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Achieving social change with “Pay for Success” deals

With the right approach from government, “Pay for Success” projects create new opportunities for tackling challenging human service issues.

Overview

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“Pay for Success” (PFS) deals provide a new route for state and local governments to tackle challenging human service problems. However, as transformational tools, these projects require governments to reset their thinking toward paying for results, while allowing the innovation and flexibility needed to achieve those results. Contracts between government and service providers have to acknowledge this flexibility, while also guarding against potential unintended consequences.

Background

In the four years since PFS was introduced to the domestic US market, deals worth over $70 million have been launched. States, counties and municipalities nationwide are actively exploring PFS deals as a way of merging evidence and capital to address critical human service needs.

Based on experience to date, it is clear that, to be successful transformational tools, PFS projects require government to focus on three priority areas: valuing outcomes and budgeting for results, procuring for results, and rigorously measuring performance and outcomes.

Key Findings

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.

Analysis
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.

Recommendations

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.

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