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14 Jan 22

Can blended finance help fill the financing gap in health and education?

Can blended finance help fill the financing gap in health and education?

Figure 1: Market size and growth of blended finance for health and education

The urgency of achieving SDGs 3 (Good Health) and 4 (Quality Education) by 2030 remains acute. At least half of the world’s population still lacks access to essential health services and up to 53% of ten year-olds in low- and middle-income countries are unable to read and understand a short age-appropriate text. The COVID-19 pandemic has strained health systems globally and closed schools in many parts of the world. The pre-pandemic estimate of the annual funding gap for health stood at $134 billion, while the pandemic could grow the annual funding gap for education from $148 billion towards $200 billion. Finally, institutional investors typically prefer larger-scale, more established sectors like financial services and energy to health or education, where ticket sizes are smaller and the role of the government (as opposed to the private sector) in service provision has traditionally been more prominent.

However, blended finance can help create de-risked vehicles capable of attracting private investors into these more emergent and fragile sectors. Convergence’s latest Data Brief analyzes the 83 transactions targeting SDG 3 (Good Health) and the 36 transactions targeting SDG 4 (Quality Education) recorded by the Convergence database, representing $15.8 billion and $1.46 billion in total committed financing, respectively. The brief also presents insights from interviews with key stakeholders.

Here are some key takeaways from the Brief:

Impact bonds are more prominent in blended finance for health and education: A plurality of developing market impact bonds has targeted health (including the treatment of cataracts, nutritional education for prediabetic women, and improved maternity care), they are also much more prominent in education compared to the overall market (14% vs 2%). Impact bonds allow financial payments to be tied to specific development interventions but can be resource intensive and less scalable. Impact bonds that have attracted institutional backing include the $27 million ICRC Programme for Humanitarian Impact Investment, launched in 2017 to build physical rehabilitation centers in conflict-affected countries in Africa.

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Figure 2: Health transactions by blended finance vehicle type

Health and education transactions are generally smaller in size compared to the rest of the blended finance market: The global private K-12 sector is highly fragmented, with many small-scale proprietors and only around 15 for-profit companies with revenues over $100 million existing globally. Education transactions have thus tended to be smaller in size, with a median size of $31.5 million and 64% being below $50 million. Meanwhile, health transactions have a median transaction size of $50 million, compared to $57.8 million for the overall market. However, health transactions can range widely in size. 29% of them are over $100 million in size, led by large-scale international facilities like the International Finance Facility for Immunisation or the Africa Medical Equipment Facility, a $150 million unfunded risk sharing facility launched in 2020 by IFC, in partnership with local participating financial institutions and original equipment manufacturers.

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Figure 3: Education transactions by total size

Within education, greater use of guarantees and greater targeting of local financial institutions may be key to achieving scale: Financial institutions have been the direct beneficiaries of only 17% of education transactions (compared to 23% in the wider market), but our interview respondents note that the high demand for finance amongst private schools in developing countries could be met through local financial institutions if they were shown that the sector is investible. Similarly, guarantees and risk insurance have been underutilized in education compared to the broader market (14% vs 30%), but our interview respondents note that if there were higher numbers of guarantors of education loans, this would remove some of the key barriers local financial institutions face in appraising and underwriting private schools.

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Figure 4: Education transactions by blending archetype(s)

Scaling private financing into health and education will require the development community to deploy catalytic financing to launch funds of funds to develop a broader investment ecosystem in the space: Our interview respondents note that the investment landscape for health and education is defined by single fund managers, foundations, and donors, without that layer of funds of funds that can be found in other sectors like technology. Going forward, the development community should commit catalytic capital towards building out an ecosystem of funds of funds that can mobilize capital into health and education at scale.

Become a member and read the full brief for more insights, including top concessional funders and top commercial investors.

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About the Author
Andrew Apampa, CFA

As a Manager, Andrew is responsible for developing Convergence’s data and research activities, including building out Convergence’s database of historical blended finance transactions and developing blended finance trends analysis and benchmarks. Prior to joining Convergence, Andrew worked at the African Private Equity & Venture Capital Association (AVCA) as a Research Associate. While there, Andrew inaugurated the Special Report series, publishing in-depth studies on thematic issues within African private equity, such as political and currency risk in African PE, and the rise of the private credit industry in Africa. Prior to joining AVCA, Andrew worked at HSBC as an Emerging Markets Equity Strategist, where he published reports focused on investing in frontier equity markets. During his time at HSBC, he also worked on the European Equity Strategy team and the Global Research Marketing team. Prior to his time at HSBC, Andrew was at the University of Cambridge, where he completed his master’s thesis on protest and mobilization in Sub-Saharan Africa. He is a CFA charterholder.