Pay for Success and Social Impact Bonds
Pay for Success and Social Impact Bonds have emerged as 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 contracts are currently being utilized or explored in social issues from recidivism to foster care, asthma prevention, homelessness, early childhood and workforce development.
Pay for Success (PFS) is a term for performance-based contracting in the social sector where government only pays social service providers if results are achieved rather than providing cost reimbursement payments.
Social Innovation Financing (SIF) bridges the timing gap between government success payments and the upfront working capital needed to run PFS programs. Financing capital can be raised from philanthropic or commercial sources. Social Impact Bonds (SIBs) are a form of SIF.
Pay for Success Mechanics
Pay for Success projects require government, service providers, and funders to agree on targeted outcomes for a societal issue. Government and project partners then enter into a multi-year contract, in which the government agrees to make success payments if targeted outcomes are achieved.
Upon launch, a Pay for Success project follows the mechanics below, as detailed in the contract:
1. Private and philanthropic funders provide the necessary up-front capital to fund the Pay for Success project and service delivery to an intermediary
2. The intermediary disburses payment to the service provider for service delivery
3. One or more service providers deliver the social intervention.
4. An independent evaluator monitors outcomes against agreed-upon benchmarks and reports to project partners on evaluation results
5. Based on evaluation results, government makes success payments only if targeted social outcomes are achieved
6. Success payments are then used to repay funders and/or reinvest in the project.