The Nonprofit Finance Fund (NFF) has released the first-ever compilation of the nation’s first Pay For Success (PFS) projects, examining a wide range of details on each of the 10 projects.
“Pay for Success has generated a flurry of ‘hype’ and ‘hate’ disproportionate to its limited applications in the field to date,” said NFF Vice President Jessica LaBarbera. “We believe that the legacy of these early projects will be their role in lighting the way toward a social sector more focused on collaboration, outcomes, and a commitment to understanding and paying for the full costs of positive change,” she said.
“The market is too young for us to draw conclusions,” said Dana Archer-Rosenthal, NFF’s Pay for Success program manager and lead author of the report. “The challenge – and opportunity – in the next phase of the PFS market’s development is not to advance a particular financial innovation but to collectively improve our ability to deliver better results,” she said.
“Pay for Success: The First Generation” examines project goals and project design; partners and stakeholders involved; underlying data, evidence, and evaluation plans; governance and investment structures, including repayment terms and investor profiles; and, project costs. The 36-page report breaks down the size and history of each PFS project as well as details on investors and lenders, service providers, evaluation, methodology and outcomes tied to success payments.
There are few generalizations or conclusions that can be made about the 10 projects, or about the PFS field more broadly given its early and rapidly evolving nature, according to the report.
“In the U.S., all of the current PFS projects have been accompanied by a form of social innovation financing, often referred to as a Social Impact Bond, in which investors provide upfront financing for the delivery of service sand are repaid only if the services achieve a pre-agreed upon set of positive outcomes.”
Project implementation necessitates a changed, and deepened, relationship between the public sector and the service provider, something the authors said is “an innovation in itself,” and part of all PFS projects, regardless of the level of evidence underlying the project.
On average, the project development timeline has been about two years. After a flurry of activity near the end of 2014, only one new project launched in 2015. Catalytic investments in project feasibility assessment and transaction structuring by the federal Social Innovation Fund’s Pay for Success program in late 2014 should result in an invigorated pace of new project launches in 2016, 2017 and 2018, according to the report.
Projects to date have clustered in three issue areas: criminal justice and recidivism; early childhood education; and homelessness.
The size of PFS projects varies by number served and size of investment but there is an emerging consensus that between $5 million and $10 million is an appropriate minimum threshold for a project, given both the relatively high transaction costs and interest of investors – particularly commercial ones – in larger investment opportunities.
To date, no project has had a federal agency as the payor, with most PFS activity at the state or county level. The federal government did play a role in two early projects: the New York State Increasing Public Safety and Employment Project and the Massachusetts Juvenile Justice PFS Program. Both received grant funds through the Workforce Innovation Fund.
Most PFS projects have used funding to finance an increase in the number of people served by a particular program or service provider, hence the model is viewed as a tool to scale proven programs or those with some evidence demonstrating effectiveness.
In several cases, PFS projects have introduced new services and in others they have combined services. Projects also can allow for flexibility in program design and delivery that standard government projects for social services don’t usually allow.
After three years of service delivery, the NYC ABLE Project for Incarcerated Youth announced in July that the evaluation of the first cohort of youth served at Rikers Island jail showed no difference from historical data in terms of recidivism rates over the two-year period following enrollment in the program. No success payments were made to Goldman Sachs, the sole investor, which triggered the use of a 75 percent guarantee by Bloomberg Philanthropies, the guarantor. Goldman Sachs decided not to continue funding a fourth year of services, an option included in the contract, and the project was ended.
In October, the first set of interim results from the Utah High Quality Preschool Program showed that all but one student among those evaluated as likely to require special education services upon entering preschool actually required the services. In that case, the investor – again Goldman Sachs – received an interim payment based on the avoided cost per student.
During the past five years, NFF has conducted more than 200 PFS trainings, presentations, webinars, workshops, and convenings across the country for service providers, governments, and investors.
The New York City-based fund also manages the Pay for Success Learning Hub (www.payforsuccess.org), a repository for education and information on Pay for Success. NFF’s work on the report was made possible with support of the Corporation for National and Community Service’s Social Innovation Fund (SIF).