Pay for Success and Social Impact Bonds
Pay for Success and Social Impact Bonds have emerged as potential mechanisms for increasing investments in effective social interventions by changing the way government allocates and invests its resources – focusing on results and outcomes. In short, funding what works.
Pay for Success (PFS) is a general term for performance-based contracting between government and social service providers, where government only pays providers if target outcomes are achieved, e.g. reduced recidivism or improved health outcomes, as opposed to providing cost reimbursement payments.
Social Innovation Financing (SIF) is a financing approach that bridges the timing gap between government success payments and upfront working capital needed for service providers to run PFS programs. Financing capital can be raised from philanthropic or commercial sources. Depending on the terms of the financial deal, these investors will be either repaid from government success payments or will reinvest payments into future projects. Social Impact Bonds (SIBs) are a form of SIF.
Pay for Success Mechanics
Pay for Success and Social Impact Bond constructs are framed around several key principles:
- Government, service providers, intermediary and lenders agree on targeted outcomes for a societal dilemma, for example, reducing recidivism or homelessness.
- Government and project partners enter a multi-year contract, in which the government agrees to make success payments if targeted outcomes are achieved.
- Private and philanthropic funders provide the necessary up-front capital to lead contractor to fund the program.
- One or more service providers deliver the social intervention.
- An independent evaluator monitors performance against agreed-upon benchmarks and reports to project partners on results
- Government makes success payments only if targeted social outcomes are achieved; success payments are then used to repay lenders and/or reinvest in the project.