performance Committee (CGPC) on a regular basis until the trend

changes, and the CGPC in turn informs the Board if action is recommended. The Board

has the authority to cancel grants if deemed appropriate and necessary. However, the

development of clear criteria around circumstances that could warrant Board action is

lacking and the burden is on LEGs to signal whether a disruption in funding is justified.

This may put LEG members in conflicts of interest and/or compromise their ability to


19

collaborate effectively with the government. The Partnership also needs to balance the

need to ensure the requirements have meaning with the need to ensure progress

towards GPE goals and objectives by addressing the constraints that influence

domestic investments, such as efficiency.

Implementation modalities: GPE’s often complex ambition in grants is frequently

not well aligned with the modalities that are put in place. Modalities are deeply linked

to risk management and aid effectiveness. Highly complex grant designs coupled with

significant capacity constraints results in slow implementation, often through

mechanisms that bypass the very systems GPE aims to strengthen. More aligned,

focused efforts to strengthen national procurement and delivery mechanisms are

needed. Unless development partners eligible as GPE Grant Agents are willing to make

these efforts, GPE’s prospects of doing so are limited.

Results-Based Financing: GPE’s results-based financing approach is new and

untested, and to optimize its impact, better guidance is needed on the development of

effective strategies and indicators that appropriately balance ‘stretch’ and

achievability. An “early stocktaking” by an independent consultant has been launched

to assess the underlying assumptions and theories of change revealed in the processes

as they have played out to date, and to provide a comparative analysis of other

approaches, some of which are mature enough to have been reliably evaluated. GPE

seeks to develop more fully its own approach to RBF and articulate it by the end of

2016, and the proposed analysis will provide input and guidance to that process.

Partnership: Inclusivity in the model can also present challenges. It is slow and

cumbersome to achieve agreement in a multi-stakeholder forum. On the one hand,

government sovereignty and grant agents’ right to determine the level of risk

acceptable in order to take legal responsibility for a grant is undeniable. On the other

hand, other partners as co-members of the Partnership rightfully have a stake in GPE’s

interventions at country level. Where collaboration is effective and transparent, these

juxtapositions are not irreconcilable, but where there are tensions, the process can lead

to gaming and conflict.

Quality Assurance and risk: GPE has strengthened quality assurance through

multiple actions, including the requirement of independent assessment of ESPs, a

separate quality assurance function within the Secretariat, and a single methodology

for the CGPC to assess grants. In addition, an operational risk framework is in place to

add a layer to risk mitigation and monitoring to that already undertaken by grant

agents. However, GPE needs to build greater knowledge around capacity building and

leverage opportunities to strengthen capacity to effectively deliver quality education

services in an equitable way.


20

2. Improvements on existing features19

To address the above challenges, possible adjustments to the funding model

could include:

A common communication framework around LEG members’ responsibilities when

endorsing an ESP or TESP (would not require Board approval)

Adjusting GPE domestic financing benchmark of 20% to that of the Financing

Commission’s 15 to 19% so that processes and methodologies will be aligned to the

broader global framework (would require Board approval)

For the primary education benchmark, determine whether to measure recurrent costs

only (which tend to be on a relatively even trajectory) or recurrent and investment

costs (recognizing that investment costs tend to fluctuate, sometimes significantly)

(would require Board approval)

Develop and communicate criteria for conditions that warrant grant cancellation

(would require Board approval)

To reduce transaction costs compared to grant size, simplify processes in countries

with smaller grants, for example by ‘clearing’ grant agents’ quality assurance

arrangements as sufficient (would require Board approval)

3. Introduction of potential new/additional features20

Potential new features to enhance the use of the funding model to make

progress against GPE’s goals and objectives could include:

Create an enhanced accountability mechanism that determines what happens when a

country does not meet one or more of the funding model requirements, including

agreed upon conditions and process for grant cancellation, suspension,

reprogramming, or future ineligibility,

Provide technical assistance to support the government to meet the domestic

resource requirement,

Replenish a country’s implementation funding (e.g., ESPIG) through the same grant

agent after countries draw down on their existing development allocations to respond

to an emergency,

Support and incentivize development partners and countries to use harmonized and

aligned funding modalities for GPE grants (e.g., ESPIG),

19 Dalberg has incorporated all of the enhancements discussed during small working group sessions 20 Dalberg has incorporated all of the enhancements discussed during small working group sessions


21

Incentivize inclusion of refugees in education systems by providing top-ups to

ESPIGs in countries whose ESPs or TESPs include provision of education to refugee

population

Leverage co-financing of GPE-endorsed ESPs or TESPs through new, innovative

financing mechanisms,

Align countries’ planning and budget cycle through rolling applications to improve

alignment and reinforce linkage to domestic financing,

Provide tailored funding for specific activities within the ESP/TESP (e.g. dedicated

infrastructure financing),

Explore whether the impact of the GPE RBF would increase with a larger variable

tranche in country contexts with more resources and capacity and provide guidance

for the selection of indicators for the variable part,

Explore blended financing for LMICs to expand reach of funding model and leverage

impact in more countries.

Table 1: Funding model features and perspectives

GPE FUNDING MODEL FEATURES AND PERSPECTIVES

Funding

Model Key

Elements

GPE Grant

design

prior to

2014

Funding

Model

2014 Design Current

Approach/Issues

Opportunities

to Maximize

Funding

Education

Sector

Analysis

Not

Required

Required and

grant support

provided

Better guidance

needed and

international

capacity for

technical support to

be improved

Education

Sector Plan

Development

Endorsed

ESP

required for

GPE

funding, no

timeline to

ensure ESP

drives GPE

program;

grant

available to

finance ESP

development

Endorsed ESP

and multi-year,

costed

implementation

plan required 3

months prior to

application

submission;

grant available

to finance ESP

development

Adjustment of GPE

grant cycle to

countries’ planning

and budget cycle is

needed for optimal

impact

Explore

mechanisms to

leverage co-

financing for

GPE-endorsed

ESP/TESPs


22

GPE FUNDING MODEL FEATURES AND PERSPECTIVES

Data

Requirement

Not required Data or strategy

to obtain it

required,

including

national

learning

assessment

system

Global efforts

needed to enhance

capacity at country

level for effective

EMIS and learning

assessment systems

Targeted

financing

through

separate

funding

windows to

reinforce impact

of funding

model

requirements

Domestic

Financing

Requirement

Not required Progressive

progress

towards 20% of

domestic

financing; 45%

allocated to

primary

education

More sophisticated

analysis of

domestic financing

needed, including

link to efficient

spending

More

convincing

accountability

mechanism

could

strengthen

donors’

confidence in

the ability to

drive domestic

financing

Development

Partner

Financing

Requirement

Not required Token mention

of need for

donor

commitment

but no

mechanism to

deliver

Donor reduction in

support to

education

impacting

countries’ ability to

implement ESPs

Explore

mechanisms to

leverage co-

financing

Fixed Part

Aligned

modalities

encouraged

Funding model

favors aligned

modalities:

variable part

easier in

aligned

modalities

Alignment still a

challenge

Top-up for

pooled or

budget support

modalities

Results-

Based

Variable

Part

Not required 30% linked to

equity,

efficiency and

learning

outcomes

Lack of knowledge

and capacity to

make optimal

impact

Link to

additional

financing for

knowledge

development,

innovation and

capacity

building


23

ANNEX B: EDUCATION SYSTEM DEVELOPMENT AND STRENGTHENING

Framework of types of enhancements to consider for the current funding model:

Application of the funding model: Optimization of the use of requirements and incentives and adjustment of GPE’s approach to results-based financing across country contexts – e.g., by varying the percentage split between requirements-based vs. results-based funding.

Potential new features: Provision of additional funding for specific priorities (e.g., support to refugees and displaced people) and provision of tailored funding for specific needs within an ESP/TESP (e.g., educational infrastructure via dedicated infrastructure finance).

Integration of more diverse financing. Inclusion of non-grant financing options (e.g., concessional loans from MDBs) and a more systematic approach to securing co-financing to support the GPE-endorsed ESP/TESP.

Communication, knowledge sharing, and learning. Increased clarity and guidance around key components of the funding model; positioning and relationship of the funding vis-à-vis other initiatives; and how GPE engages others (including donors) in delivering the funding model effectively.

1. Additional detail on assessment of enhancements prioritized in the FFF draft:

Data and EMIS: Overall we see this as a highly important and necessary change to the funding model. The recommendations in this area rightly aim to strengthen accountability mechanisms to ensure countries meet the data requirement – which is core to GPE’s model. Countries will need to demonstrate that financing is available for the implementation of data strategies both from domestic and other international sources. If financing is insufficient, the country would need to allocate a portion of its ESPIG toward data. In additional, the KGPE funding feature will also reinforce and strengthen the data requirement by providing additional support to eligible countries. Overall, the approach strengthens mutual accountability while ensuring countries with large capacity needs have the support to meet the data requirement. However, going forward, it will be important to further clarify and refine how these accountability mechanisms could work, in practice. Refining this initial prototype with developing country partners will be an essential next step in the design process.

Domestic resource mobilization: The enhancements to strengthen financial data and put in place stronger accountability mechanisms are appropriate and needed. For accountability mechanisms, we recommend the Board consider a variety of options (mandatory reprogramming, cancellation, or future ineligibility for GPE funding) beyond triggers for grant suspension. Alongside refinement of this mechanism, the Partnership as a whole will also need to continue to test and refine modifications to the domestic financing requirement itself to ensure that the thresholds are set in meaningful way. The Social Accountability and Advocacy mechanisms have a strong reinforcing role to play in advancing this important goal, and these two mechanisms should be further designed in lock step as this process moves forward.

Alignment of international financing: This is a critical challenge area for the FFF to address given that aligned funding modalities enhance GPE’s aid effectiveness, risk management, and ultimately, impact against learning, equity, and efficient and effective systems goals. Yet the percent of ESPIGs deemed to be aligned21 decreased from 2015 to 2016.22

The SFWG has discussed specific enhancements to address this issue – but not yet arrived at final recommendations. It agreed that GPE should provide stronger guidance to country-level partners

21 ESPIGs which met 70% of the seven alignment criteria (defined by GPE) were deemed to be aligned 22 GPE 2016 Annual Portfolio Review


24

and DCPs to enhance the focus on alignment during the grant agent selection process, including through stronger emphasis on the criterion (from the GPE guidelines) “to work through the most appropriate modality.” However, the SFWG agreed to revisit other proposed enhancements involving funding incentives after further exploration of the scope of this challenge.

Going forward, we recommend GPE consider a comprehensive approach that a.) uses multiple levers (e.g., stronger guidance to country level partners and DCPs & funding incentives, if deemed appropriate based on further exploration) and b.) targets multiple segments of stakeholders who influence alignment outcomes (DCPs, grant agents, donors). This is both appropriate and needed.

To refine this enhancement, we recommend further consideration and analysis in four areas. - Further exploration of the scope of the problem to inform development of specific ideas,

as already proposed by the SFWG - How GPE could better coordinate with organizations that look at systems and fiduciary

processes (e.g., the World Bank), as already proposed by the SFWG - Clarification of how GPE could provide stronger guidance to country-level partners during

the grant agent selection process, as already proposed by the SFWG - Testing the proposed funding enhancement ideas (e.g., funding incentives, if deemed

appropriate) with the appropriate stakeholders to gauge whether they can effectively “move the needle” on this critical issue

2. Additional detail on assessment of enhancements considered related to GPE’s role in emergencies and protracted crises:

Continuity during emergencies: The proposal to provide continuity financing in cases of crises and emergencies as additional funds would help GPE resolve the trade-off between emergency response and development. Preserving ESPIG funding will allow the implementation of key activities to progress as planned, ensuring that emergencies would not significantly diminish the impact of prior investments. With the potential introduction of ECW, it is imperative for this enhancement to be coordinated with ECW to avoid any duplicate efforts and competition for financing. In addition, we recommend that sufficient safeguards or co-financing requirements are put in place to avoid displacing emergency funding from OCHA and other humanitarian efforts.

Support to refugees and displaced people: Providing supplementary funding to countries with strong proposals to respond to the needs of refugees and IDPs is aligned with GPE’s equity goals – and could mobilize additional financing from donors given this issue is high on the political agenda. It has minimal transaction costs and could be incorporated into existing ESPDG and ESPIG processes. However, this enhancement must be considered alongside the definition of the ECW operating model. We will revisit the value add of this enhancement before the February 2017 Board meeting, at which point the Boston Consulting Group will have completed its work on the ECW operating model.

Beyond this specific issue, we recommend the SFWG further explore the use of “incentive” funding more broadly. Incentive funding would give GPE the flexibility to direct supplementary funding toward other key issues in the future, as agreed by the GPE Board. This would allow GPE to remain nimble and agile to address key priorities that arise in the future – just as refugees and IDPs have triggered funding needs in the past few years given increasing global migration. As one example, the Global Fund provides incentive funding on a competitive basis to eligible applications that demonstrate the greatest potential for high impact – with the goal of encouraging ambitious requests based on national strategic plans.23

23 Global Fund, “Funding Process & Steps”


25

3. Additional detail on assessment of enhancements related to continuing efforts to strengthen the operating and funding model

Results-based funding: The ideas proposed in this area relate more to continuous learning and improvement rather than a concrete change that requires Board approval. We strongly endorse the plans that the Secretariat has to commission a rigorous evaluation of the efficacy and additionality of education sector plans, and in particular the RBF components. The Board may need to consider larger changes to GPE’s approach to RBF once more evidence is available from the implementation of the funding model. This includes the question of whether GPE should adjust the percentage of a country’s MCA devoted to RBF (currently set at 30%) across country contexts. The Board should be prepared to consider this issue when more evidence is available – and the FFF should give GPE the flexibility to tailor its RBF approach to specific country contexts in the future.

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ANNEX C: REINFORCING FUNDING MECHANISMS

Figure 3: Funding mechanism criteria definitions

Criteria Definition

Potential impact against goals of 2020• Alignment to GPE’s Theory of Change and • Demonstrability of impact

Potential to fund at scale• Relevance and possibility of implementation across multiple countries, regions, or

globally

Complementarity with existing GPE funding model (ESPIG)

• Contribution to strengthening the impact of the current funding model

Comparative advantage of GPE• Degree to which GPE adds value to and is uniquely positioned to implement in the

education landscape

Transaction costs are not disproportionately high

• Minimal transaction costs, relative to volume of funding disbursed

Potential financing from a diverse range of new and existing donors

• Ability to attract financing from a range of donors (e.g traditional donors, foundations, private sector)

Potential to promote additional financing for education

• Likelihood of mobilizing additional financing for education (vs. displacing funds from GPE pooled fund and other channels in the sector)

Potential to prioritize in case of low replenishment

• Ease with which recipients can be prioritized in event of a lower replenishment than planned

Demand• Observable or expressed demand (primarily at country-level, but also from non-state

actors)


27

Figure 4: Funding mechanism scoring rubric

Criteria Potential assessment

Low Moderate High

Potential impact against goals of 2020

• Limited areas aligned with GPE’s ToCand Results and Indicators Framework

• Limited evidence and measurability of impact

• Some alignment to GPE’s ToC and Results and Indicators Framework

• Some evidence of measurable impact

• Highly aligned with GPE’s ToCand Results and Indicators Framework

• Demonstrated or highly measurable impact

Potential to fund at scale• Can be applied to select government

bodies, limited to the national level• Can be applied to diverse actors at

the national level• Can be applied to diverse actors

nationally, regionally, and globally

Complementarity with existing GPE funding model

• Weak linkage to sector planning or implementation, not aligned to GPE’s business model

• Some linkage to sector planning or implementation, aligned to GPE’s business model

• High linkage to both sector planning and implementation, aligned to GPE’s business model

Comparative advantage of GPE

• Limited experience and resources in an area that is already well funded

• Can readily leverage existing experience and resources in an area that is already receiving funding

• Can readily leverage existing experience and resources, targeting a systematically underfunded area

Transaction costs are notdisproportionately high

• High transaction costs, with substantial capacity implications that are difficult to mitigate

• Moderate transaction costs, with some capacity implications that could be mitigated

• Minimal transaction costs and capacity implications

Potential financing from a diverse range of new and existing donors

• Likely sources of financing limited to traditional donors

• Likely sources of financing include at least one group beyond traditional donors

• Likely sources of financing include multiple groups beyond traditional donors

Potential to promote additional financing for education

• High risk of displacing funding from elsewhere (e.g. targets existing donors)

• Medium risk of displacing funding from elsewhere ( e.g. targets a mix of new and existing donors)

• Minimal risk of displacing funding from elsewhere (e.g. primarily targets new donors)

Potential to prioritize in case of low replenishment

• Prioritization would require ad hoc decision-making

• Some prioritization built into design, but would require additional analysis

• Prioritization built into design and only require constraining # of recipients

Demand (incl. non-state where relevant)

• Low demand and, in some case, explicit disinterest from potential recipients

• Expressed potential demand, but no easily observable demand from potential recipients

• Easily observed and expressed demand from potential recipients


28

Reinforcing funding mechanism assessment INNOVATION

29

The Innovation challenge fund mechanism has a high potential for impact against GPE’s goals. Recent evaluations demonstrate positive results overall from challenge fund investments, with most achieving their goals (e.g., DFID Financial Education Fund).24 In GPE’s context, the Innovation funding mechanism can help build stronger partnerships between governments and innovators to develop new solutions that deliver on all three goals of improving learning outcomes, increasing the proportion of children who complete primary and/or lower secondary education, and equipping more teachers with tools to lower student-teacher ratio. GPE can introduce tested new ideas that could be scaled for integration into the education system, thereby bolstering efforts supported by GPE implementation grants (e.g., ESPIG). There are limitations to scale and demand from potential applicants depending on the design of challenge funds. The competitive process, which helps identify the most effective and efficient solutions, favors a winner-or-very-few take all model. For example, the Knight Foundation reports selecting only about 1.6% of applicants.25 In addition, sourcing high-quality applications from non-state actors poses a challenge (e.g., Mulago Foundation). Depending on size of award, the Innovation challenge fund may not be attractive enough for governments (fund size is too small) or may exclude potential non-state actor recipients with limited absorptive capacity (fund size is too large). To ensure that the Innovation funding mechanism achieves the objectives to the extent envisioned, an indicative assessment should be conducted early on in the design phase of the challenge fund to determine best practice, including but not limited to grant sizes, eligibility criteria,26 geographical coverage, provision of technical assistance, and duration.

Innovation has relatively high potential to mobilize increased financing from diverse actors, including from private sector as well as traditional donors and foundations. Traditional donors and foundations that could not otherwise donate to an unrestricted pool may be interested in supporting specific thematic rounds. In addition, the challenge funds can form strategic partnerships with the private sector to finance winning projects. For example, projects supported by the DFID Girls Education Challenge Fund receive matching fund from the private sector. The ratio of private capital leveraged by challenge funds could be meaningful, varying from 1:1 to 1:4.27 Piloting the Innovation funding mechanism is relatively feasible due to existing experience in running challenge funds across members of the Partnership. While these lessons could be leveraged when designing the mechanism, running a challenge fund remains a relatively novel domain for the GPE Secretariat, requiring greater capacity. The primary challenges for maintaining operational feasibility is to develop methods for mitigating the relatively high costs for running and maintaining challenge funds.28 Despite some operational concerns, GPE ultimately has a comparative advantage to play a critical role here. This is because although a number of education challenge funds already exist in the market (e.g., Girls Education Challenge Fund, Child Education Challenge Fund, Yidan Prize), there is a significant gap in targeting state actors at the global level.

24 DFID’s Financial Education Fund (FEF) was created in 2008 to increase financial literacy and access to financial services among poor people in Sub-Saharan Africa. Evaluations found that recipients of financial education demonstrated increased awareness of key financial issues, made less risky financial decisions and showed other improvements in their financial management. “Understanding challenge funds,” 2013. 25 400 winners are selected out of 25,000 applications. Stanford Social Innovation Review, “Dump the Prizes,” 2013; Knight Foundation, “Why Contests Improve Philanthropy” 2013. 26 Dalberg will not review eligibility for the Innovation challenge fund mechanism at this time. It will also depend on finalization of the Private Sector Engagement Strategy. 27 ODI, ”Understanding challenge funds,” 2013 28 The DFID challenge fund budgets is about $18 million

30

KGPE

31

Expanding investments into knowledge and good practice exchange highly impacts the achievement of GPE’s goals. Most notably, KGPE contributes to all core indicators of the GPE Results and Indicator Framework, particularly those related to improved data reporting and improved sector plans meeting quality standards. Beyond the core indicators, KGPE is also essential for delivering on the number of policy, technical, and/or other knowledge products developed with support from GPE. Disseminating information on what works promotes continual improvements to both ESPIG and ESPDG programs, enabling adoption of evidence-based approaches to planning and implementing. Moreover, sharing best practices cross-nationally can increase efficiency and effectiveness across the education system globally. Finally, there has been significant demand from consultations with DCPs, with expressions of interest in greater opportunities to learn from each other. The KGPE funding mechanism has the potential to mobilize greater global and domestic resources toward education. In addition to tapping into the initial expressions of interest to fund KGPE activities from both foundations and bilateral donors, GPE could explore a cost-sharing model in which it bears the financial and coordination costs while knowledge provider countries share a percentage of the training budgets. Furthermore, evidence and knowledge products developed through KGPE initiatives could be connected with advocacy efforts to convince governmental decision-makers to better mobilize more domestic resources for education. However, this depends on effective dissemination of key messages and coordination with advocacy efforts to successfully translate information into education policy. It remains unclear whether private sector is likely to fund KGPE activities. Given the increase in KGPE initiatives, higher transaction costs and capacity are required. With more KGPE initiatives, particularly the introduction of competitive calls for regional and public goods proposals, GPE would need to develop greater capacity and technical expertise (e.g., for assessing public goods, such as education research and data). In addition GPE would have to work more closely with partners to promote cross-national exchange, and building such relationships may require substantial effort. Recognizing that such costs could be considerable, they are moderate when compared to the expansive impact that the KGPE funding mechanism could have, as detailed above.

32

ADVOCACY AND SOCIAL ACCOUNTABILITY

33

Advocacy and Social Accountability funding mechanism contributes to the delivery of GPE 2020 by engaging a range of stakeholders to secure widespread commitment and financing for education. Adoption of good policies and technically sound practice would ultimately strengthen ESPIG programs. Advocacy and social accountability efforts has great potential for impact because it can successfully span across national, regional, and international boundaries,29 involving diverse stakeholders across public, social, and private sectors.30 Through leveraging its network of global partners and supporting a multitude of civil society organizations—whether as coalitions or as standalone expert authorities—to enter policy dialogues with government decision-makers, GPE is likely to achieve scale in its Advocacy and Social Accountability initiatives toward its goals for 2020. In particular, it is essential for achieving effective and efficient systems through increasing the proportion of DCPs increase public expenditure on education (core indicator). However, measuring impact against this indicator may present a challenge because it can be difficult to attribute causation when influencing key stakeholders often involves a multitude channels (e.g., direct communication with policy makers, public awareness campaigns). To better capture impact, it is important to document specific actions taken to influence particular policy outcomes and to construct a plausible counterfactual that accounts for other forces that may be in play. Global advocacy is an important component of the Advocacy and Social Accountability mechanism because it is missing in the education landscape. However, there are concerns among the SFWG about how to operationalize this funding window. Pending finalization of the CSP, GPE should continue to probe questions that may influence the design of global advocacy efforts, including the vision for this funding window, the role of targeted financing, GPE’s role in seeding advocacy initiatives, and potential overlap with other funding mechanisms or existing local initiatives. Advocacy and Social Accountability is a viable funding mechanism, despite a potentially smaller array of funders. Private philanthropy initiatives focused on civic engagement, government transparency, and accountability do exist (e.g., Omidyar Network), but it is not clear whether such areas could garner further private capital support. Even so, the Advocacy and Social Accountability funding mechanism has the potential to convince policymakers and the global community at large to mobilize more financing toward education.31 To achieve this objective, GPE would have to grow into an important intermediary role—one that is unlikely to be taken up by others globally—to fund third-party advocacy. While GPE can leverage its experience from CSEF, there needs to be further capabilities in screening civil society actors and in approaching political decision-makers.

29 The Open Society Global Drug Policy Program, which works with policymakers and grassroots groups advocating to end the injustices of the drug war, covers five continents. 30 ONE Campaign is an advocacy and campaigning organization fighting extreme poverty and preventable diseases, which constitutes seven million members from every walk of life, from artists to business leaders, students to scientists. 31 Similar efforts in other sectors, such as health, have been successful (e.g., Bill and Melinda Gates Foundation funded Nothing But Nets, which helped win US Congress support malaria interventions).

34

PRELIMINARY: Alignment of funding enhancements and reinforcing funding mechanisms to GPE Results Framework core indicators32

Goals/Objectives Core Indicators

Enhancements Reinforcements

Data Domestic financing

Alignment Innovation KGPE Advocacy and

Social Account-ability

Goals

Improved and more equitable learning outcomes

Proportion of development country partners (DCPs) showing improvement on learning outcomes (basic education)

Percentage of children under five (5) years of age who are developmentally on track in terms of health, learning and psychosocial wellbeing

Increased equity, gender equality, and inclusion

Proportion of children who complete: (a) primary education; (b) lower secondary education – by total and by gender

Effective and efficient systems

Proportion of DCPs that have (a) increased their public expenditure on education; or (b) maintained sector spending at 20% or above

Proportion of DCPs with pupil/trained teachers ratio below threshold (<40) at the primary level

Proportion of DCPs with DCP reporting at least 10 of 12 key international education indicators to UIS (including key outcomes, service delivery, and financing indicators as identified by GPE)

32 To be further updated before February 2017 Board meeting based on final proposals for funding model enhancements and reinforcing mechanisms

Assessment of GPE’s Financing and Funding Framework – DRAFT as of October 28, 2016

35

Country level objectives

Strengthen education sector planning and policy implementation

Proportion of endorsed (a) education sector plans (ESPs) or (b) transitional education plans (TEPs) meeting quality standards

Support mutual accountability through inclusive policy dialogue and monitoring

Proportion of joint sector reviews (JSR) meeting quality standards

Ensure efficient and effective delivery of SPE support

Proportion of GPE program grant applications approved from 2015 onward: (a) identifying targets in funding model performance indicators on equity, efficiency, and learning; (b) achieving targets in funding model performance indicators on equity, efficiency, and learning

Global level objectives

Mobilize more and better financing

Donor funding through GPE

Proportion of GPE grants aligned to national systems

Build a stronger partnership

Proportion of (a) DCPs and (b) other partners reporting strengthened clarity of roles, responsibilities and accountabilities in GPE country processes

36

ANNEX D: FINANCING INSTRUMENT ANALYSIS

Figure 5: SFWG initial prioritization of financing instruments in Oslo in June 2016

Figure 6: Additional analysis on financing instruments completed by Dalberg

Instrument considered SFWG prioritization

Global Financing Facility Yes

Risk financing (parametric insurance & catastrophe bonds)

Yes

IFFIm (bonds)Yes to collaboration; no to launching new IFFIm

Levies No

Advanced market commitment No

Debt swaps (Debt4Education) No

Impact financing No

Challenge-based funding Yes

Unfunded quality demand Yes

GPE Fund targeted funding Yes

Matching fund Yes

Criteria guiding prioritization

• Mechanism should be attractive to potential donors

• The scale of funding that can be generated through it should significantly outweigh any transaction costs involved

• Mechanism should link to one or more funding mechanism

• Mechanism should not dilute existing core contributions

Instrument considered SFWG prioritizationAnalyzed in this

assessmentComment

Leveraging concessional loans* Yes, as part of GFF ✔ One blended finance option

Loan buy-downs* Yes, as part of GFF ✔ One blended finance option

Risk financing Yes ✔Preliminary analysis to supplement work funded by Rockefeller

BondsYes to bonds via IFFIm

✔Analysis focuses on several types of bonds GPE could consider (e.g., IFFIm-style vs. bond issued by an MDB)

Guarantees* No, as part of GFF ✔Reconsidered as blended finance option given high leverage and minimal upfront capital requirements

Development impact bonds No ✔Reconsidered given strong emphasis on results-based funding

Levies No ✔Reconsidered given potential to cover recurrent costs within education systems (e.g., teacher salaries)

Advanced market commitment No Less appropriate for systems approach

Debt swaps (Debt4Education) No Minimal potential for scale

Impact financing No Minimal potential for scale

Challenge-based funding Yes Considered as funding mechanism

Unfunded quality demand Yes Considered within the context of targeted funding, but not as a unique instrumentGPE Fund targeted funding Yes

Matching fund YesConsidered as one approach to mobilize additional resources, but not as a unique instrument


37

Figure 7: Feasibility assessment of financing instruments

The detailed analysis for each instrument is included in the figures below.33

33 Analysis of risk financing is not included given work is ongoing supported by The Rockefeller Foundation

Feasibility assessment Loan buy-downs

Leveraging loans

Parametricinsurance

Levies Guarantees Bonds DIBsG

ENER

AL

Tested conceptMODERATE MODERATE MODERATE MODERATE MODERATE HIGH LOW

Suitability for education systems strengthening

MODERATE MODERATE HIGH HIGH LOW MODERATE MODERATE

OP

ERA

TIO

NA

L

Ease of design and setup MODERATE MODERATE LOW LOW MODERATE MODERATE LOW

Ease of implementation HIGH HIGH MODERATE HIGH MODERATE MODERATE MODERATE

Minimal transaction costs HIGH HIGH MODERATE HIGH MODERATE MODERATE MODERATE

FIN

AN

CIA

L

Donor interest HIGH HIGH MODERATE NA MODERATE MODERATE HIGH

Debt servicing ability

MODERATE MODERATE HIGH HIGH MODERATE MODERATE MODERATE

Potential for scale HIGH HIGH HIGH HIGH HIGH HIGH MODERATE


38

Financing instrument: Loan buy-downsOverview

Key examples:• DFID bought down an IBRD loan to China for

education in 2003, with the results deemed simply as “satisfactory” by an independent evaluation group1

• Results-based polio vaccine buy-down unlocked IDA financing for Nigeria and Pakistan with performance targets for immunization coverage. Most areas of Pakistan are now polio-free, and northern Nigeria transmission rates are at the lowest level recorded.

Profile

Description GPE buys a portion – interest and/or principal – of a country’s debt in exchange for an agreed amount of the bought down debt going to approved education programs (either the whole loan, or a certain percentage greater than the buy-down amount)

Instrument type

Blended finance

Typical donors or investors

• Donors: Foundations, multilaterals, and governments (The Gates Foundation, DFID, Rotary International, the UN Foundation, and the Government of Australia have all used grants to buy down non-concessional loans and lower the cost of capital)

• Lenders: Development banks (World Bank Group: non-concessional IBRD and concessional IDA, and the Islamic Development Bank)

Possible financingvehicles

• Earmarked grants for loan buy-downs in particular• A dedicated special-purpose buy-down facility (e.g., a

separate legal entity

Possible funding mechanisms

• Concessional loans to LMICs to support education systems strengthening activities (e.g., implementation of sector plans)

Types of activities funded

• Historical: Rural education, polio vaccinations, power plants, infrastructure

• Potential: Education programs aligned with GPE

Notes: 1. Additional detail behind the satisfactory ranking not available

Sources: Results for Development, “Buying Down Loans for Education” 2013; Results for Development, “Time to Think Outside the Box: Buy-Downs as an Education Financing ” 2015; World Bank, “Innovative Financing for Development Solutions,” 2015; Dalberg, “Innovative Financing for Development,” 2014; Stakeholder interviews, 2016


39

Financing instrument: Loan buy-downsStrategic assessment

Strategic assessment

Strengths • Affordability: Lowers the cost of debt by effectively turning non-concessional loans into concessional loans• Sector support: Encourages borrowing for education for countries otherwise reluctant to incur debt• Leverage: Uses donor money to unlock affordable debt for individual countries, ideally at ratio greater than 1:1• Availability of funds: Non-concessional finance is a large source of funds (e.g., IBRD) to which buy-downs could

create access

Challenges • Debt burden: Securing donor funds for indirect allocation to education programs through debt – rather than direct grants – might be difficult; there has been some opposition to the idea of increasing country debt

• Additionality: May not generate incremental spending in education; acquired loans may simply replace current funds allocated to the sector

Risks • Limited utilization: Many countries have demonstrated reluctance to taking non-grant resources to fund their education sectors (rather than for infrastructure)

• Country debt burden: Countries may take on more sovereign debt than they are able to handle

Conditions for success

• Stakeholder interest: Donor interest in funding buy-downs and lender interest in making loans under a buy-down agreement

• Recipient demand: Country interest and willingness to take on incremental debt with a buy-down benefit; this interest should increase with a rise in global interest rates

When is this appropriate?

• Need for leverage: Borrowers constrained by a shortage of affordable debt would be ideal candidates; for example, LMICs’ education programming may require up-front capital in order to scale up

Lessons learned &best practices

• Use of triggers: Conditions for disbursement of the loan can be built into the buy-down agreement to incentivize good performance and planning prior to the deployment of funds

• Intermediation: Some development banks (including IsDB) have expressed interested in loan buy-downs for education; matching this interest with targeted grant financing (e.g., from GPE) and specific country commitments will be essential to moving forward with future initiatives

Sources: Results for Development, “Buying Down Loans for Education” 2013; Results for Development, “Time to Think Outside the Box: Buy-Downs as an Education Financing ” 2015; Dalberg, “Innovative Financing for Development,” 2014; Brookings Institute, “Financing Education: Opportunities for Global Action,” 2015; Stakeholder interviews, 2016


40

Financing instrument: Loan buy-downs Feasibility analysis

Feasibility assessment Rationale

GEN

ERA

L

Tested conceptMODERATE

• Buy-downs have taken place previously in health and other sectors; however, few have been used for education

• Results have not been conclusive or ground-breaking yet, due to few success metrics


MODERATE

• Previous buy-downs have been predominantly in the health sector• Within education, lenders are more interested in education to employment or school

infrastructure rather than basic education and systems strengthening

OP

ERA

TIO

NA

L

Ease of design and setup MODERATE

• A pool of funds is needed to pay for a loan buy-down, as well as substantial negotiations between lenders, GPE, and country governments to ensure institutional alignments

Ease of implementation HIGH

• Once buy-down terms are negotiated, the loan would not require much coordination from GPE; if a results-based trigger is involved, a third party could be responsible for evaluation (with some GPE oversight) to minimize implementation efforts for GPE

Minimal transaction costs

HIGH

• Once the payment for the buy-down is agreed upon and education programs are approved, the transaction costs could be low both financially and operationally; however, these costs would depend on the level of monitoring required

• Partner countries may need to adapt processes to receive loans rather than grants

FIN

AN

CIA

L

Donor interestHIGH

• Different donors such as sovereign governments, private foundations, and multilateral organizations (especially DFID) have been interested in buy-downs


MODERATE• Since a sovereign loan would be taking place, the country has a concessional obligation to

repay the creditor at the terms negotiated, even with the buy-down

Potential for scale

HIGH

• Loan buy-downs could leverage grants to unlock financing for education at a greater than 1:1 ratio by making the loans affordable to country recipients

1. Results for Development, “Time to Think Outside the Box: Buy-Downs as an Education Financing ” 2015

Sources: Results for Development, “Buying Down Loans for Education” 2013; Brookings Institute, “Financing Education: Opportunities for Global Action,” 2015; Dalberg, “Innovative Financing for Development,” 2014; Stakeholder interviews, 2016


41

Financing instrument: Crowding in concessional loansOverview

Key examples:• Concessional Financing Facility (CFF) supports host

communities in MENA dealing with influx of refugees (currently Jordan and Lebanon); $140 million in grants and $1 billion in loans mobilized for education, infrastructure, health, and jobs; the CFF is hosted at the World Bank as one component of the MENA Financing Initiative

Sources: MENA Financing Initiative, “Concessional Financing Facility,” 2016; World Bank, “Glossary of Selected Innovative and Conventional Financial Instruments and Mechanisms,” 2016; Dalberg, “Innovative Financing for Development,” 2014; Stakeholder interviews, 2016

Profile

Description A GPE loan facility finances education activities through sovereign lending and/or invests in return-generating projects; alternatively, GPE uses grants to leverage additional lending from MDBs/DFIs

Instrument type

Blended finance

Typicaldonors or investors

• Donors: Governments (e.g., Japan, US, UK, Germany, Canada, EU, Norway, or the Netherlands)

• Lenders: Development banks (World Bank Group’s IDA/IBRD, European Bank for Reconstruction and Development)


• An earmarked pool of GPE resources to blend with loans from MDBs/DFIs, resulting in an instrument that provides concessional loans on behalf of GPE


• Loans with potential results-based requirements, likely for LMICs

• Project finance within education sector plans to strengthen systems (e.g., a private data company)

Types of activities supported

Historical: Projects across many sectors; e.g., agriculture, energy, infrastructure, etc. Potential: Education programs in need of significant up-front funding

Donor

DFILoan facility

GPE

Country

Educationprograms

Loan

Developmentresults

Repayment


42

Financing instrument: Crowding in concessional loans Strategic assessment


Strengths • Leverage: Via blending, grants can be used to unlock multiples of their own value in lending • Upfront funding: Ability to mobilize large amounts of upfront funding with affordable terms and conditions that would

not be available elsewhere for LICs and LMICs• Long-term project support: Can provide larger volume of funding over longer period of time• Availability of funds: Many development banks (e.g. the Islamic Development Bank) have significant funds for non-

concessional lending that can be coupled with grants• Risk reduction: Helps countries limit exposure to riskier and more expensive debt by providing cheaper alternatives; also

enables donors to support lending without taking on lending duties (diligence, negotiations, collections, etc.)

Challenges • Stakeholder management: Relying on lending partners to ensure education programming aligns with GPE and country goals might prove to be more difficult than funding through GPE itself

• Additionality: Identifying projects that would not have been funded otherwise

Risks • Country debt burden: Country accumulates too much debt, threatening its future financial stability• Poor risk assessment: Due to the social nature of these loans, terms and repayments may be designed in such a way that

they significantly underprice risk of certain projects (e.g., in the case of large infrastructure projects)• Additionality and impact: Concessional loans go to projects that would have been financed with non-concessional loans

anyway

When is thisappropriate?

• Unmet financing need: Countries or other parties willing to borrow for particular social purpose, but constrained by shortage of affordable debt (e.g. LMICs interested in borrowing for education)


• Stakeholder interest: DFIs must be willing to put in the effort to collaborate around these types of arrangements and commit their assets


• Maximizing leverage: Blending of debt and grants should ideally be done so as to achieve a 1:1 ratio or higher in order to unlock as much financing as possible

• Suitability for select activities: Concessional loans have been largely used for infrastructure – therefore, within education, the building of schools or building data capacity may be priorities for this financing instrument



43

Financing instrument: Crowding in concessional loansFeasibility analysis


GEN

ERA

L


• Concessional lending for global development have been deployed over the past 30 years; it is a highly tested method of aid funding more generally

• Concessional loans have not been tested extensively in the education sector


MODERATE

• Most concessional loans have been targeted at high-cost projects such as infrastructure development; education takes up a low percentage of total loans

• Educational infrastructure could be funded by concessional lending

OP

ERA

TIO

NA

L


• GPE could develop arrangements to blend grants with financing partners’ lending; level of effort would depend on whether a new vehicle is needed (e.g., a new trust fund)

• Terms of loans (interest and repayment period) need to be negotiated to align goals of both the lender and a country partner

Ease of implementation

HIGH• Working through MDB/DFI systems would be fairly straightforward to implement (e.g.,

Concessional Financing Facility model with pre-arranged lending that matches grants)

Minimal transaction costs HIGH

• Working through existing MDB/DFI systems would minimize transaction costs for GPE, as the lending process would be primarily managed by the financing partner

• Partner countries may need to adapt processes to receive loans rather than grants

FIN

AN

CIA

L

Donor interestHIGH

• Development banks have stated interest in complementing GPE grant funding with loans• With a trusted lending partner by GPE’s side, donor appetite would likely be greater


MODERATE• Even at concessional interest rates and terms, repayment is still expected and is fundamental

to the concept of this financing tool

Potential for scale

HIGH

• Debt can bring projects to fruition when grant funding is insufficient• Blending grants with debt results in leverage ratios greater than 1:1• Maximizes the utilization of grant money by leveraging existing MDB/DFI processes and

systems to blend financing



44

Financing instrument: BondsOverview

Key examples:• IDB launched the Education, Youth,

Employment (EYE) Bond, which raised over $600 million from 2014-2015; 81% was allocated to education projects

• AfDB has issued several Education Support Bonds to Japanese retail investors

• IFFIm uses long-term donor pledges to issue bonds on the capital market and provide immediate funds to Gavi; donors funds provide revenue stream for return on bonds

Profile

Description GPE helps launch an education-focused bond that provides grant resources to the GPE funding platform for disbursement to countries. The entity issuing the bond would receive pledges from GPE and/or its donors.

Instrument type Debt security


• Donors: Previous bonds issued for development/social purposes have been backed MDBs/DFIs who issue the bonds as well as donor pledges (e.g., IFFIm)

• Investors: can vary widely – e.g., central banks, banks, asset managers, pension funds, insurance companies, and corporate companies

Possible vehicles • Bond issued by DFI/MDB• A dedicated special-purpose vehicle (e.g., IFFIm)


• Grants to countries for implementation of ESPs, with focus on programs that require large upfront capital –such as infrastructure for schools and/or teacher education institutions; ICT equipment; connectivity


• Historical: Green bonds and other thematic bonds, including some in education• Potential: Further growth of education bonds as a fixed income asset class for thematic bonds

Sources: Documentation from GPE Secretariat; IDB, “IDB launches inaugural Education, Youth, and Employment (“EYE”) Bond,” 2014; AfDB, “AfDB Offers Education Support Bond to Japanese Investors,” 2013; AfDB, “2015 Annual Report,) 2015

Donor pledges

GPE

Country

Educationprograms

Grant

SPV

Fixed return

Investors

Grant

Donor

GPE

Country

Educationprograms

Grant

Bond issuer

Fixed return

InvestorsLikely loans

Money would likely not flow

directly through GPE

Funding agreement

IFFIm-style bond

MDB-style bond


45

Financing instrument: BondsStrategic assessment

Sources: Documentation from GPE Secretariat; IDB, “IDB launches inaugural Education, Youth, and Employment (“EYE”) Bond,” 2014; AfDB, “AfDB Offers Education Support Bond to Japanese Investors,” 2013; AfDB, “2015 Annual Report,) 2015


Strengths • Upfront capital: Bonds can help frontload financing, which is important for capital investments (e.g., infrastructure) or large one-time expenditures (e.g., technology)

• Predictability: Bonds provide funding that is more reliable than donor replenishment cycles• Affordability: Bonds provide grant resources that could support the poorest countries; IFFIm mechanism has achieved a

very low cost of financing

Challenges • Revenue stream: Bonds require a revenue stream for the issuer to repay the principal and interest to the investors; IFFIm bonds address this issue by using donor pledges as collateral. If the bond is not IFFIm-style, repayment requires a revenue stream that is not donor grants. Therefore, DCP recipients of financing mobilized via the bond would likely need to take a loan – which drops the AA or AAA sovereign risk of a developed country donor to a less creditworthy rating of the DCP recipient. This increases risk and thus the cost of capital/price of the bonds. An IFFIm-style bond is valuable because it is seen as risk-free.

• Replicability: Although MDB/DFI-style bonds are highly replicable, an independent evaluation of IFFIm in 2011 determined the model would be difficult to replicate without strong donor interest driving the opportunity

• Sustainability: IFFIm has encountered challenges for an organization like Gavi that is growing and expanding rapidly

Risks • Failure of model: At the onset, IFFIm model risked failure; however, it survived the financial crisis due to its operational efficiency. It also faces the risk of losing its AAA status, which would undermine IFFIm’s success.

• Loss of assets: An effective hedging strategy is essential in order to protect the value of assets supporting IFFIm-style bonds


• Requirement for upfront capital: GPE would need to make a strong case for why its model requires upfront capital and/or predictable long-term funding – especially as compared to other organizations who face the same issues around unpredictable donor contributions. The 2011 IFFIm evaluation found that Gavi had not fully used the potential the model offers for frontloading investment and predictability.


• Long-term, capital-intensive education projects: Bonds can provide long-term financing to projects that require high upfront capital investment and a longer period of time to demonstrate outcomes

Lessons learned & best practices

• Measurable outcomes can help attract donors to back IFFIm-style bonds• Working through MDB/DFI: MDB status has been critical in enabling IFFIm to access low cost funds due to World Bank’s

AAA rating


46

Financing instrument: BondsFeasibility analysis


GEN

ERA

L

Tested concept

HIGH

• MDBs/DFIs have issued many thematic bonds over the past two decades, including several focused on education

• IFFIm demonstrated proof-of-concept for bonds backed by long-term donor pledges, but this concept is less tested than MDB/DFI bonds


MODERATE

• Long-term bond financing is appropriate given learning outcomes take time to achieve• Bonds are most appropriate for activities that require a large amount of upfront capital (e.g.,

infrastructure)

OP

ERA

TIO

NA

L


• MDB/DFI-style bonds are relatively easy to design and issue given they frequently use bonds to mobilize resources from capital markets

• Setting up an IFFIm-style bond would require high upfront investment of time and resources given IFFIm is a separate legal entity

Ease of implementation MODERATE

• MDB/DFI-style bonds are relatively easy to design and issue given they frequently use bonds to mobilize resources from capital markets

• Setting up an IFFIm-style bond would require high day-to-day operational investments given IFFIm is a separate legal entity; IFFIm has struggled to teak advantage of economics of scale

Minimal transaction costs MODERATE

• Transaction costs for MDB/DFI-style bonds are low given usage of existing MDB/DFI systems and processes

• Transaction costs for IFFIm-style bond would be higher given it operates as its own entity

FIN

AN

CIA

L

Donor interest

MODERATE

• MDBs/DFIs frequently issue bonds, but resources are used for their own programs• According to Gavi, donors may not be as interested in IFFIm-backed bonds in the current

financial environment (as compared to 2008 when IFFIm was established); convincing case must be made regarding the need for upfront financing and predictability over time


MODERATE• Bond investors require return of principal and additional returns, but coupon rates (fixed rate of

return) are typically low

Potential for scale HIGH• From 2000-2013, bonds were responsible for ~25% of all finance mobilized by innovative

financing mechanisms1

Notes: 1. See Dalberg, “Innovative Financing for Development,” 2014Sources: Documentation from Secretariat


47

Financing instrument: LeviesOverview

Key examples:• The airline ticket levy has provided 50% of

UNITAID’s funding over the past five years. It has been implemented in ten countries and has raised $2 billion since 2006 – despite a global recession

• UNITLIFE launched a levy in 2015 to address chronic malnutrition in Sub-Saharan Africa. Natural resource-rich countries invest a small percentage of their revenues from the sale of the sale of oil, gas, and mining in a dedicated UNICEF fund. The levy is expected to generate between $100-$200 million a year, but results are not yet available

Profile

Description A proportion of sales on certain products, services, or transactions would be directed to the GPE funding platform, including the current unrestricted GPE Fund and/or new vehicles in the future

Instrument type

Tax


• N/A; resources are mobilized directly from consumers or other entities participating in the specified transaction to be taxed

Possible vehicles

• Resources mobilized could be transferred to the GPE Fund or another new funding vehicle


• Any GPE grant (planning, implementation, etc.)


• Historical: Primarily used in support of health causes• Potential: Could have broad applicability across the

social sector, especially for issues that can attract a lot of public attention

Sources: Documentation from GPE Secretariat

Consumers or transacting

entities

GPE

Country

Educationprograms

Tax Grant


48

Financing instrument: LeviesStrategic assessment

Sources: Documentation from GPE Secretariat


Strengths • Flexibility: Levies could support almost any GPE financing priority• Simplicity: Structure is simple, easy to understand, and low-cost if built on existing tax collection systems• Predictability: Levies provide funding that is more reliable than donor replenishment cycles• Affordability: Levies provide grant resources that could support the poorest countries• Publicity: Given their broad reach, levies could raise awareness of GPE’s work

Challenges • Securing buy-in: Reaching an agreement with countries to implement a levy is difficult. Also, a levy could be voluntary, e.g., across an industry (thus not requiring legal/regulatory changes across the board) – which could compound the problem of generating buy-in.

• Legal and regulatory requirements: Levies require changes to regulatory/legal environment in all relevant countries

Risks • Delayed or unsuccessful implementation: Despite passage in 2013, the European FTT still is not operational• Volume and sustainability of finance: There is a risk the levy does not persist or does not generate the revenue

expected


• Consumer willingness: Individuals must be wiling to pay a small tax on a high-volume product or service• Lobbying and multi-country alignment: Creating a global levy requires an agreement across countries to create a new

consumer/user tax; creating a country-specific levy would require lobbying and agreement within that country• Global consensus: Agreement about the goals of the levy – and their importance – across the international community


• Recurrent funding: Levies can support recurrent costs, such as HIV/AIDS treatment (in the case of UNITAID) or teacher salaries (in the case of GPE countries)

• High-visibility programs: Programs with demonstrated impact and clearly measurable results are best-positioned to implement a levy given importance of public buy-in


• Building on existing systems: To minimize transaction costs, levies should build on existing tax collection systems


49

Financing instrument: LeviesFeasibility analysis


GEN

ERA

L


• UNITAID serves as a successful “proof-of-concept” for levies, but the instrument has only been used for a handful of cases in development


HIGH

• Flexibility of levies allows funds to be directed to almost any area of education need, including GPE’s systems strengthening approach

OP

ERA

TIO

NA

L

Ease of design and setup

LOW

• The technical aspects of design and setup are relatively easy if collection of funds is based on existing tax collection systems (e.g., airline ticket levy used existing system for collecting air tax)

• However, securing buy-in for a levy from multiple countries is quite difficult. Even though the EU approved the introduction of a Financial Transaction Tax (FTT) in 2013, implementation has been delayed and countries have not agreed on what resources mobilized via the FTT will support

• A 2009 UNESCO effort to launch a sports levy was never implemented

Ease of implementation

HIGH• Management requirements are low if collection of funds is based on existing tax collection

systems


HIGH• Transaction costs are low if collection of funds is based on existing tax collection systems

FIN

AN

CIA

L

Donor interestNA

• Does not require donor support


HIGH• Levies do not require any repayment

Potential for scale HIGH

• If an agreement can be reached, levies have high potential to raise significant resources; UNITAID levy has raised over $2 billion in 10 years and UNITLIFE levy (launched in 2015) is expected to raise $100-$200 million a year for child nutrition

Notes: 1. See Dalberg, “Innovative Financing for Development,” 2014Sources: Documentation from Secretariat


50

Financing instrument: GuaranteesOverview

Key examples:• MENA Guarantee Facility provides guarantees for

MDB loans to countries, World Bank bond issuances, and Sukuk issuances – results to date are limited given recent launch of the facility

• Private Sector Facility provides guarantees to the African Development Bank (ADB) to support lending to private sector actors in non-creditworthy African countries – results to date are limited given recent launch of the facility

Profile

Description GPE uses a subset of its grant resources to enter a partial guarantee agreement with an investor for a specific transaction or portfolio of transactions. Backed by the guarantee, the lender extends loans to GPE countries for education sector investments – and could provide favorable financing terms.

Instrument type

Blended finance


• Third-party donors – mostly bilaterals – have provided guarantees to MDBs (e.g., World Bank) to spur increased lending to countries. Foundations (Rockefeller, Gates) have provided guarantees through program-related investments (PRIs)

• MDBs and bilaterals have launched special-purpose vehicles (e.g., Guarantco, African Guarantee Fund) that provide guarantees for specific transactions

Possible vehicles

• Earmarked resources within a larger portfolio• A dedicated special-purpose guarantee vehicle


• Concessional loans to LMICs to support education systems strengthening activities (e.g., implementation of sector plans)


• Historical: Large infrastructure and energy projects; commercial bank lending to businesses (e.g., SMEs)

• Potential: Expansion into social sectors, including health and education

Sources: MENA Financing Initiative, “Guarantee Facility,” 2016; SSIR, “Making Markets Work for the Poor,” 2016; The Rockefeller Foundation, “The Rockefeller Foundation's Program-Related Investments Portfolio,” 2013; Stakeholder interviews, 2016


51

Financing instrument: GuaranteesStrategic assessment

Sources: MENA Financing Initiative, “Guarantee Facility,” 2016; World Bank, “Partial Credit Guarantees,” 2016; Dalberg, “Innovative Financing for Development,” 2014; Stakeholder interviews, 2016


Strengths • Leverage: Unlocks increased financing for GPE countries per $1 of donor capital committed by using grant resources to guarantee lending at a leverage ratio greater than 1:1

• Minimal upfront commitment: Only requires a small fraction (e.g., 5-10%) of upfront payments from donors to set aside a reserve to cover expected losses; payments are only triggered upon default of the underlying transaction(s)

• Risk reduction: Partially protects lenders (e.g., MDBs) from capital losses, thereby mitigating the risk of the underlying loans to GPE countries

• Favorable financing terms: Can be structured to offer advantageous financing terms • Fit-for-purpose: Offers flexible structure that can be tailored to different sectors and borrower/recipient needs• Fit with GPE countries: Could allow MDBs to increase their lending to historically underserved countries (e.g., LICs)

Challenges • Affordability: Does not provide grant financing to countries, which makes cost of capital higher • Low uptake: Uptake of guarantees could be low due to lack of demand for non-grant financing for education• Additionality: Financing supported by guarantees is not always additional; to spur incremental lending, guarantee must

identify transaction(s) that would not have happened without the risk mitigation instrument

Risks • Limited financing mobilized: Guarantee does not mobilize additional financing for education systems in GPE countries due to a.) limited country uptake and/or b.) lack of additionality (e.g., the guarantee supports loans that would have been issued even without a risk mitigation instrument)

• GPE capital losses: If risks are improperly understood (e.g., due to inadequate risk analysis), the default rate would be much higher than expected, and payouts of donor/GPE money to banks would results in losses


• Recipient demand: Recipient (e.g., GPE countries) demand for increased non-grant lending from the investors (e.g., MDBs) receiving the guarantee


• Perceived risk: Investor(s) are unwilling to participate in select transaction(s) due to perceived risk; therefore, risk reduction is required to spur lending to the target recipients (e.g., GPE LICs)

• Need for leverage: More financing is required than the amount of upfront donor grants


• Pricing: It is important to price the guarantee appropriately and diversify across different risk profiles• Selection of appropriate transactions: Loans must be selected to ensure the guarantee unlocks incremental funding


52

Financing instrument: GuaranteesFeasibility analysis

Feasibility assessment RationaleG

ENER

AL


• Has been well-tested in some sectors (e.g., infrastructure, energy), but has limited use in education and other social sectors to date


LOW

• To date, country demand to take on non-grant financing for education projects has been low; in 2014, 15% of gross disbursed ODA for basic education in developing countries came from loans, based on available data1

• Risk aversion amongst investors is not the primary driver of funding gaps across national education systems; it is primarily an issue of accessing affordable capital

OP

ERA

TIO

NA

L


• Guarantees to MDBs are relatively easy to structure because they take advantage of existing MDB processes and systems

• However, ease of setup for GPE depends on whether or not issuing guarantees would require creating a new fund/facility in addition to the GPE Fund


• Guarantees to MDBs are relatively easy to execute because they take advantage of existing MDB processes and systems

• Risk assessment and proper structuring of guarantee contracts are paramount to successfulexecution of guarantees; GPE would need to build its risk capacity, if managed internally


MODERATE• Transaction costs for countries may be higher given need to take out a loan

FIN

AN

CIA

L

Donor interest

MODERATE

• A number of bilaterals and several foundations (Rockefeller, Gates) have provided guarantees• Guarantees are attractive because a smaller amount of donor capital is required upfront (e.g., in a

special purpose vehicle or ring-fenced account) to cover expected losses • Some donors are skeptical of guarantees’ ability to generate impactful, incremental lending


MODERATE• Countries need to pay guarantee fees, but pricing can be reasonable given flexibility in how the

instrument is structured

Potential for scale HIGH

• When implemented effectively, partial credit guarantees can achieve high leverage ratios • From 2000-2013, guarantees were responsible for nearly 40% of all finance mobilized by

innovative financing mechanisms2

Notes: 1. OECD Creditor Reporting System 2. This includes partial risk guarantees via MIGA. See Dalberg, “Innovative Financing for Development,” 2014

Sources: OECD and WEF, “Blended Finance Vol. 1: A Primer for Development Finance and Philanthropic Funders,” 2015; Stakeholder interviews, 2016


53

Financing instrument: Development Impact Bonds (DIBs)Overview

Key examples:The Educate Girls DIB in Rajasthan, India was launched in 2015 and is seen as one of the best examples in the sector of innovative financing. In this case, CIFF is the donor and outcome payer, and UBS is the investor. Though results have not yet been conclusive, the initiative has already achieved many of its goals – enrolling 44% of all out of school girls in the region, and meeting 23% of the total learning targets. If they continue at this rate, UBS will recoup their $267,000 investment within 2-3 years.

Profile

Description GPE acts as an intermediary between investors and donors, who are the outcome payers of verifiable education sector results

Instrument type Results-based financing


Donors: Foundations and multilateral (CIFF and DFID)Investors: Banks or impact investors (UBS)


• GPE creates a fund or pool of resources that receives contributions from donors and acts as the outcome funder

• GPE coordinates and set up DIBs in different countries, with donors acting as direct outcome funders


• Results-based implementation grants, with distinct indicators and outcomes agreed upon by all parties

• More targeted grants that focus on specific education priorities (e.g., girls)

Types of activities funded

Historical: Girls’ education in India, sleeping sickness in UgandaPotential: Any education program that has measurable results

Sources: DevEx Impact, “A look inside the Educate Girls development impact bond and the first-year results,” 2016; Dalberg, “Innovative Financing for Development,” 2014; DFID, “Evaluating Development Impact Bonds,” 2015; Stakeholder interviews, 2016

DonorOutcome funder

GPEIntermediary

Recipient

Educationprograms

Repayment

DIBs Results

Investor

Resultsbasedgrants


54

Financing instrument: Development Impact Bonds (DIBs)Strategic assessment


Strengths • Private sector inclusion: Catalyzes private investment alongside public donations• Innovation: Is highly innovative in results-based financing; DIBs are on the frontier of new aid models• Risk-sharing: Distributes the financial risk and implementation risk between donors and investors• Emphasis on results: Incentivizes implementation partners by basing annual funding on achievement rates of

predetermined outcomes

Challenges • Alignment on outcome metrics: Agreement on specific outcome metrics – the success of which can be clearly attributable to the implementing agent, measured well, and captured within a 3-5 year time horizon that DIB investors will require

• Stakeholder interest: Convincing donors and investors to come together to fund a DIB lies at the crux of this model• Proof-of-concept: DIBs are unproven in both developing countries and the education sector, which generally has a longer

time frame for significant intervention results

Risks • Implementation failure: If expected results are not achieved, both donors and investors may be less inclined to engage in the DIB model in the future due to perception that DIBs do not work (there is not much room for trial and error)

• Donor fatigue: interest amongst DFIs and foundations will wane if the idea of DIBs doesn’t get off the ground soon• Shortage of opportunities: Lack of implementation projects and partners with interventions that can scale results

Conditionsfor success

• Measurable outcome metrics: Identifying and being able to monitor targeted and attributable success metrics • Intermediary coordination: All stakeholders need to be actively involved and aligned: donors, investors, intermediaries,

implementing partners, country governments, and third party M&E evaluators


• Shorter term, targeted programs: DIBs unlock private sector and donor funding in parallel, which mobilizes funds annually for a project duration of about five years; illustratively, this could be used for activities such as data capacity building, teacher training, or providing education to refugees


• Donors first: It is essential to initially secure donors, who provide the capital for outcome funding• Implementer selection: Secondly, an implementer with a strong track record (whether it is a country government, or

multiple NGOs and companies) is needed to attract sufficient investment• “Less is more:” Simple outcomes are better; DIBs are best suited to problems that have easily measured and achievable

outcomes (such as attendance in education)



55

Financing instrument: Development Impact Bonds (DIBs)Feasibility analysis


GEN

ERA

L Tested conceptLOW

• There has only been one developing country education DIB; Social Impact Bonds in developed countries, with their own governments as outcome payers, are more common


MODERATE

• DIBs can theoretically fund any project with results, but meaningful direct and immediate outcomes for education are relatively more difficult to measure

OP

ERA

TIO

NA

L

Ease of design and setup LOW

• Requires significant capacity to set up; would take GPE a long time to design• Multiple actors involved, which requires extensive negotiation processes and stakeholder

management and coordination


• Assuming the outcomes are clearly specified and consistently measured, the payment from donors is straightforward

• Robust evidence from a third party evaluator reduces the burden on implementers, investors, and donors

Minimal transaction costs MODERATE

• The design process requires considerable additional capacity from the intermediary• Due diligence conducted by a third party is essential to verifying the outcomes• DIBs could required additional efforts from countries and implementing partners,

particularly during the design phase

FIN

AN

CIA

L

Donor interestHIGH

• The Islamic Development Bank is interested as a lender, and DFID as a donor• DIBs are regarded as an innovative financing instrument with high potential for

development, and education finance experts have expressed their support

Debt servicing ability MODERATE

• Outcome payers commit to a simple interest rate over 3-7 years – or, there can be tiers of payouts depending on the extent of success reached in the outcome metrics

• Though DIBs are referred to as bonds, there are no coupons or yields involved

Potential for scale

MODERATE

• The DIBs that have launched have been slow to scale up, but there have been new DIBs in the planning stages every year since 2013

• The concept in itself is very scalable, but DIBs are currently in need of enough investors, donors, and implementing partners to take the idea to scale


Documents

ASSESSMENT OF GPE’S FINANCING AND FUNDING FRAMEWORK€¦ · BOD/2016/12–DOC 08 B ... This includes an assessment of the proposed funding and financing approaches – as well as