Innovative finance for employment: Supporting vulnerable people into work

Covid-19 has created an unprecedented economic shock. Countries across the world face huge challenges getting people back to work. This challenge is particularly pronounced for vulnerable populations, who already faced significant barriers to employment prior to the pandemic.

In some contexts, entire population groups are struggling to get sustained jobs. For example, lower-skilled women and youth seeking employment (including, in lower-income countries, informal job markets) are often at a disadvantage compared to others. In other situations, individuals with specific challenges — such as mental health, learning disabilities and substance misuse — struggle to access and retain employment.

Some examples from around the world illustrate the point:

• In Mozambique, a country of 30 million, there are only approximately 700,000 jobs in the formal sector, resulting in a large informal economy
• In South Africa, of the six million young people who will be leaving secondary education over the next five years, only two million will proceed immediately to tertiary education or the workforce. That’s four million people with an uncertain future.
• And in the UK, while there has been increasing emphasis on large-scale employability programmes over the last twenty years, these have not translated into sufficient outcomes for the most marginalised groups who remain out of work.

Programmes around the world are looking to improve employment outcomes for these vulnerable populations. At Social Finance we work extensively with partners to apply innovative finance in very practical ways to address tough social challenges. In our experience, how funding is deployed in these programmes can be as important for improving outcomes as the amount of funding. There is increasing interest from funders in the potential of innovative finance to tackle the truly global challenge of supporting vulnerable populations into work during — and after — the Covid pandemic. 

In July we hosted a webinar which brought together insights and learnings from employment programmes in low, middle and high income countries. This included MUVA from Mozambique, Harambee Youth Employment Accelerator from South Africa, and WDP from the UK.

Social Finance started kicked things off by breaking down the complexity of innovative finance into two fundamentals: mobilising additional resources and improving cost-effectiveness of public spending to achieve better outcomes. This maps nicely to the distinction above between the amount of funding and how it’s deployed. Our focus is on the latter. We outlined six ways in which carefully ‑designed funding — for example, via an impact bond — can produce better outcomes by influencing different actors’ behaviour:

1. Accountability for results — — Whether you are a donor or a government, it is important to have clarity about who is accountable for impact.
2. Sharp and shared incentives — A well designed funding package has strong incentives to achieve results by aligning all partners around a common goal.
3. Space to innovate and iterate — There needs to be space to learn, respond to changes on the ground and try something new. Funding that requires people to deliver pre-set activities in in a pre-set sequence will struggle to tackle complex social challenges, such as boosting employment for disadvantaged groups.
4. Data and measurement for adaptive implementation — Reliable data is key to understanding your impact, allowing you to learn and adapt the programme as it proceeds.
5. Allocation of risk to those with appetite. Both financial and operational risk needs to be allocated to parties that are best placed to hold it.
6. Novel partnerships — Bringing together partners who haven’t necessarily worked together before to create new solutions and new ways-of-working.

While this sounds good on paper, the subsequent panel discussion highlighted practical experience of working with innovative finance. This brought to life both the advantages and drawbacks of this way of working. Several themes emerged:

Data on ​‘what works’

The importance of data and impact measurement particularly resonated with MUVA, given their reliance on evidence-based decision making to adapt their programmes to what’s happening on the ground. But collecting reliable data in the setting of informal markets is easier said than done. Beyond the technical requirements, there is the question of building trust with service users to ask what can be seen as quite intrusive questions (for example, on things like changes in household income) to understand the impact of MUVA’s programmes.

An alternative perspective on data and measurement came from South Africa. Harambee, as an intermediary in the social investment market, stressed the need for organisations such as itself to be well-equipped for impact measurement, given that they process a large amount of data, both for continued learning and project adaptation as well as verifying outcomes. A results-based funding approach can, in inexperienced hands, lead to impact measures simply being ticked off to trigger payments, as opposed to gaining a deeper understanding of how social value is created over time and across the system.

Using funding cost-effectively

Harambee is one of the few organisations in Africa with frontline experience of impact bonds, in this case the Inclusive Youth Employment programme. Harambee’s rationale for using an impact bond was to innovate in the way skills programmes are run in South Africa — and thus prove there are better ways to spend public money. Spending in education is hugely ineffective: a lot is spent on inputs, but with insufficient focus on outcomes.

One example drove the point home: a training provider teaching content that they knew was irrelevant to the needs of the current jobs market — but who had to continue doing so in order to meet government accreditation requirements. The administrative hurdles to change the content were simply too high. This anecdote highlighted the need to move towards outcomes-based funding, as it can provide both flexibility and shared incentives to ensure public money is used more effectively.

Maintaining operational simplicity

WDP, a UK-based provider of services for people with addictions and substance misuse challenges, is currently working via an impact bond funding model to deliver an Individual Placement Support programme. This assists those with drug and alcohol conditions into paid employment work in London. It could potentially be a very complex funding programme to co-ordinate: it involves nineteen stakeholders, including multiple funders. From WDP’s perspective as the service provider, it’s been vital to avoid the innovative financing structure overcomplicating the day to day running of the service.

To that end, Ealing Borough Council (a local authority in the greater London area) acts as the lead commissioner, playing (along with the performance managing agent) a very proactive role in coordinating the stakeholders involved to create a simple funding relationship for WDP. This has allowed WDP to focus their support on their service users, and to benefit from the operational freedom (and incentives) to deliver that the impact bond brings.

Risk and performance incentives

Another key success factor for WDP in their impact bond-funded programme is that they do not take the full financial risk of payment by results. The emphasis on payment by results has meant from the outset that WDP has had a very performance-driven process with clear outputs and deliverables. Yet they are very aware of the operational risks involved in delivering their services; having upfront funding to allow for learning and adaptation as needed has been critical. In particular, it has incentivised a strong relationship with the key players involved, allowing joined-up problem solving — particularly useful during Covid-19.

Unintended consequences

While some of the dynamics in WDP’s programme have been very positive, incentives need to be framed carefully. For example, the design of the impact bond means that outcomes payments are weighted differently depending on whether someone enters full or part time work, with the former triggering a bigger outcomes payment. But in reality, both full or part time work require similar efforts from WDP’s team. Achieving the employment outcomes depends on the client’s needs: and in some cases, part time work may be more appropriate for that individual, providing them with better balance to manage their condition.

This was a rich and nuanced discussion of real ‑world experience in the employment sector with innovative finance instruments such as impact bonds. As ever, in the right circumstances, these instruments can drive a strong focus on results — — but the design has to be carefully tailored to the challenge.

We are very grateful to our panellists for their insights:

• Iana Barenboim, MUVA, Mozambique
• Nchimunya Hamukoma, Harambee Youth Employment Accelerator, South Africa
• Graham Howard and Rebecca Odedra, WDP, UK

Social Finance has been working with MUVA to assess the potential of innovative finance to increase the economic empowerment of disadvantaged youth and women in Mozambique and scale MUVA’s impact. Together we prepared a report on Innovative finance for employment: the potential for women and urban youth. This identified four innovative finance models that have the potential to enable disadvantaged urban youth and women to access economic opportunities, tailored to the specific structural and financial challenges identified in Mozambique.

For further information, or for support to design outcomes-based contracts to deliver employment outcomes, contact: rob.mills@socialfinance.org.uk