Pay for Success/Social Impact Bonds

The Pay for Success (PFS) model, also known as the Social Impact Bonds model, is a relatively new way to finance improvements in persistent social problems. PFS brings together investors with local, state, and federal government agencies to fund and improve education, health, and social services. AIR is implementing this approach in many communities around the country.

For example, a local company or community investor might fund programs to reduce homelessness or strengthen literacy among young children. Connecting such upfront funding to specific program outcomes requires independent evaluators to determine whether the outcomes have been met. If these services deliver their intended results (e.g., reduced homelessness, improved student literacy), the government then reimburses investors for the cost of the service, along with a modest return on their investment (typically 1 to 2 percent of the overall investment). In this design, the investors bear the initial cost of services and take the risk of not being reimbursed should the service not produce the intended outcomes as measured by the evaluators.

Typically, an intermediary organization may provide technical assistance to public agencies and service providers, strengthening their capacity to deliver evidence-based programs and strategies to achieve outcomes. Why would investors take that risk? Because improving these near-term outcomes (for example, greater literacy in pre-kindergarten through third grade) may have important effects on the broader social and public sectors (e.g., increased earnings, greater consumer buying power, and decreased reliance on government safety nets). The PFS model has been used in the United States since 2012, with more than 12 projects underway and about 50 projects under development. The chart below depicts the stakeholders in a typical PFS project.

Stakeholders in Pay for Success