WHAT IS PAY FOR SUCCESS?
Pay for Success (PFS) is an approach to contracting that ties payment for service delivery to the achievement of measurable outcomes. The movement towards PFS contracting is a means of ensuring that high-quality, effective social services are working for individuals and communities.
Traditionally, contracts or grants to support social service delivery are based on the volume of services delivered (e.g., number of students taught in a job training program) or short-term outputs (e.g., number of people who graduated from the job training program). An outcome is a longer-term (and hopefully positive) change; for example, a job training participant who finds and keeps a job, and experiences an increase in earnings.
In a PFS contract, the payor for outcomes – typically, but not exclusively, government – agrees to provide funding if and when the services delivered achieve a pre-agreed-upon result. Typically, an independent evaluator determines whether the agreed-upon outcomes have been met.
PFS contracting has been used to scale up effective programs and interventions, as well as test innovative models of service delivery. Since the payor is not committed to paying for services if they do not achieve the desired outcomes, PFS can be particularly attractive to governments as a way to realize greater accountability and efficiency by allocating resources to programs with demonstrable outcomes.
The first PFS project launched in the United Kingdom in 2010, and the first project in the United States launched in 2012. Since then, early-stage PFS activity has occurred in most parts of the United States. As of early 2016, eight projects have launched, one project has completed, and there are more than 40 projects in development. Further, there is significant activity at the federal government level to support the growth of the PFS market (see Table 1). To date, PFS projects have been designed to address a range of issues, including homelessness, recidivism and early childhood education. (Updated: 2/5/16)
PAY FOR SUCCESS FINANCING AND SOCIAL IMPACT BONDS
Most service providers are not in a strong enough financial position to deliver services for several years with no dedicated revenue, especially with the risk of not being repaid if they do not achieve the pre-agreed upon outcomes in a Pay for Success (PFS) contract (see above). For this reason, PFS contracts are usually accompanied by financing agreements that provide upfront capital to support service delivery throughout the project period.
Table 1. Federal Pay for Success and Evidence-Based Funding Activity
Social Innovation Fund (SIF): Program of the Corporation for National and Community Service that has used tiered-evidence approach to award more than $240 million in funding for program expansion and evaluation in communities across the country since 2010; 2014 and 2015 appropriations included up to $21.7 million to support development of PFS projects.
Education: Investing in Innovation Fund (i3) supports expansion of in programs with demonstrated impact in improving secondary and post-secondary achievement; both the House of Representatives and Senate approved the inclusion of PFS initiatives as an allowable use of state and local funds in various titles of their respective versions of the Every Student Succeeds Act of 2015.
Housing and Urban Development: In 2015 HUD issued an Request for Proposal, using funding from the Department of Justice, for PFS projects that use supportive housing to improve outcomes for formerly incarcerated individuals upon reentry.
Health and Human Services: HHS uses tiered evidence criteria to prioritize funding for evidence-based programs in the areas of teen pregnancy prevention and maternal and child health, and is investing in building the evidence base in a number of areas.
Workforce Development: The Workforce Innovation Fund provides grant funds to projects with evidence-based approaches, including two early PFS projects; the 2014 Workforce Innovation and Opportunity Act (WIOA) authorizes states and local workforce investment boards to invest up to 10 percent of funds in PFS projects.
PFS financing agreements, in which private investors provide upfront capital for the delivery of services and are repaid by a back-end payor (usually a government) if contractually agreed upon outcomes are achieved, are often referred to as "Social Impact Bonds" (illustrated in Chart 1 and described below). Social Impact Bonds (SIBs) are a mechanism by which to shift financial risk from service providers to investors, with investors underwriting service providers’ based on their ability to deliver on positive social outcomes.
The contracts and the flow of money in SIB financing are often managed by a project intermediary or transaction coordinator. Funding is aggregated from private, nongovernmental investors to provide the upfront capital required by a service provider to deliver services over the life of a PFS contract. The payor contracts with the service provider for certain outcomes and also contracts with investors to pay back their investment if the agreed-upon outcomes are achieved. An independent evaluator determines whether or not the target outcomes have been met. If the target outcomes are not met, investors are not repaid.
PAY FOR SUCCESS ACTORS
Pay for Success (PFS) projects are multi-stakeholder partnerships that typically involve the public, private and nonprofit sectors.
WHERE CAN I FIND MORE INFORMATION ON PAY FOR SUCCESS?
The Pay for Success (PFS) Learning Hub is the top source of information on the PFS field, including project summaries, sample documents, and reports and analyses that capture the opportunities and challenges of the PFS model. Resources housed on this site come from diverse players in the emerging PFS market and are aggregated from a neutral perspective to allow for a range of viewpoints on the field. Some good places to start an exploration of PFS are:
- America Forward, Pay for Success Infographic
- Federal Reserve Bank of Philadelphia, "Pay for Success: Financing Research-Informed Practice"
- America Forward, "Pay for Success: Innovation, Flexibility, and Data-Driven Results"
- McKinsey's Social Sector Office, "An Introduction to Social Impact Bonds" video
- TEDx Talks, "Pay for Success in Government: Better Outcomes at Lower Cost" video
- Corporation for National & Community Service, "State of the Pay for Success Field: Opportunities, Trends, and Recommendations"
- Brookings Institution, "The Potential and Limitations of Impact Bonds: Lessons from the First Five Years of Experience Worldwide"
- Nonprofit Finance Fund, "Frequently Asked Questions: Pay for Success/Social Impact Bonds"
- Nonprofit Finance Fund, Pay for Success U.S. Activity