What is Pay for Success?
Pay for Success (PFS) is an approach to contracting that ties payment for service delivery to the achievement of measurable outcomes. The movement towards PFS contracting is a means of ensuring that high-quality, effective social services are working for individuals and communities.
Traditionally, contracts or grants to support social service delivery are based on the volume of services delivered (e.g., number of students taught in a job training program) or short-term outputs (e.g., number of people who graduated from the job training program). An outcome is a longer-term (and hopefully positive) change; for example, a job training participant who finds and keeps a job, and experiences an increase in earnings.
In a PFS contract, the payor for outcomes – typically, but not exclusively, government – agrees to provide funding if and when the services delivered achieve a pre-agreed-upon result. Typically, an independent evaluator determines whether the agreed-upon outcomes have been met.
PFS contracting has been used to scale up effective programs and interventions, as well as test innovative models of service delivery. Since the payor is not committed to paying for services if they do not achieve the desired outcomes, PFS can be particularly attractive to governments as a way to realize greater accountability and efficiency by allocating resources to programs with demonstrable outcomes.
The first PFS project launched in the United Kingdom in 2010, and the first project in the United States launched in 2012. Since then, early-stage PFS activity has occurred in most parts of the United States. As of early 2017, over a dozen projects have launched, one project has completed, and there are more than 50 projects in development. Further, there is significant activity at the federal government level to support the growth of the PFS market. To date, PFS projects have been designed to address a range of issues, including homelessness, recidivism and early childhood education.
Financing and Social Impact Bonds
Most service providers are not in a strong enough financial position to deliver services for several years with no dedicated revenue, especially with the risk of not being repaid if they do not achieve the pre-agreed upon outcomes in a Pay for Success (PFS) contract (see above). For this reason, PFS contracts are usually accompanied by financing agreements that provide upfront capital to support service delivery throughout the project period.
PFS financing agreements, in which private investors provide upfront capital for the delivery of services and are repaid by a back-end, or outcomes payor (usually a government), if contractually agreed upon outcomes are achieved, are often referred to as "Social Impact Bonds" (illustrated and described below). Social Impact Bonds (SIBs) are a mechanism by which to shift financial risk from service providers to investors, with investors underwriting service providers’ based on their ability to deliver on positive social outcomes.
The contracts and the flow of money in SIB financing are often managed by a project manager or transaction coordinator. Funding is aggregated from private, nongovernmental investors to provide the upfront capital required by a service provider to deliver services over the life of a PFS contract. The payor contracts with the service provider for certain outcomes and also contracts with investors to pay back their investment if the agreed-upon outcomes are achieved. An independent evaluator determines whether or not the target outcomes have been met. If the target outcomes are not met, investors are not repaid.
Pay for Success Actors
Pay for Success (PFS) projects are multi-stakeholder partnerships that typically involve the public, private and nonprofit sectors.