Pay for success
“Pay for success, also referred to as Social Impact Bonds, is a public-private partnership that drives government resources toward social programs that deliver proven results to those in need.
This innovative funding model connects high-quality service providers with impact investors, who provide up-front funding for programs, and governments, which agree to repay that investment if, and only if, the program achieves predetermined goals of improving lives. Since it is an innovative financial model for public benefit projects, the emphasis here lies on its new features and emerging pain points.
Different sectors in this model
In this funding model, the government publishes its needs, and the intermediary finds proper non-profit organizations as service providers to compose projects. Then, the intermediary creates a contract that states that the government will only pay the money back if the service provider fulfilled its needs. Next, the intermediary seeks investors to pay in advance. The investor receives financial returns from the government when the job is finished. Through this funding model, the government passes on its risk to the private sector investors. Non-profit organizations, on the other hand, receive an easier, more steady stream of funds. Finally, investors not only make money, but they also get social returns with their capital.
Through our conversation with Antonia in “Social Finance”, a non-profit organization that runs pay for success projects, we received several details on pain points throughout the process. One of the biggest problem would be that though it is a seemingly perfect funding model, it is still a new concept for America (less than 5 years). It takes time to build trust for the market.
For the government, human resources is also a big concern. The existing budgeting system in the government is not consistent with paying after success. Third, it is not a necessity for the government to avoid risk if the funding is sufficient. Last but not the least, the government finds it hard when seeking compelling service providers, and it is expensive to do the third-party evaluation for these service providers.
For the investors, the market is not mature enough. And the rate of return is not sufficient compares to the risk they undertake. Similarly, they find it hard to evaluate the qualification of service providers.