Pay for Success in the Spotlight and Up for Debate

The Pay for Success (PFS) approach to driving resources to, and better outcomes from, social programs has been covered a lot on this blog. New Profit is a strong supporter of the PFS movement through our investment in the Massachusetts Juvenile Justice Pay for Success Initiative (MAPFS) and America Forward’s advocacy efforts to build bipartisan support for the approach among policymakers.

Recently, a number of pieces in the media have spotlighted PFS and sparked debate about the goals and future direction of the movement. The main piece in question is “The Payoff of Pay for Success“, which was written by V. Kasturi Rangan and Lisa Chase of Harvard and published in the Stanford Social Innovation Review.

The article, which uses MAPFS as an example, is one of the most deeply researched and highest profile general endorsements of the PFS approach that has yet been published. Here is an excerpt:

“[PFS] will undoubtedly make an important contribution. By attempting to attract investments in the service of impact-driven models, government agencies will learn to quantify the costs of social issues and nonprofits will learn to quantify the benefit of their interventions, leading to a more effective partnership in serving society’s needs.”

However, Rangan and Chase’s piece is also based on an assumption that we disagree with, given our deep commitment to cross-sector collaboration as a driver of PFS and broader social impact. The authors write: “…we believe that despite all the hype, PFS’s ability to attract return-seeking capital to social programs will be muted.”

This assumption led George Overholser, the CEO and Co-Founder of Third Sector Capital Partners, an organization with which New Profit collaborates on MAPFS, to write a thoughtful response piece. These are the key paragraphs from Overholser’s response:

“The great promise of PFS is not to “unleash a huge flow of return-seeking capital” that will “plug the funding gaps.” This point of view perpetuates the notion that PFS is largely about the up-front funding mechanism, most notably social impact bonds (SIBs). Certainly, the funding mechanism is a critical component of PFS, but over time it represents mere catalytic pennies on the dollar when compared to the magnitude of government dollars that PFS can unleash.

As PFS evolves and as we learn more about how to forge successful PFS projects, a comparatively small amount of private capital will be needed to drive large redeployments of government funds toward the social innovations that work best for America’s most vulnerable communities. It’s a point that Rangan and Chase eventually make at the end of their article: “These [PFS] projects … not only will raise the bar for nonprofits to demonstrate robust indicators of their outcomes but also, we believe, will fundamentally change the way governments procure and deliver social services.”

In the PFS approach, private financing is decidedly not intended to pay for social programs. Rather, its role is to provide temporary loans that are needed to bridge the timing delays that are a natural consequence of any measure-then-pay system. If and when the program hits its impact targets, then government (not private funders) pays for the program. This allows the private loan capital to be fully replenished and—this is critical—it becomes available to be recycled. This recycling phenomenon is what makes it possible for a small amount of private loan capital to catalyze large amounts of government PFS payments.”

In a Fast Company piece published yesterday – “A Revolution Of Outcomes: How Pay-For-Success Contracts Are Changing Public Services” – Overholser built on this point:

“The essential source of change is the insertion of rigorous evidence into the way government selects and pays for social programs,” he says. “We’re using careful measurements of whether communities and individuals are better off, as opposed to how much they get paid [for those services].” Overholser sees PFS as a catalyst for governments to start buying services based on data and measurable outcomes, and perhaps not just as part of PFS contracts. One day, they might simply have a line of credit for relatively safe investments, the same way companies might have one.

Overholser, who years ago was part of Capital One’s founding management team, says he’s currently working on 37 projects across 10 issue areas.

“Our expectation is that a subset of the projects we’re looking at will be particularly compelling in their performance, and those will be rapidly replicated around the country. Each time we replicate it, there will be track record to go on, which in turn will allow us to accelerate the pace of growth,” he says.

This is an important moment for PFS. While the approach is its infancy, the momentum behind it is growing and New Profit continues to believe it holds great promise for driving greater social impact.

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