Education: A funding machine that drops change

Gaps in social infrastructure are leaving children without access to good-quality education – so, how are investors changing this? Romil Patel reports from Cape Town and London.

It is often said that education is a birthright, not a privilege. But the pathways to accessing that right are not evenly dispersed owing to a range of factors, such as where the development of educational infrastructure has been carried out diligently and distributed effectively. Globally, of the children who are not enrolled in school, more than half live in sub-Saharan Africa. 

“We often come from the view of European countries where we are used to the idea that there is public education and this is offered by the state, society or the community – a public body – and it is essentially accessible for people,” says Yann Groeger, regional director of Africa and Latin America at BlueOrchard Finance, which manages the Regional Education Finance Fund for Africa (REFFA) – the continent’s first regional facility of its kind. 

Across the globe, the picture can be very different from Europe’s, with many developing countries still lacking the basic infrastructure and facilities to deliver quality education. A 2019 report on progress towards UN Sustainable Development Goals (SDGs) noted that sub-Saharan Africa faces the greatest challenges, with fewer than 50% of primary and lower secondary schools able to access electricity, the internet, computers and basic drinking water. This is despite the fact that between 2010 and 2017, African governments spent 16% of their budgets and an average of 5% of GDP on education. 

According to the African Development Bank, the continent is, on average, the least efficient region for education spending, with an efficiency score of 58% for primary and 41% for secondary level. This leads people to seek out alternatives.

A gap in the social infrastructure leaves people without equal access to good-quality education, plus a sense that they are disempowered and disenfranchised – but financial institutions can play a key role in empowering them.

Emphasis on quality
The challenge is to scale up both the quality and quantity of education where governments have limited room for manoeuvre. SDG4 aims to ensure inclusive and equitable quality education and promote lifelong learning opportunities for all. In this regard, then, how are investors delivering social impact while achieving long-term, sustainable financial returns?

“Instead of directly financing schools, there is a conscious approach that we need to have financial intermediaries who would generally finance micro and small and medium enterprises (SMEs) – finance either private schools or provide school fee loans for families to send their children to schools. The approach is strengthening financial institutions who are already active,” says Maria Teresa Zappia, deputy chief executive at BlueOrchard. 

These can be microfinance institutions, commercial banks, NGOs or personal loan lenders. “With this initiative, there is a window to build capacity where the idea is not only providing loans to private schools via a financial intermediary, but also being able to ensure that the schools as the end beneficiaries are good quality and affordable to the base of the pyramid.”

This is where it’s important to distinguish between the characteristics of a typical private school, the range of its offering and potential clientele. In Europe, private schools are associated with the wealthy. Elsewhere, however, they can offer practical solutions to the children of people who traditionally may not have had access to a high standard of education. 

Based at the University of Cape Town, the Bertha Centre for Social Innovation and Entrepreneurship is the first academic centre dedicated to social innovation in Africa. Its innovative finance lead, Tine Fisker Henriksen, says education is a sector that has seen a massive spread of investment opportunities. 

Elusive no more
In 2011, Old Mutual Alternative Investments (OMAI) launched its first – and currently the largest – education impact fund, available in eight of South Africa’s nine provinces. 

“We are invested in around 41 schools and we have got about 21,000 learners,” says Zomunoda Chizura, head of impact investing at OMAI. “In that investment, our focus in terms of what is the minimum success for us is that we want to deliver affordable education, so we have a cap in terms of our school fees to make sure that we are building schools, the vast majority of which, don’t charge more than, 24,000 rand (€1,270) in school fees: the range is from 19,000 rand to 29,000 rand a year. 

“We do measure the quality of our education versus the national average – quality being students passing – and for 2019, our schools fund matric pass rate was 92% versus the national pass rate of 81%, and so on,” adds Chizura. “We also want to ensure that access is there for the students and we are going to the areas with population centres where children can safely go to school or be safely transported to them.”

In other words, the delivery of the education has to be accessible to a wide catchment of working people within a certain budget to be commercially sustainable – and, therefore, an attractive investment proposition that can be replicated to create impact at scale. 

“For the segment that we’re in, our typical parents would be teachers, nurses, policemen, civil servants – the lower part of the ladder – and they can afford most things, but what they want is a quality education, so we are able to provide that constant education that would give their children a better chance at life,” says Chizura. “Before 1994, education was based on colour,” he reflects. “For Bantu education, it was never meant for you to go beyond a certain level, so we are reversing that.”

Beware of blind spots
Every parent wants the best for their child, but those at the base of the pyramid financially could be spending a significantly higher proportion of their available income on education, As a result, accountability is paramount. 

To serve students to the best of their ability, schools have to function both as a centre for learning and as a viable business to continually upscale and reflect that in their educational offerings. 

When it comes to stewardship, site visits ensure that what is presented to the board is an accurate snapshot of what is taking place on the ground. They also allow investors to engage with and monitor what their education partners are doing. Here, the application of ESG as a risk mitigation tool is applied to the impact objective. 

“Our approach is governed by best-practice ESG,” says Dean Alborough, head of ESG at OMAI. “We run a full breadth of ESG considerations on a school, where we are looking at monitoring it from various aspects – risk management as well as making sure we achieve the impact that we’re looking to unlock.

“We undertake monitoring, engagement at a board level and track indicators on schools. Not just the positive impact metrics, but also risk management metrics, such as environmental, waste, water and health and safety controls, so we keep a broad perspective. 

“There’s a danger for impact investors to only focus on the positive outcomes they’re trying to achieve, and they can get blind spots around risk management.”

To offer the community longevity and provide students with a steady education, the offering must be financially sound. One advantage that schools enjoy is that academia is not a seasonal product – however, cashflows are inherently volatile because many people don’t have stable incomes with which to pay fees. 

“This is where financing can play an important role,” says BlueOrchard’s Groeger, “be it on the direct financing of school fees, so there is stability in terms of income for the school, or financing the school directly and taking away the liquidity problem that schools sometimes face – enabling them to invest in their infrastructure by expanding the facility, or invest in technology and give people the access to things they didn’t have before. 

“Investment is really important for schools to offer good quality and if they get the financing, they can really lift up the quality of education they produce.” 

As schools progress, they make the case for investment in social enterprises run in a viable manner – those that deliver good services and crucially, true additionality. “

This is part of a very strong mission of what we’re saying to financial institutions,” says Zappia. “Maybe you have an SME portfolio that is sound, but have you thought about lending to schools?”

© 2020 funds europe



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