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. Under these programs, impact is measured rigorously and government makes “success payments” only when results are achieved, as opposed to providing payments up front.
Social Innovation Financing (SIF) is a financing toolbox that bridges the timing gap between government payments and upfront capital needed for service providers to run PFS programs. Financing capital can be raised from philanthropic or non-philanthropic sources. 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, lead contractors and investors agree on targeted outcomes for a societal dilemma, for example, reducing recidivism or homelessness.
- Government and lead contractor enter a multi-year contract, in which the government agrees to pay lead contractor if targeted outcomes are achieved.
- Private and philanthropic investors provide the necessary up-front capital to lead contractor to fund the program.
- A Lead Contractor orchestrates the delivery of the social intervention via subcontracts with service provider(s).
- An independent evaluator monitors performance against agreed-upon benchmarks.
- Lead Contractor receives government payments only if targeted social outcomes are achieved, then repays investors or reinvests in programs.