Jobs For Youth, Savings For Government, Return For Investors – All In One?
UNDP Serbia is experimenting impact investing through Youth Employment Bond together with Finnish Innovation Fund Sitra.
The high cost of youth unemployment
The youth unemployment rate is very high in Serbia, which requires more attention and also innovative ways to tackle the challenges. The youth unemployment rate in 2015 was 43.2 %, which is significantly above the general unemployment rate in the country (18.2 % for the population of working age 15-64).
Having 4 out of 10 young people (ages 15-30) neither in employment, education or training (NEET youth) costs the Government over EUR 1.6 billion a year. You read it right- EUR 1.6 billion. This figure includes costs of various unemployment related social benefits and foregone income taxes (EUR 0.6 billion or 0.5% of Serbia’s GDP) and foregone wages and productivity loss (EUR 1 billion).
This cost outstrips current investment in active labor market aimed at the youth and does not even account for indirect costs such as social isolation, loss of skills and competences, cost to the health system resulting from worse health outcomes, or higher levels of crime and anti-social behaviour, which are much harder to monetize. Detachment from the labour market leads to skills degradation and loss of motivation that not only impairs the capacity to search for employment in the future, but also impacts the future job performance. If all the indirect costs would be added to the estimation, the cost to the society would multiply significantly.
Long-term unemployment has a particularly adverse effect on youth and their position on the labour market. Currently there are over 90.000 long-term unemployed youth in Serbia and only 25 % of them are included in the active labour market programmes. This leaves room for new and innovative ways of including youth in the labour market.
Engaging private sector through impact investing
To tackle the challenges and negative impacts of long-term youth unemployment, UNDP together with Finnish Innovation Fund Sitra and the Government of Serbia is designing a Youth Employment Bond pilot with the Social Impact Bond (SIB) mechanism. Social Impact Bond is a result-based financial instrument for impact investing, where private investments are intended to create a positive social or environmental impact as well as a financial return. Typically, SIBs have been designed to help reform public service delivery.
Impact investing opens up an innovative way to engage private sector to bolster global sustainability and SDGs further together with public sector and service providers. The impact investing industry is growing and impact investors are already aligning their investment strategies with SDGs, which creates a mutual framework for new partnerships to tackle the global development challenges together.
Social impact bond modality, one of the instruments of impact investing, reduces the funding risk of public sector as the outcome payers (usually the government or municipality) agree to pay and reward investors only if outcomes are achieved. Thus taxpayer’s monies will be invested only in programs that have measurable impacts and that either create savings or improve social welfare. It also creates incentives for service providers to improve their performance through results-based contracting where the impact of the services has to be measurable.
The first SIB was launched in 2010 in UK and by now 60 SIBs have been commissioned worldwide across Europe, Australia, Canada and the United States. SIBS have raised over $200m of capital and touched over 90,000 lives. Almost half of the SIBs are focusing on employment, while others are covering areas such as health, homelessness, child welfare, education and criminal justice. There is a strong focus on preventive and early intervention measures; some tackling the current migration flow in Europe.
There are successful examples of youth employment projects with SIB modality. For example, the ThinkForward programme supported 1050 disengaged young people in 14 schools in north-east London to achieve a successful transition from school to work. Through the success of the programme, over ninety percent of young people aged 18 progressed into further education, employment or training and thus investors have reaped a financial return.
Finnish Innovation Fund Sitra has launched two SIBs in Finland on occupational wellness and fast integration and employment of immigrants. In addition, they are currently developing three more bonds focusing on wellbeing of children and families, support independence of elderly and advancing employment.
To justify the activities and estimate the impact that could be created through impact investing, Sitra has estimated the cost of some current welfare problems to the Finnish Government, which could be prevented with early interventions: For example, child in custody care EUR 100.000/municipality, social marginalized youth EUR 20.000/municipality or physical inactivity EUR 1-2 billion and smoking EUR 1.5 billion cost for the society annually. SIB modality shifts the focus from paying for activities to paying for results. “A change of mind set is still needed in public sector to start paying for the results” said Mika Pyykkö, the Head of Impact Investing focus area of Sitra. This would also force us to look more closely how we evaluate the impact of our work. Result-based financing and contracting requires detailed data analysis on the baseline and on the changes created through the activities. In addition, the metrics for the impact analysis have to be extremely specific and measurable.
Youth Employment Bond in partnership
The Finnish example to promote integration and fast employment of immigrants through SIB to avoid a long unemployment period raised the interest of the partners in the Government of Serbia. The Government of Serbia is looking for new innovative ways to tackle the challenges Serbia is facing and creating jobs and promoting entrepreneurship is high on the agenda. The Youth Employment Bond is responding to this challenge.
To reach out to partners, UNDP Serbia together with Sitra and the Embassy of Finland organized an event on 1st of September to introduce the new modality and discuss its viability in Serbia. The Finnish Residence gathered 50 interested people from Government, financial institutions and private sector.
In addition, a task force with relevant stakeholders, such as Office of the Prime Minister, Ministry of Youth and Sport, Ministry of Labour, Employment, Veteran and Social Affairs and National Employment Service, has been set up to support the development process of SIB.
UNDP and SITRA have embarked on designing the pilot for Serbia, based on similar principles of Finnish SIB modality, applied to Serbian conditions. Detailed analyses are under preparations on the financial and legal framework as well as on the service gaps in the youth employment services. The business rationale is that approximately only a fourth of the currently unemployed youth is covered by the active labour market measures in place and there is scope for introducing more measures, packaged in an innovative way, through private-public partnership, to expand and accelerate the employment of young people. The result-based contracting with service providers leaves room to innovate how the services will be provided while focus of the contracting will be on the results.
The Youth Employment Bond brings together different actors from private, public and development sectors with ultimate target to create jobs for youth, savings for government, return for investors and we believe that development is an investment! Stay tuned for more updates early next year.
P.S. A shout out to our funder of Ministry of Finance of Slovakia who supports the alternative financing work.