Paying for success: A transformational model for the social sector

Investors are assured of a return of the principal with modest returns on project completion and independent evaluators validating contractually defined outcomes. Thus, every stakeholder is strongly incentivised to ensure project success, since it is tied to a financial return

Every year, in India, government expenditure on social sector programmes has increased, keeping pace with objectives of economic growth and welfare. Such programmes cover several elements essential for human development such as education, public health, nutrition, access to clean water, and sanitation.

While public expenditure has helped raise the number of school-going children, it does not appear to have correlated to improved learning (Vipin Kumar/HT PHOTO)

However, despite years of growing public spending commitments for welfare, measured impacts, in terms of outcomes, often range from middling to poor.

The paradox in learning and health

For instance, Pratham Education Foundation’s annual comprehensive Annual Status of Education Report (ASER) consistently shows poor learning outcomes among early school-going children.

Its 2019 report found that nearly 49% of children in class 3 across 26 rural districts in 24 states could not read a class 1-level textbook. Only 41% in class 1 could recognise two-digit numbers. Elementary and primary school enrolment in 2019-20, as per the government’s Unified District Information System for Education (UDISE+) report, however, stood at nearly 98% and 90%, respectively.

While public expenditure has helped raise the number of school-going children, it does not appear to have correlated to improved learning.

Similar patterns can be derived for nutrition programmes. For instance, various schemes and the public distribution system under the National Food Security Act have helped 950 million citizens access subsidised food grains. However, data from the first phase of the annual National Family Health Survey-5 for 22 states and Union Territories showed that the percentage of anaemia, wastage, stunting and underweight children either stagnated or increased in 2019-20 compared to 2015-16.

Shifting the focus to outcomes

To a large degree, the government’s ability to push the frontiers of social sector programmes — from availability to access, and from access to impact — is determined by the approach to how these programmes are financed.

The approach is not so much a question of the quantum of allocations, but how incentive structures are shaped.

Traditional programmes tend to place a greater emphasis on inputs (for example, higher budgets) and activities (hiring more teachers) rather than outcomes (learning). While the former is imperative for growth, the need of the hour is to complement these efforts with an approach that shifts performance incentives to the delivery of outcomes.

Over the last decade, results or outcomes-based financing (RBF/OBF) has gained traction in the social sector. It brings private participation: Where an investor provides up-front capital in response to a project commissioned by an “outcome payer” (typically, a government or philanthropic organisation). Service providers — usually non-profit organisations possessing a deep understanding of local contexts through an on-ground presence and domain expertise — implement the project.

Then, evaluators measure the delivered impact independently.

A share of the pie

Investors are assured of a return of the principal with modest returns on project completion and independent evaluators validating contractually defined outcomes. Thus, every stakeholder — the investor(s), outcome payer, service providers, and evaluators — is strongly incentivised to ensure project success, since it is tied to a financial return.

A specific OBF instrument that the government should consider is the social impact bond (SIB) in which the government is the outcome payer. This financing structure, operating on OBF principles, has been used successfully in many Western economies over the last decade. SIBs are particularly suited for new and innovative projects where outcomes can be attributed to the intervention, and target groups are easily identifiable.

India already has some experience with development impact bonds (DIBs), a similar instrument where the outcome payer is a philanthropic organisation. The Educate Girls DIB, supported by the UBS Optimus Foundation and Children’s Investment Fund Foundation in Rajasthan, achieved tremendous success after its launch in 2015. Over its three-year lifecycle, it clocked 160% of its learning target for the 7,000 children in programme schools. This was 79% more than its peers in non-programme schools.

Financial and social return

Such “pay-for-success” models have significant transformational development potential. They ensure fiscal prudence since governments pay only on the delivery of pre-defined outcomes and facilitate risk-sharing with investors who seek a “double bottom line” (financial plus social return). SIBs also provide service providers with more scope to determine the necessary inputs and strategies required to achieve contracted outcomes.

This differs from more rigid procurement norms typical in traditional government-funded projects. Creative solutions and flexibility are leveraged to address complex social problems. Successful use-cases can then be scaled by the government on completion.

There appears to be some movement in exploring such financing structures with the first SIB in India, backed by the Pimpri-Chinchwad Municipal Corporation in Maharashtra, launched late last year. More state and local governments should emulate this approach to innovative financing.

Promoting impact bonds

Institutional mechanisms to promote impact bonds in India need to be prioritised. This is relevant both, from policy and regulatory standpoints, to help grow this market and protect investor commitments. A mechanism to build this ecosystem — such as the Centre for Social Impact Bonds located within the United Kingdom Cabinet office — will bring all stakeholders onto a common platform to build capacity, broaden learning, and identify potentially catalytic projects.

India is estimated to require up to $2.64 trillion in investments to meet its Sustainable Development Goal (SDG) targets by 2030. Thus, the case for governments to facilitate, support, and encourage private entry into the development sphere is clear. While SIBs are unlikely to plug all development gaps, they can help optimise social spending. More importantly, they could help mainstream a culture that privileges outcome delivery over a mere ticking of boxes in project status reports.

Anant Jayant Natu is an associate partner in the Government and Social Impact (GSI) practice at MicroSave Consulting (MSC) and leads their Catalytic Finance practice. Tomojit Basu is a manager in the GSI practice at MSC

The views expressed are personal