Financing Upskilling – Pay When You Are Paid
Millions of people across the world lost their jobs as the COVID pandemic raged across the world. No one was spared. From wall street to the streets of Mumbai, there was panic. Suddenly hundreds of millions were working from home as countries locked down and kept people indoors. “Zoom” became a verb and the most unlikely people were talking to each other and collaborating at work over online meetings. Schools and colleges were conducting classes over the internet and everyone on the planet who did not have a smartphone and high-speed internet access at home was pushed further back in the digital divide. Telemedicine which had faced huge resistance for years suddenly became de rigueurfor anything not related to COVID. Accenture, where I had worked for 14 years, saw its share price first fall from over $200 a share to $150 in March 2020 with the initial panic, only to rise to unprecedented heights over the next 18 months and reach $340 as I write this today. Digital clearly was here to stay and digital evangelists like Accenture made huge gains.
The pandemic is hopefully a once in a lifetime event but changes in technology have been constant over the last few decades. Many of the changes continue to be disruptive and people need new skills in order to remain relevant and gainfully employed. Not learning new skills meant a low rise in pay at best and job loss at worst. I recently retired from Accenture as a Managing Director in their Analytics practice. Analytics, data science and artificial intelligence are household names today but when I graduated from college 30 years ago, these terms were unheard of. There are many people like me who started their career in manufacturing, moved to information technology and business process outsourcing and then went on to build a career in data and analytics but there are hundreds of millions, maybe even billions who could not acquire new skills as the world changed and were stuck in dead-end jobs or even found themselves suddenly not in demand.
Our estimates tell us that India needs to create at least 20 million new jobs every year. Eighteen million people reach job seeking age and there is a need to move at least 8 million people out of agriculture every year. This is a huge jump from the best estimates that show we create 4.3 million jobs each year currently. Other estimates show we create less than a million jobs each year. Jobs that are being created today are increasingly technical and tend to require some degree of specialised skill; without these skills, even the ‘created’ jobs will remain vacant. It is estimated that over a million jobs are vacantin the Central Government and one of the biggest reasons for these vacancies is a skill shortage.
People are at first blinded by the change. It catches many people unawares because they have not been keeping track of the changes impacting their industry. Some realise early that new skills will be needed to get ahead in their jobs and many realise a little later that they need these new skills to even hold on to a job, any job. Not many people even know what skills to acquire as the change becomes endemic across industries and job requirements become very different everywhere. If they know what skills to learn, they do not know where to learn them from. The number of training institutes today offering to teach people data science and python programming are in the hundreds in a city like Bengaluru but it costs money to attend these training programs and one does not know how good these institutes are and there is no guarantee that one will get a job even after attending paying for and successfully completing this training.
I met Gurmeet in the late 90s and she was a lathe operator and told me she wanted to become a CNC machine operator because it paid much better. She never did. She remained a lathe operator and lost her job around 10 years ago and returned to her village. Imagine someone like Gurmeet who earns INR 10,000 a month as a lathe operator and wants to become a CNC operator earning INR 25,000 a month. Even if Gurmeet knew from her friends that Aakash Training School is a great place to learn from, she would not have had INR 50,000 to pay for the training and her family cannot survive three months of the training without her current INR 10,000 a month salary. Imagine the local moneylender offers her a loan of INR 80,000 (covering the cost of the training and the three months’ lost wages) to be repaid with interest. Even then, Gurmeet would be hesitant because there is no guarantee she will get a job as a CNC operator and earn the INR 25,000 a month pay. What if he does not get the job and he is stuck with a huge loan? This would destroy her family. So, she decides to take her chances with her current job and not try to improve her position. Manpreet on the other hand got lucky. Like Gurmeet, he too was a lathe operator but he had a friend called Rakesh who owned a similar training institute and was very confident of the quality of the training delivered at his outfit. Rakesh offered to give Manpreet the INR 80,000 and told him that he need not repay the loan unless he got a job as a CNC operator after the training. The deal was for Manpreet to pay Rakesh 50% of anything he earned over the current INR 10,000 a month for the next 2 years. If Manpreet did well, Rakesh got his money back with interest and if Manpreet did not do so well, Rakesh lost any chance at interest and maybe even lost the principal. Manpreet graduated from the training and went on to become a CNC machine operator and repaid the loan to Rakesh with interest and they are best friends now.
The concept of “at-risk” loans is like that. The training institute does not charge the student an upfront fee and sometimes even gives a loan to compensate for lost wages. The notional cost of the training including the money offered to compensate for lost wages is treated as a loan to be repaid if the trainee gets a job and earns a certain income. The trainee promises to pay a percentage of her future income provided it is above a threshold for a specific duration with a cap on the maximum amount to be paid. The training institute and the trainee now have the same interests at heart, and both try hard to make this successful.
While Rakesh made good money on the loan he gave Manpreet, it is hard to scale. Training institutes do not have unlimited resources and will need the loans they give to be refinanced. Here is where the financial markets come in and the idea of career impact bonds (CIB). CIBs were coined by an organisation called Social Finance. The training institute creates a pool of all the loans they have given to their trainees and sells the future cash flows from these loans to a special purpose vehicle (SPV). The SPV structures bonds which are sold to investors. The coupon on the bonds will depend on the seniority of the bond. The senior bonds get first right to the interest and principal and are more likely to be repaid in full and are less risky. This could attract pure financial investors. The junior tranches are riskier and these bondholders will get paid only after the senior tranches get their money. Maybe this can be funded by CSR money from large corporates wanting to invest in upskilling Indians and some impact investors. The equity tranches are the riskiest attracting only philanthropists, the government and the training institutes which are willing to put some skin in the game.
Over time, as more evidence becomes available about the expertise of an institute and the effectiveness of its programs (which can be measured through an average increase in wages or the employment benefits before and after the program), there is more information available for traditional investors. Making this a long-term sustainable method of acquiring new skills.
CIBs are financial instruments. The performance of these bonds will be closely monitored and investors will flock towards bonds backed by loans from the more successful institutes and courses. The interests of the market will be aligned with those of the student and the training institute offering potential seekers of skills the knowledge of what to learn and where to learn it from. The institutes gather data over time and figure out which types of trainees are more trainable.
One might ask, how is this any different from securitizing student debt? A person gains skills in college but if they take a student loan for this, they are expected to repay the loan irrespective of how much they earn. These loans also require the student to provide a collateral for the loan. CIBs on the other hand depend on a tangible outcome in the form of increased wages to require repayment of the loan. The repayment risk, especially due to difficulties in tracing the income of the beneficiary and the lack of collateral, can be solved by utilizing accounts that are connected to a person’s unique identification. For instance, the linking of a person’s income to their Jan Dhan account which is connected to their AADHAR. The use of accounts poses a challenge in India. It has been noted that over 40% of Indians lack access to basic banking facilities. Those without access to banking facilities can often be those in the most dire need of upskilling to move into productive employment. This is why, we believe, every upskilling program needs to be accompanied by a module on financial literacy. The opening of an account will be immaterial if the beneficiary doesn’t know how to effectively use their funds.
This brings us to the question of pedagogy. India has a long history of encouraging rote learning in its education system. Even when the New Education Policy announced that students would have to learn coding in school it was met with resistance. How then would we ensure these training institutes don’t fall into the same trap? The answer is: the markets will ensure this. If a training institute doesn’t provide effective hands-on learning, the worker’s theoretical knowledge will not convert into applied skill. This will mean the expected outcome will not be realised. Over time, this will ensure the training institute ceases to function due to a lack of funding.
Why are CIBs the future? The CIBs work in tandem with the markets. They will ensure the demand for skills is met through the supply of trained workers. While there might be cyclical distortions that lead to gluts or shortages, in the long-run there will be equilibrium. This means a large number of people can acquire new skills without worrying about the high opportunity cost of the program or how they will repay the loan. Since the training is determined by market forces and the repayment is dependent on outcomes, training institutes that impart market-relevant skills that translate into efficient workers will thrive. Philanthropists and governments will see a direct impact on their investments in reskilling, allowing them to redirect their funds to the right training institutes. Financial investors have an investment option that generates returns and causes social impact.
