Third Sector Responds to U.S. Department of Treasury Pay for Success Request

Third Sector was pleased to respond to the U.S. Treasury Department’s Request for Information on strategies to accelerate the testing and adoption of Pay for Success financing models in the United States on December 2nd. President Obama’s 2014 budget included a request for a $300 million appropriation to create an Incentive Fund to help state and local governments implement PFS projects. The Treasury Department sought information to help develop functions and uses for a potential Incentive Fund.

Based on our experience implementing PFS projects, our response outlined our thoughts on how a potential Incentive Fund could accelerate the adoption of PFS across the country. These included:

  • Federal support should require that all PFS deals assess impact in an ongoing way, against well-quantified counterfactuals. This does not always require a randomized controlled trial, as counterfactuals are sometimes more easily established. The key is to avoid creating a system that incentivizes “funding what once worked” rather than creating a feedback loop that allows for continuous improvement.
  • Credit enhancement should focus on mitigating counterparty risk, not performance risk. Investors need assurance that local governments will follow through with their contractual PFS obligations. The Federal government can assist where local governments cannot guarantee multiyear contingent payments by providing credit enhancement. However, performance risk for projects can and should be taken on by private investors.
  • Financing to support PFS deal construction can take numerous forms. As detailed in our response, we believe the Incentive Fund could provide a combination of co-success payments with state and local governments, credit enhancement to mitigate counterparty risk and predevelopment technical assistance funding to stimulate PFS deal construction efforts.

You can read our full response at the website here.