The Intersection of Impact Investing and Pay for Success

By Joe Gayeski and Mary Beech

Pay for Success (PFS) is one way local and state jurisdictions can address pressing social issues in their communities. By integrating data and building rigorous evaluation into government contracting, PFS can reward social services that demonstrate measurable impact.

To make this possible, PFS leverages private capital. The model’s innovative cross-sector funding has attracted more attention than any of its other aspects, prompting the question of the role impact investing can play in the public provision of social services. The financing question was well put by Eduardo Porter of the New York Times in July last year: “to what extent could, or should, private capital assist in achieving the government’s goals?”

In April, Third Sector presented at two events focused on socially responsible and impact investing. Senior Analyst Mary Beech spoke at Boston University's Net Impact panel on Socially Responsible Investing and Analyst Joe Gayeski sat on a panel at SEEED, a social entrepreneurship conference held annually at Brown University. At both events, Third Sector presented how private capital can assist government in providing evidence-based social services:

Impact Investing can unlock public funding for critical social services: Neither SRI nor Impact investing can address poverty, homelessness, recidivism, or any other social issue on its own. As highlighted again and again, impact investors must collaborate with the public sector to achieve meaningful results. PFS is a vehicle for such collaboration: through the cross-sector model, Third Sector’s three launched projects have leveraged approximately $16 million of impact investments to commit up to $40 million of public funding to success payments - catalyzing an even greater sum of government resources for critical social services.

Impact Investing can scale effective interventions: PFS contracts provide a vehicle for private funds to help high-performing service providers reach more individuals. In the Massachusetts Juvenile Justice PFS Initiative, the $12 million in impact investing joined philanthropic grants to allow Roca, Inc. to expand its services to a greater number of young men in need. By making investments in addition to philanthropic giving, private funders can increase funding to organizations serving vulnerable communities.

Impact Investing can show what works: PFS brings innovation to traditional government procurement by rigorously evaluating the impact of social services, so taxpayers only pay for interventions that move the needle on critical social issues. By assuming the upfront financial risk of a PFS contract, private funders can provide the resources necessary to produce evidence of effective programs.

For example, private funding behind Project Welcome Home supported the integration of several disparate government databases. The integrated data equipped Santa Clara County with a comprehensive view of its chronically homeless population. This new information provided the County with the means to evaluate its permanent supportive housing program, thus improving the effectiveness of its services.

"Impact investors must collaborate with the public sector to achieve meaningful results."