Community Development Innovation Review

Pay for Success (PFS) financing mechanisms, including social impact bonds (SIBs), provide opportunities for multiple stakeholders with different expertise—government, private investors, foundations, and service providers—to work towards common goals. For government agencies at all levels, PFS mechanisms create opportunities for the public sector to reward “what works” or expand access to evidence-based preventive social interventions without requiring taxpayers to shoulder all of the financial risk upfront. But in order for these new mechanisms to work, government must retain a central and important position.

Pay for Success (PFS), a form of social impact financing, is receiving international attention as a way to pay for scaling up high-return interventions, ranging from prisoner rehabilitation to infant health. It is attractive because risk of failure is shifted from taxpayers to the private sector; if programs don’t work, government doesn’t pay. Government pays for success by rebating a large portion of the savings from programs that work to private investors in those programs. If there are no savings, that is if interventions do not reduce government costs, there is nothing to rebate to investors. In this article, I review contracting and time-to-completion considerations with particular attention to feasibility studies, the critical first stage of establishing a social impact finance program.

Across the United States, a variety of social sector stakeholders are looking to “pay for success” (also known as pay for results or pay for outcomes) approaches to enhance the reach and impact of social programs.

For more than 100 years, philanthropy has taken risks other sectors either would not or could not take to advance innovations benefiting poor or vulnerable people.

Pay for Success (PFS) financing, sometimes known as social impact bonds (SIBs) or social innovation financing, has attracted much attention because it offers the promise of governments paying only for successful programs while increasing funding for prevention programs by accessing capital markets. To understand the emerging PFS investment landscape and determine the structures and investors that are most likely to attract incremental capital, we spoke with more than ninety investors and other stakeholders as part of an eight-month research project.

To address the wide-ranging challenges facing the United States, collaboration among philanthropy, government, and the investment community is vital. Social impact bonds (SIBs) offer a new way to advance cross-sector partnerships and introduce innovative financing solutions to scale proven preventative social programs.

In this article, we propose a vision of a social impact bond (SIB) model that moves beyond just achieving cost-savings to spurring innovation, knowledge-building, rigorous evaluation, and, potentially, outcomes that go beyond cost savings.

In this issue, Terri Ludwig notes the parallels between the Low Income Housing Tax Credit (LIHTC) and social impact bonds (SIBs). She rightly points to their public-private structure, market-based pricing, and built-in program accountability measures as evidence of commonality. Importantly, however, the forces that led to the creation of the LIHTC program were rooted in a different set of priorities than those currently undergirding SIBs.

Every application of Pay for Success (PFS) financing (e.g., recidivism, health care utilization, special education) must meet clear, measurable goals to obtain “payout” funding. Much of this journal focuses on how to structure contracts to achieve these goals. But larger questions remain.

Pay for Success (PFS) financing is a relatively new concept in the United States, with great potential for improving the social sector and government efficiency.