Three challenges must be overcome for state and local governments to realize the promise of PFS deals. First, attracting investment through the valuation of outcomes, and budgeting for results. Second, re-tuning procurement practices (which are not generally designed to facilitate an innovative approach where government is contracting for an outcome, not a prescribed service). And third, rethinking what’s needed to support an outcomes-based model that requires rigorous measurement to validate results.
Up to now, to establish early footholds in a potentially large new market, the small number of commercial investors in PFS projects has been willing to accept higher levels of risk than would typically be accepted in commercial markets. However, as more states and other jurisdictions enter the market, competition for these risk-tolerant dollars is likely to increase. By moving now to address and mitigate investor risk, governments will enhance their attractiveness for new and expanded investment.
PFS deals represent an exciting field of innovative finance. However, they need to be addressed thoughtfully and in a structured way. As more state and local governments across the US move to explore what PFS contracts have to offer, there is still much work to be done.
Highest priority is addressing the three principal challenges arising from this new method of collaboration between government and private sectors: valuing outcomes and ensuring future payment for investors, adapting government procurement practice, and establishing rigorous processes for measuring and validating outcomes. Consistent PFS legislation nationwide will also be key to realizing the full potential of PFS, with practical guidance needed on how to draft and implement PFS contracts.