International aid to global education, particularly basic education is falling. Total aid from OECD countries fell by 2% from 2010-11; aid to low-income countries for education fell by 10% and to basic education by 5%, in the same period (OECD Creditor Reporting System 2013). In absolute terms, aid for basic education dropped from $6.2 billion to $5.8 million from 2010-2011. Not only do low- and middle-income countries face an increasingly difficult external aid environment, they continue to face major challenges of both access and learning in basic education.
A loan buy-down is a financial transaction in which a third-party pays down part of a loan (by softening the terms of the loan or reducing the principal outstanding) for the borrowing country on behalf of the lending organization. By reducing the financial burden of the loan, the third-party donor releases the borrowing country from some or all of its future repayment obligations.
Buy-downs have the potential to encourage borrowing for education, health and other social sectors from otherwise reluctant countries, and can stimulate specific results if the triggers to qualify for the buy-down are appropriately specified. There are only a few examples of buy-downs so far, most of which have been in the health sector, for e.g. the “triple-win” financing mechanism by the Islamic Development Bank, co-financed by the Gates Foundation, to fund Pakistan’s polio eradication program.
Global Partnership for Education (GPE) commissioned R4D to assess the feasibility of such a loan buy-down to support measurable reforms in education, while also raising financing for the sector.
R4D’s report analyzes the loan buy-down model as it has been applied to different sectors, and considers key design aspects to applying it to the education sector, including selecting suitable countries with large unmet needs in education, the type of triggers to link buy-downs to results, and further operational issues. It highlights the key questions that remain, such as the level of interest from countries, lenders, and donors for a loan buy-down, the possibility of risks involved, and other disincentive effects. The study calls for a pilot with consultation to answer these questions, which GPE’s board has approved and is in the process of commencing.