There might be evidence that social impact bonds can improve employment. “Where?” In a couple of places, South Africa, for one.
Employment – or unemployment – in Africa is a big issue. We know this, and we say it all the time. In my bid to complain less and do/seek more, I embarked on a journey to find out what people are doing about employment and unemployment. And I found one: using social impact bonds. If the idea of social impact bonds is foreign to you, you are not alone. I was there, until now. I hope you enjoy this read, where I break it down and show how it was used as a tool to address employment in a country that badly needs it – South Africa.
“If government fails, lives fail.” – Seun Onigbinde
Post Map
African countries are flirting dangerously with a governance crisis.
This is nerve-wracking for those concerned with the future of governance and government. According to the 2019 Afrobarometer data, 60% of the surveyed population considered economic conditions in their country to be “very bad” or “fairly bad”. Some 59.5% of people said their countries were going in the wrong direction.
Many Africans are dissatisfied with their countries’ economic progress, especially when it comes to jobs and employment. An estimated 76% of Africans think governments are handling the creation of jobs badly. Asked where government could increase its spending on programs to help young people as the highest priority, 50%% said jobs. When asked what they consider the most important problems their government should address, unemployment ranked at the top in 2019/2021. It also ranked first in the 2016/2018, 2014/2015, and 2011/2013 surveys.
The numbers, again
According to International Labor Organization(ILO), Africa’s unemployment rate among youth ages 15 to 24 was 10.6% in 2021. This was the lowest unemployment rate globally compared to a global average of 13.8%. On the surface, this looks commendable; in reality, not so much. For instance, Africa has high informality levels, low wages, and underemployment. It also struggles with precarious work and poor social protection schemes. These factors mean that the situation is more nuanced than the statistic implies. Similarly, the low rates conceal significant regional disparities even within Africa. North Africa, for instance, exhibited the highest unemployment rate in the world at over 30%. Conversely, the rates in Sub-Saharan Africa sit at under 10%.
The picture becomes clearer when one considers that some 10 to 12 million youth enter the workforce in Africa each year. Yet only 3 million formal jobs are created annually. Additionally, of the estimated 38% total working poor in sub-Saharan Africa, young people make up 23.5%. Africa’s youth have the tough end of the stick. This is concerning, considering that Africa has the world’s most youthful population, with a median age of 20. By 2050, two in every five children born in the world will be born in Africa.
Without economic growth that produces and enables better quality work and working conditions, African countries — and their inhabitants — will face undesirable consequences. So far, the quest for work is fuelled by desperation and survival as people accept work in unpleasant conditions. And in some instances, as the African Development Bank notes, it is not uncommon to see humanities and social sciences graduates operating taxis in Algiers. Or even, Cameroonian engineers transporting customers in motorbike taxis in Douala.
Attention must be paid to the kernels of reform that will better match talents with areas of need and productive use.
Youth employment and job-creation-themed events are popular with governments.
Like investment conferences, flamboyant displays are made of efforts to improve jobs, but the results are less than colourful. Challenges range from the lack of needed and adequate skills to inadequate employment opportunities. But, these are more evidence of a failure of policy and practice. The focus on getting people ready for work when little is known about what work there is, where this work is, and what it demands of people, is a missed opportunity in service delivery and a persistent policy failure in many places.
African governments and development partners to think beyond current development paradigms and explore different ways of doing things. This will allow varied solutions that will, in the case of job creation, for instance, ensure that the skills, knowledge, and vibrancy of Africa’s most productive asset are better put to use.
Rethinking the employment problem and the pathway to jobs is necessary. It will enable African governments to allocate scarce resources better and increase the likelihood of realising desired outcomes such as a better educated and employed population, not just educated graduates for having sake.
African governments must do the difficult work of creating jobs for their population, especially youth.
The options for African countries are to do less of what’s not working, and more of what is. Government is meant to serve the people; when they fail, lives are jeopardised. As Director and co-founder of BudgIT, Oluseun Onigbinde shared, “when government fails [especially in Africa], lives fail”. We as citizens must therefore demand accountability and transparency from the people we put into power in all the areas that matter, especially jobs if the Afrobarometer data is anything to go by.
What does it take to address the employment problem?
South Africa’s recent experiment and experience with Bonds for Jobs (B4J) offers insight into the need for innovative thinking around solving problems.
Through a social impact bond (SIB), engagement and support from the private sector players, and a capable non-government agency qualification, a successful attempt was made to address a tenacious social issue – high youth unemployment. This success was realised by a willingness to try a different way of doing things.
The South African case study – addressing employment with Bonds4Jobs(B4J)
Despite efforts at an input-oriented skilling system, youth unemployment in South Africa was and still is extremely high. The highest in Africa, actually. Based on recent evidence out of places like Colombia, the SIB, set to conclude at the end of 2022, was designed to evaluate alternative social delivery methods for placing young South Africans who are systematically excluded into their first employment, using a social impact bond sub-set of payment by results (PbR) structure.
What are Social Impact Bonds?
They are innovative financial products that use private investments to fund the scaling of social interventions. What this means is that investors provided working capital upfront to delivery agents, typically NGOs, to provide social welfare services. Then, if the delivery agent successfully meets mutually agreed-upon predefined outcome targets – such as placing a certain number of work-seekers into jobs – the outcome funders, typically government entities (and sometimes with private actors like donors or philanthropic foundations), repay the investors. However, if the delivery agents are unsuccessful, the outcomes funders do not pay. As a result, investors do not earn returns and could also lose their capital.
This model differs from the standard way of operating. Ones where money is given upfront, or in the case of government, upon completion of the project, with little accountability if the project doesn’t perform according to plan. Instead, payments are expressly based on results, such as job targets. As a result, the stakeholders responsible for the service delivery unite around these goals to ensure outcomes are met. Because investors give operating cash upfront to cover the expenses of inputs and operations, SIBS have an advantage over other payment-by-results models. They can focus squarely on completing the necessary tasks to assist beneficiaries. Where necessary, it also allows them to try different approaches and course-correct.
South Africa’s Bonds4Jobs (B4J)
South Africa’s Bonds4Jobs (B4J) initiative to improve employment was divided into two delivery cycles. In the first cycle, from April 2018 to January 2019, only three investors supplied working capital to the B4J SPV.Â
These funds, according to Intellidex, were then transferred to “the Harambee Academy (the training division of Harambee Youth Employment Accelerator) to deliver employment services (profiling, job matching, and training) to unemployed young people (aged 18-35) from disadvantaged backgrounds)”. However, due to Covid-19, the second cycle, which was supposed to last from January 2019 to June 2022, ended in June 2020. However, this cycle attracted many more stakeholders to enable the program’s expansion and achieve a larger number of job placements.
In pursuing this innovative approach to solving a problem and service delivery, it is important to note that the model used predefined targets. Predefined targets allowed all stakeholders to focus on the outcomes. For instance, to count as a placement in this SIB, jobs had to be of “medium to high complexity (measured by the type of job and the job description), for young people who could reasonably be classified as economically excluded and facing poor prospects in the labour market.” Why this qualifier? Generally, those who meet the B4J criterion for disadvantage (having attended a low-income school, having a low home income, or receiving state social assistance) typically have inferior employment chances.Â
South Africa’s Bonds4Jobs (B4J) – the objectives behind the program
According to B4J objectives, this program would then evaluate whether these prospects could be significantly improved by offering quick, affordable, and demand-led services (i.e., those developed in consultation with employers) instead of relying solely on conventional paths to employment. A thorough understanding of the preparation, mechanics and execution of how this SIB worked in South Africa makes for good reading. It can be found in a recent report published by Intellidex. For illustrative purposes, the below chart loosely summarises the stakeholders and how the B4J was set up.
General B4J SIB structure recreated from Intellidex Social Impact Bonds in South Africa reports.
The idea behind it.
The idea is that SIBs can motivate actual social results.
By paying out at the successful conclusion of the pilot, government would be rewarding outcomes, as opposed to processes or promises. Thus government can make greater efficiency in public expenditure while addressing a real social problem, such as unemployment. Similarly, SIBS can deliver many benefits by crowding in private investment to social causes, including more effective services. And, another big gain from this model is the shift away from a focus on outputs (for example, providing a training programme to someone) to outcomes (the training leading to a job). And it’s not just semantics.
Improving employment with social impact bonds – the results?
Are SIBs the golden key to improved social services and public-private sector cooperation? Perhaps, or at least, in this case, they were.
Harambee and its service provider entities met year one’s target (600 job placements) three months early. In the second year, they achieved 86% of the performance target, despite the Covid-19 and national lockdown in South Africa.
With targets met, investors who put up the risk capital to fund the programme received their money, government delivered on a much-needed service gap, and people – one of the more vulnerable groups – received a source of income.
Are SIBs without issues? Of course not. Some challenges and areas still need to be explored in further detail. For instance, SIBs are viewed as high-risk investments among commercial investors. It may be challenging to replicate in Africa, where there is little trust between government and the private sector. However, South Africa’s pilot has begun building a track record in managing successful multistakeholder service delivery and repaying investors with competitive returns. The lessons around how that was done and how to expand trust and collaboration, among other gains, will be helpful to many others on the continent.
Similarly, Intellidex reported that the contracts and result audits were not publicly available and were completely off-limits despite SIB participants responding to information requests; this, they found, was mainly because of contractual provisions requiring non-disclosure. While somewhat understandable given varying investor needs, preferences, and agreements, this should not be the case, especially if learnings are to be spread. Also, the transaction costs to prepare such instruments and set up the programme are not low.
What, then, does the employment experience in South Africa lend to the future of SIBs in South Africa and elsewhere?
First, the South African experience was successful for several reasons. The targets were reasonable, clear, easily verifiable, and relevant to the local context. The pilot also involved credible impact assessments throughout its duration. It helped, too, that it involved socially conscious investors (who could catalyse the profit-first investments) and engaged capable service providers. Lastly, the pay-for-success model led to greater efficiency in public expenditure and, at the same time, incentivised successful delivery for the very same reason.
Many people believe that service delivery failures happen because we focus too much on inputs and outputs instead of outcomes. Because of this, public administration and budgeting procedures allocate funds that must be spent and refunded to the national coffers if not used. Service delivery agents thus only need to prove that the funds have been spent. There is little to no emphasis on showing that the training sessions, teachers, facilities, and resources used have produced any desired measurable outcome. This incentive system prioritizes spending over accurately assessing the impact of activities.Â
It is why targets for universal primary (and secondary) school enrolment are laudable in many places on the continent. And yet employers still complain of improper matching of skills and poor educational outcomes. Efforts have been made to get bottoms into seats, but these targets are oblivious to the calibre and quality of the services provided.
The literature shows that a social impact bond may help accomplish social outcomes. This may be especially true in areas with a history of policy failures (whether in design or execution). Thus, an outcome-focused approach is more likely to guarantee improved quality of service delivery and the possibility that actual and desired results align.
The way forward for innovations in international development
George Box, a British statistician, coined the famous phrase ” All models are wrong, but some are useful,” in 1976. The point is perhaps not whether or not the model is right or wrong, but if they can help solve the problem at hand. In some places, SIBs have not worked. Even in South Africa, a similar model was used in education, and the outcomes, although good, were not out-of-the-park successful. Even here, the research shows why. The point is, it depends. The focus should be on what we can learn from when it worked. And when it didn’t, how to ensure that we can iterate for successful outcomes.Â
By focusing on what is practical, based on the facts we have, we can make better choices and decisions that will lead to better outcomes. And when they don’t, we learn, and we iterate. It sure is better than repeatedly doing the same mediocre and underwhelming things at the cost of lives and livelihoods. Progress over perfection.
To remind, concluding thoughts on addressing (un)employment
Addressing employment, creating jobs, and matching them with people is particularly relevant in Africa. The continent stands on the cusp of a significant demographic shift. Its population is projected to double within the next two-three decades. Already, two-thirds of Africa’s population is under 30, and many are unemployed – or lacking in employment prospects. The continent’s transformation and development will depend on matching facts on the ground with deeds. And deeds with innovative and careful planning. To solve Africa’s problems, we need to pursue action over rhetoric.
Suppose Africa fails to take bold steps to create jobs for its burgeoning population, its countries risk falling even further behind. This is bad news for a world economy that is increasingly integrated and speeding ahead. We need to do more – and sometimes, that requires thinking differently, and employing different tools. We can do it.
PS: A revised and more analytical version of this will soon appear on a third-party media platform. Stay tuned
If you missed the previous post, check it out here: NO, SETTING MORE GRANDIOSE GOALS WON’T BRING US DEVELOPMENT
Noelle Wonders
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