Some 250 million children under the age of five—43 percent of kids five or younger worldwide—are at risk of not developing to their full physical, cognitive, and socioemotional potential. This poses an enormous cost to society and huge future risks in many countries.
Changing this is possible. The first step in preparing today’s children for tomorrow’s world is to intervene early with programs such as pre-natal care and nutrition, breastfeeding promotion, quality preschool education, and a multitude of other early childhood development (ECD) services that stretch through to primary school entry. Early investments not only make sense in the short term, but research also shows that every $1 invested in reducing stunting (chronic malnutrition) and quality preschool is estimated to have a return of between $15 and $138 and boosts adult earnings by between $6.4 and $17.6.
Nevertheless, while the privileged few usually have access to the quality services they need, for the rest of the world’s population, access to early childhood services depends upon funding and support from government and non-profits; even when those services do exist, they can be unpredictable, of poor quality, and at small scale.
What can be done? Ideally, strong government service systems would step up to tackle this daunting challenge. However, the benefits of early childhood programs are often too delayed and the investment too risky for governments to prioritize these programs with their limited funds. Though early childhood interventions have the potential to have large positive impacts on children’s lives, there is still much to learn about effective delivery and dosage, as a recent review of the impacts of early childhood interventions in low- and middle-income countries attests. ECD interventions, along with many other development programs, are complex and often behavior-dependent, requiring careful adaptation to each context.
Social and development impact bonds (SIBs and DIBs), also known as pay for success financing (PFS), offer a viable and promising solution. They allow impact investors to bridge the risk and time-delay barriers to government or foundation investments in ECD, and in turn, these private investors may share in the high returns reaped by society. More importantly, impact bonds are a results-based financing mechanism that allow service providers flexibility in their delivery methods and encourage rapid improvements in the delivery of services based on feedback from internal data, helping to ensure the potential positive impacts of ECD interventions are achieved.
Finally, impact bonds can help to establish systems of quality monitoring as well as data sharing between government actors and service providers and can bring disparate actors such as ministries of education and ministries of health to the table to collaborate. In sum, impact bonds can serve a critical niche role at the middle phase of scaling ECD interventions. By doing so, they could springboard the development of strong government-sponsored and monitored services.
Promising early results
SIBs for ECD thus far represent a small proportion of the impact bonds contracted globally. As the table below shows, of the 69 contracted SIBs across 16 high-income countries (as of January 2017), just nine provide services to children in their early years, across four countries (the United States, Canada, the United Kingdom, and Australia).
But the face-value results from these nascent ventures are encouraging—early childhood outcomes have been achieved, and investors have received returns on their investments. In the Newpin Social Benefit Bond in Australia, for example, investors received a return of 19.42 percent of their initial investment after 3 years (equivalent to a 6.1 percent annual return). In Utah, in the first SIB for early childhood education in the United States, a reduction in the need for remedial education among the children who had received high-quality preschool resulted in a $257,000 return to investors after one year of implementation. Early results from a preschool SIB in Chicago also resulted in promised returns to investors.
Other impact bonds for ECD with a high potential for making a positive difference in children’s lives are in the works. While no impact bonds for ECD exist to date in low- and middle-income countries, for example, several are either in the design stage or near contract signing. The Departments of Social Development and Health of the Western Cape province of South Africa have committed 25 million rand (about $1.62 million) in outcome funding for three SIBs for maternal and early childhood outcomes. Outcomes selected in the deals include: improved antenatal care; prevention of mother-to-child transmission of HIV; exclusive breastfeeding; a reduction in growth stunting; and improved cognitive, language, and motor development.
An impact bond is currently being developed in the state of Rajasthan in India that would pay private health clinics for reproductive, maternal, and child health outcomes, targeting individuals in the second and third income quintiles.
Grand Challenges Canada, Social Finance UK, and the MaRS Centre for Impact Investing are working in Cameroon to develop an impact bond to finance Kangaroo Mother Care (KMC)—an intervention known to save and improve the lives of low-birth-weight infants. While not focused on early childhood education, valuable lessons from the first year results of a DIB for girls’ education show impressive learning gains despite some setbacks in implementation.
Despite their potential benefits, impact bonds (and other results-based financing mechanisms) may not be legally feasible in all settings. Capacity constraints in low- and middle-income countries could make the management of data and contracts required for an impact bond particularly challenging, or even impossible. Further, it may prove difficult in some scenarios to measure the results of such investing and attribute those results to a specific intervention. Finally, the additional transaction costs associated with impact bonds may not be worth the potential benefits of using the mechanism. Appropriate financing mechanisms need to be determined on a case-by-case basis.
Nonetheless, in contexts where they are feasible—and if designed and implemented well—impact bonds have the potential to result in big improvements in ECD interventions. They can produce system-wide changes in how governments and nonprofits do business, by forcing the strengthening of monitoring and evaluation, encouraging adaptive learning, and improving collaboration across stakeholders in a system of social service delivery. By building on existing knowledge from early childhood interventions that work at small scale, impact bonds can serve to test programs out in a middle phase, and continue to help them improve.