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Understanding Social Impact Bonds and Pay for Success

Pay for success (PFS) financing and social impact bonds (SIBs) have generated immense enthusiasm in the public and private sectors as a means to shift risk and generate new capital for social programming. In PFS and SIB transactions, private investors provide capital for an evidence-based social program. The investors’ principal is returned with a profit if rigorous evaluation concludes predetermined performance goals are met.

There are more than a dozen operating SIBs in the United Kingdom, and several PFS projects in US cities and states. However, transitioning from an experiment to a stable social funding structure requires a rigorous selection and evaluation process, and an appropriate pricing scheme for governments and investors. Urban Institute researchers have developed roadmaps for the next step for PFS development in the United States by drawing on evaluation research, policy development, and cost-benefit analysis.

These presentations and publications describe the implementation of this new financing mechanism in the justice system (although the concepts can be applied to any social sector). Sound PFS projects require strategic planning to identify a justice system’s cost and population drivers and the corresponding evidence-based solutions.

This model provides an innovative process for the government to clarify and quantify its policy goals and for philanthropic and commercial investors to leverage their charitable giving. Developing the instruments for efficient, standardized pricing and carrying out new programs through a defined model will be essential to build PFS’s stability, legitimacy, and ability to support sound social policy.

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