Pay-for-success (PFS) contracting arrangements remain a new concept in the U.S., with many of the projects too early in their implementation to have received much of an assessment. While potentially a means of mitigating and solving a vast array of societal problems unsolved by traditional government service provision—including inmate recidivism, low educational achievement outcomes, and homelessness—success relies on many complex parts working together, especially difficult for a concept still much in its infancy.
As a recent Governing article notes, PFS arrangements for which the most robust results exist—such as New York City’s Rikers Island ABLE program and the state of Utah’s “at risk” educational PFS program—have been mixed from an investment standpoint. Meanwhile, early results have been promising for a Massachusetts homelessness PFS program.
PFS arrangements (or, occasionally termed “social impact bonds”) work by allowing private investors—often philanthropic organizations—to offer up funds and pool them (sometimes, with government grants) to solve complex societal problems through targeted social interventions. The interventions are then typically applied by a specialized nonprofit and in partnership with governments, using interventions they expect to be successful.
From the investor standpoint, a “success” is when benchmarks that meet or exceed the government sponsor’s desired outcome for the program are met, triggering payouts to investors that result in a modest positive return-on-investment for individuals in the private donor group.
Although verified, positive outcomes for PFS investors have been limited to date, capital has continued to flow to PFS programs. The Nonprofit Finance Fund’s payforsucess.org website lists 83 PFS programs nationwide as of mid-August, though the first American PFS program was implemented just six years ago.
Early results have been promising for a Massachusetts homelessness PFS program. Further, a second Massachusetts PFS program run by Jewish Vocational Services that seeks to provide English language training and job placement assistance to 2,000 adults recently received a capital commitment from Maycomb Capital’s Community Outcomes Fund. The Community Outcomes Fund is a first-of-its-kind investment fund that will exclusively invest in PFS. It received $50 million in capital commitments (direct funding and loan guarantees) from private investors as of May.
The federal government has also shown support of PFS arrangements. It provided $100 million in PFS funding during the second term of the Obama Administration, and a new program providing another $100 million for PFS ventures was finalized by President Trump in February.
As investors, governments, and providers work together to attempt to solve a diverse set of issues, a continued trial-and-error approach should result in a greater understanding of where and how PFS approach can be effective. Time may prove there’s not a PFS approach for every major societal problem.
PFS is a unique entrepreneurial endeavor that uses an investment vehicle with a limited history to tackle tough problems that decades of public sector management and public policy interventions have struggled with. One should expect mixed results.
The coming years will produce a wealth of information concerning the results of past and continuing PFS arrangements, which should prove helpful for future PFS endeavors. Still, the uniqueness of each custom-designed PFS program and the institutional environments in which the arrangement operates necessarily limit the applicability of past results to predict future ones.
Still, it’s important to remember that even PFS investment “failures” can come with improved outcomes for governments, taxpayers, and, most importantly, individuals targeted by PFS program interventions.
In the U.S., the first PFS program was New York City’s Rikers Island ABLE program. Goldman Sachs and other investors sought to reduce recidivism amongst youth incarcerated at Rikers Island, with a 10 percent reduction in recidivism rates triggering a payout to the private funders. Not only were the performance benchmarks not met, a Vera Institute analysis noted the program had no “statistically significant” effect on reducing recidivism. The investors lost a combined $7.2 million.
However, the same Vera analysis noted that “44 percent of participants reached a programmatic milestone found in prior studies to be associated with positive outcomes.” A New York Times article noted some good news in the wake of the end of the program, too: the project’s “trailblazer” effects to encourage future PFS endeavors; the potential benefits of a results-based, PFS approach overtaking more traditional “low-bid” contracting approaches; and anecdotes from individuals positively impacted by the Rikers PFS program. Investors absorbed the entire $7.2 million loss and saved taxpayer money.
A Utah early education PFS program (the first education-specific PFS arrangement in the U.S.) showed highly positive initial results for at-risk kindergarteners and preschoolers. But, outside experts challenged its methodology claiming there was no control group to ensure that the students were successful as a direct result of the program, and not because the students were misidentified as “at risk.”
Aside from investor payout concerns, by receiving and benefitting from enhanced educational services that would otherwise not be offered, Utah students and their families benefitted from their PFS program, as have the communities where student beneficiaries are located.
The question of how and when the investors should benefit based on the project’s methodology and results can be straightened out. But the lingering questions don’t mean the PFS arrangement should be ended. (Indeed, it hasn’t.)
Aligning investor, government, and service provider interests into one viable investment vehicle will take time, and as more arrangements are attempted, groups will get a much better understanding of the most effective metrics on which to base performance and the appropriate payouts to investors. Experience will be vital in improving the interaction of the many moving parts of PFS arrangements.
Though the PFS movement will see continued challenges from an investment standpoint, citizens shouldn’t lose track of the fact that lives still are being improved by PFS programs, while not risking further taxpayer money. A focus on how best to improve outcomes to the point of making PFS arrangements a more viable long-term solution for investors will be vital in the coming years, where there will a greater wealth of information to guide all involved in PFS arrangements. As investors continue to search for and fund innovative approaches to tackling societal problems with the PFS approach, the outcomes for all parties—targeted individuals, governments, taxpayers, and investors—should continue to improve. Whether investment outcomes improve will be vital in determining how long outcomes for affected communities improve.
PFS programs are new, unique, inherently complex, and can potentially be used to help tackle many chronic societal problems that public policy has struggled with for decades. Getting investors, service providers, and government leaders to identify and agree to arrangements that identify success and reward it effectively will always be difficult. But in time, as more arrangements are tried, parts of the process should become less difficult.
Fortunately, the risk to taxpayers and governments is low from PFS arrangements, and investors, despite setbacks, remain determined to fund PFS ventures. As states and communities across the U.S. continue to familiarize themselves with pay-for-success arrangements, we shouldn’t lose sight of the fact that metrics-based investment failure still often comes with success for those targeted by PFS programs. Investment outcomes should improve as a greater understanding of PFS is developed through experience. In the meantime, continued investor interest in PFS should be celebrated and further encouraged.