91Â鶹¹ú²ú¾«Æ·×ÔÅÄ

Delivering high-quality education requires significant investment. The list of needs is extensive—competitive salaries to attract qualified teachers, ongoing training to keep them effective, adequate learning materials, digital transformation, proper infrastructure, nutritious school meals, and robust assessment systems to catch struggling students early, just to name a few.

But the money for all this may be drying up. In  (LAC), countries spend just one-third per student compared to the OECD average – and the trends have shown signs of decline in some countries. Around 2000, the region spent about 4.2% of GDP on education; this rose to ~5.2% by 2010, but fell back to roughly 4.6% by 2020. A similar trend is seen in OECD countries.

Adding to this is a challenging macroeconomic backdrop: LAC’s economic growth remains among the , while  continues to constrain fiscal space, squeezing national budgets and limiting the room for much-needed education investments.

So what do we do when needs are massive but traditional funding isn't enough to cover them all? We get creative. This is where innovative financing comes in.

Since "innovative financing" is often used to describe multiple approaches, it's helpful to clarify what we mean. Broadly, innovative financing falls into two categories: non-traditional mechanisms to mobilize additional resources beyond conventional budgets (such as impact bonds, debt swaps, and matching funds), and approaches that aim to increase the effectiveness of available resources, like results-based financing.¹

At the Inter-American Development Bank (IDB), we've been experimenting with both innovative financing approaches. Within education, we've supported countries in establishing multiplier funds, where loans provided by the IDB are complemented by matching grants from partners like the Global Partnership for Education (GPE) and Education Above All (EAA), significantly reducing the overall cost of investments. 

Beyond education, we've engineered some of the largest multilateral debt swaps, which have restructured existing public debt with more favorable financing terms, generating fiscal savings that are redirected toward priority development areas. These swaps have served a dual purpose - not only do they raise additional funding, but they also promote better spending since the funds are released conditionally upon meeting specific targets (known as Key Performance Indicators, or KPIs).² The IDB has been pioneering the use of this instrument, first for biodiversity conservation, but we are looking into adapting it to education. 

¹ For a useful overview of innovative financing mechanisms in education, see  and . We also recommend Marina Dreux Frotté’s recent blog on the topic.

² For more information on some of the multilateral debt swaps facilitated by the IDB, see  and . 

While our experience with innovative financing instruments continues to evolve, it has already yielded valuable insights. Here are some key lessons and reflections that have emerged from our work:

1. Getting finance ministries on board: Ministries of finance juggle budget decisions for entire countries with competing needs, and education already claims a substantial portion of public spending—around 17% of total government expenditure in LAC. Getting their attention to mobilizing additional funds for education isn't easy. That's why providing financial incentives significantly strengthens the case. In our experience, multiplier mechanisms with a hybrid investment structure that combines grants with loans not only have eased fiscal constraints for countries but also made investing in education much more attractive.
2. Addressing the cash flow challenge in results-based financing: The idea of paying for results is compelling. However, in practice, not all education systems are able or willing to cover the upfront costs and wait to be reimbursed once results are achieved—especially when there’s a risk of not being paid if targets aren’t met. For some, results-based financing can feel daunting and financially burdensome. At the IDB, we're implementing mechanisms that address this issue with a twist on results-based financing. Countries receive the full loan amount upfront, but are eligible for a 5% loan discount if, at the end of the project, they meet agreed-upon targets. This design preserves the performance incentive while removing the barrier of upfront financing. We’re implementing this model for the first time in education with El Salvador.
3. Balancing ambition with reality when defining KPIs: Setting targets that are both achievable and ambitious is no easy task. Those familiar with education understand that meaningful change takes time and that many variables can affect the impact of interventions. At the same time, it's understandable that stakeholders often prioritize social investments tied to bold, measurable goals. The challenge lies not only in setting realistic targets but also in the ability to measure them. Many countries still lack robust data systems to effectively track progress. That's why it's essential to work closely with governments to define targets that are both ambitious and attainable, tailored to their specific contexts and available resources—while also supporting efforts to strengthen monitoring and evaluation systems along the way.
4. Money matters, but how you spend it matters too: Innovative financing can help a lot but doesn't replace core education budgets. It's typically a small percentage of overall education spending. For example, consider the savings generated by the largest debt swap, which was done in Ecuador with the support of IDB. It generated $1.126 billion in fiscal savings, of which $450 million (with interest) went to a Galapagos conservation fund over 18 years. That's roughly $25 million per year. When you compare this to Ecuador's annual education spending of about $3.4 billion, $25 million represents less than 1% of the total. If you spread these funds thinly across everything, they'll disappear without a trace. This is not to say these resources aren't relevant—they definitely are! There's a lot of good that can be done with $450 million. But to have real impact, how the money is spent matters just as much as how much is spent. This is where efficiency and smart prioritization come in—for example, by going deep in a few critical areas; investing in robust education management information systems (EMIS) that support the entire functioning of the system; and targeting resources toward underserved groups, where the potential returns are highest.
5. Inviting private capital to the table: Mobilizing private capital could be the next big step in innovative financing for education. Globally, assets under management classified as sustainable finance already represent trillions of dollars. Yet, education remains underrepresented, despite its strong potential appeal to investors who seek both social impact and financial returns. Addressing this gap will require ongoing dialogues with Ministries of Education to raise awareness about this possibility, while exploring financial instruments capable of attracting and sustaining private investments in education.

Interest in innovative financing for education is growing. Will it close the funding gap entirely? Probably not. But can it help reduce the gap and drive meaningful change? Absolutely—if used effectively.

The key is to provide governments with both financial and technical support. On the financial side, we must help not only finance ministers but also education leaders assess which tools are most suitable for their context. These instruments can be complex, so support in their design and implementation is essential.

Equally important is addressing the technical challenges discussed earlier—such as setting realistic KPIs, strengthening data systems, and using resources strategically. By combining financial innovation with hands-on implementation support, we can help education systems make the most of every available dollar.

*About the institution: The Inter-American Development Bank (IDB) has been working since 1959 to improve lives in Latin America and the Caribbean by providing financial and technical support to governments and institutions in the region. We also conduct cutting-edge research and develop innovative solutions to address development challenges at both local and global levels.

Disclaimer: This blog section features insights and ideas from the SDG4 High-Level Steering Committee members and other education partners on transforming education and leading SDG 4. The opinions expressed are those of the authors alone.