The catalytic role of donors

This blog is part of a series on the experience of Global Affairs Canada (GAC) in structuring an outcomes fund – the CAD $30–50 million Outcomes Fund for Education Results (OFFER) – in Colombia. Upon launch, the fund will aim to ensure students have equitable access to education and opportunities for retention and achievement. We’re pleased to share the lessons learned around the role of the governments, donors, and non-state actors to support the development of Outcomes Funds and how these vehicles could contribute to systemic change.

Also in this series:

An interview with Global Affairs Canada
The role of government
The role of non-state actors
Outcomes funds as drivers for ecosystem building

Middle-income countries face significant social and economic challenges. The World Bank recently estimated that about 75% of the world’s population and 62% of the world’s poor live in this group of nations. Although many Latin American countries in the group have lower than average poverty rates, they also display significantly higher levels of income inequality among their citizens. Unequal access to, and low quality of, basic infrastructure and social services such as education, health, or training for employment result in poor life outcomes for a considerable proportion of the population living in Latin America.

Covid-19 has exacerbated these social problems for the most vulnerable in the region. It is estimated, for instance, that only 14%-25% of students from the lowest income quintiles across Latin America have an internet connection; in a world of remote schooling, this fact alone will widen already significant gaps in access to education and learning achievement for the most disadvantaged students.

Meanwhile, governments in the region face substantial challenges in improving social outcomes. Although middle-income countries have strong institutions and often significant resources to allocate to different issues, the money spent on social programs does not necessarily translate into better results for the population. This situation is associated with three of the main limitations public authorities encounter when trying to innovate, work at scale, or at a systemic level.

Public sector budgeting rules

Public authorities must typically budget and execute public funding on an annual basis. This budgetary rule creates substantial restrictions for planning and implementing mid- and long-term programs that could significantly impact the living conditions of the population. In addition, the use of departmental budgets that must be spent on activities falling exclusively under the remit of the department limit the effective funding of programmes addressing complex social needs.

Procurement practices focus on acquiring specific services

The public sector’s traditional procurement rules prescribe the type of services that are to be delivered in each project or contract. This feature disincentivises innovation, as it doesn’t allow enough contractual space to test and learn new practices that could improve social outcomes.

Little collaboration with non-state stakeholders

Fruitful collaborations between governments and non-state actors are rarely seen in the social sector (building partnerships across sectors is challenging, given the rigid structure of governments). In turn, this lack of collaboration inhibits public authorities from learning about alternative market approaches to improve social outcomes.

GAC, one of the leading donors in the education sector in Colombia, has played a vital role in promoting innovation and better social outcomes through payment-by-results mechanisms. In a context where the government faces the above restrictions to innovate and grow its impact at scale, GAC has funded multiple education programs and provided strategic advice to the government. Over the years, this bilateral donor has developed high credibility in the education ecosystem and built solid and productive collaborations with state and non-state partners. GAC’s unique position in the sector was crucial to push the successful design of the Outcomes Fund for Education Results in Colombia (OFFER) in the following ways:

• a strategic perspective and the depth of its relationships allowed GAC to rally organisations from the public and non-profit sectors around this initiative and get rapid buy-in to get going;
• an ability to commit a significant amount of funding for several years gave the initiative a solid foundation, while the discretionary nature of its funds enabled the openness and flexibility to test innovative financing approaches that were essential during the design of the fund;
• finally, GAC’s extensive geographic reach, reputation and convening power facilitated the engagement of multiple local stakeholders as the initiative progressed.

GAC’s efforts around the OFFER supplement other initiatives in the country that demonstrate the catalytic role of donors and international cooperation agencies to accelerate the uptake of innovative payment-for-results mechanisms. Since 2017, Colombia has launched four social impact bonds (SIBs) and one pay-by-results contract in the area of employment – more than any other middle-income country and more than many higher-income ones.

Moreover, in early 2020, the Department of Social Prosperity (Prosperidad Social, as per its name in Spanish) set up an Outcomes Fund focused on improving employment outcomes for vulnerable and internally displaced populations – with a view to growing its scale and broaden its remit over time. This fund would not have been possible without the financial and non-financial contributions of the State Secretariat for Economic Affairs (SECO), the Innovation Lab of the Inter-American Development Bank (IDB Lab) and Corona Foundation through the Social Impacts Bond Program (SIBs.CO). The two international organisations worked alongside the government during the development and early implementation of the fund, offering financial support, convening power, access to expert technical and legal advice, and their own knowledge and insight to the government team leading this initiative.

The Colombian experience points to the importance of donors and international cooperation agencies catalysing the launch of ambitious system-changing initiatives such as Outcomes Funds in middle-income countries, although the lessons learned are likely relevant for higher- and lower-income countries as well. Given the regulatory and budgetary barriers to innovation and scale faced by the public sector, international donors, which can more easily take risks and provide significant financial and non-financial resources to test new approaches, should step up their support.