Education is at risk: Risk financing for education
Shocks like earthquakes, droughts, armed conflicts, civil unrest, commodity price fluctuations and financial crises disrupt the delivery of education and undermine the ability of education systems to sustain gains.
April 11, 2016 by Alice Albright, GPE Secretariat
7 minutes read
Shree Mahendrodaya Higher Secondary School. Sindhupalchowk, Nepal Credit: GPE/Aya Kibesaki

Our investments in education are at risk. Shocks like earthquakes, droughts, armed conflicts, civil unrest, commodity price fluctuations and financial crises disrupt the delivery of education and undermine the ability of education systems to sustain gains.

Education infrastructure is lost or damaged. Schools are used as long-term shelters. Students and teachers lose the ability to reach schools or fear for their safety when they do. Hunger, malnutrition and other child health issues limit school attendance and contribute to teacher absenteeism. What is more, the most vulnerable are usually the most impacted when crises strike.

Shocks to the system

In Nepal an earthquake in March 2015 caused $313 million damage to the education sector. In Sierra Leone the Ebola crisis closed schools for nearly nine months between 2014 and 2015. In Somalia, years of civil war destroyed or closed 75% of public schools, and two generations of children have grown up without access to basic education.

In Chad, the humanitarian crisis has been exacerbated by declining oil prices, challenging the government’s ability to meet spending targets in education, and humanitarian appeals have failed to raise the $7.3 million needed to support education for refugees. In Niger, instability caused by Boko Haram caused the government to divert spending from the education budget to the security sector.

There is also a high risk that oil price fluctuations will impact financing for education in Nigeria and that the drought in Ethiopia will cause a severe shock to the education sector there.

GPE has invested $4.4 billion through 120 grants in 56 countries. Last year, more than 60% of our disbursements were in countries affected by conflict and fragility.

For us, the losses experienced by our partner countries are worrying. Risk management and risk transfer instruments, including insurance, could offer an important set of tools for protecting our investments from the impact of shocks.

By transferring some risk to the market and increasing resiliency planning, additional sources of financing could be leveraged, efficiency gained, and quality of spending improved.

Early access to financing matters

The cost of shocks is compounded by delay and there is a positive multiplier effect to early intervention. The longer a child is out of school, the more likely it is they will never return but funding for early response in the poorest countries is often challenging.

Combine that with the fact that crisis response financing is unpredictable and humanitarian assistance tends to focus on life-saving activities, and education is often deprioritized.

It’s not just about funding. Awareness of risk in designing and implementing education sector plans design and implementation can significantly expand in-country capacity for proactive risk management. While some risks cannot be easily forecast, others can be mitigated through practical measures such as building stronger schools in earthquake zones or avoiding the use of schools as long-term post-disaster shelters.

Basic risk assessment during project preparation can lead to inclusion of valuable risk reduction measures that could be implemented as part of education sector plans, and improve national resiliency.

Market interest

Insurance markets have shown an increased willingness to underwrite specified perils that impact physical and social infrastructure in developing countries including cyclones, excess rainfall, earthquakes and drought.

There is interest in these markets to take on risk quantified using index-based models where the insured loss is based on pre-agreed independently verifiable data and payout amounts tied to the severity or magnitude of the particular event and its ultimate impact.

The payout could be used for a pre-agreed set of activities, or for sector budget support depending on the context. And a country would only qualify if it has a resiliency/risk management plan in its education sector plan.

With insurance, risk can be transferred to the international market (including both traditional reinsurance markets and the broader capital markets through instruments such as catastrophe bonds), unlocking a new source of contingent financing for the sector and securing efficiency gains for spending.

With over 60 partner countries GPE offers a naturally diverse portfolio and could transfer that diversified risk to investors.

Quantifying the risks

If the underlying risks can be packaged successfully into a financial instrument or structure then there is a real prospect of using insurance markets to help insure continuity of education systems vulnerable to shocks.

While the risk of natural disasters in developing countries has been well modelled, potential for political risk needs to be further explored. For a risk financing mechanism, we need to model in advance the event risk and the cost of maintaining education after a shock. This may be the number of school days missed and the associated cost, or a proxy combining the number of children impacted and an estimated cost per child per day.

We are at the early stages of exploring this concept but I am excited by its potential. I look forward to the views and suggestions of the International Commission on Financing Education Opportunity, and the Expert Finance Panel, which will meet in Washington D.C. this week. Education is the key to achieving all of the Sustainable Development Goals and when the gains in education are lost, it undermines countries’ ability to deliver on their broader development agenda.

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