Pay for Success (PFS) contracts provide a way for governments to test human service programs through the private sector and only pay if the program delivers on its promised results. Although they have been in existence for just five years, PFS contracts have generated a great deal of interest around the world in that short time. There are now more than 50 PFS contracts underway or completed globally, with 11 in the United States.
Readers may recognize PFS contracts as Social Impact Bonds, or SIBs, the term used to describe these contracts when first developed in the United Kingdom. Because the government does not take on debt, however, this paper uses the term “PFS contract.” Although this can create confusion with other methods governments use to pay only for success based on data and evidence, the term PFS contract is an emerging standard for these specific transactions.
At its core, a PFS contract is a type of public-private partnership that combines private financing and performance-based contracting in the delivery of social services. Governments have long contracted with private vendors to finance, build or manage capital projects from toll roads and courthouses to parking facilities and university buildings. Governments have also contracted with private providers of amenities, such as solid waste collection. Unlike capital projects and basic amenities, users of social services are not the payers, which removes prices as a mechanism to gauge success, particularly since benefits may not accrue to the same agency budget in the same fiscal period as the costs.
Originally premised on saving governments enough money on other programs for them to pay investors back their capital with a premium, more recent approaches have explored ways to value projects based on a combination of hard savings, social benefit, and public willingness to pay. South Carolina’s recent PFS contract is an example of the role private philanthropies can play because they do not require a monetary return.
PFS contracts represent the latest attempt by governments to stop paying for individual programs that do not work. With 10% of federal programs having any evaluations, and few of those showing positive results, there is a clear opportunity to find and stop wasted spending. However, some limited government advocates have been more likely to view PFS contracts as potential vehicles to create new avenues of government spending without reducing government elsewhere or acknowledging the cost. This paper examines these perspectives and is intended as a primer for policymakers on the emerging paradigm of PFS contracting.