The voices of Urban Institute's researchers and staff
February 1, 2016

No matter the intervention, pay for success programs are ambitious

February 1, 2016

Last month, Governing included pay for success (PFS) in a list of 2016’s top legislative issues to watch. Citing trends in the field, Governing suggests state and local governments might start choosing “less ambitious” evidence-based interventions for PFS projects over innovative programs that can be riskier for investors, but also might teach us more about what works. But are proven programs truly less ambitious choices?

The Urban Institute’s Pay for Success Initiative focuses on PFS as a tool to scale evidence-based interventions, while others in the field focus on the financing mechanism as a way to scale innovative programs that have not been tested but have a strong theory of change.

PFS is one solution to a set of significant challenges states face in providing social services, such as the wrong pockets problem, a shortage of up-front capital, and a lack of evidence supporting some of the programs government funds. Calling one approach to PFS more ambitious than another fails to acknowledge the different problems PFS helps governments solve, and undermines the enormous potential PFS has to make government more effective and efficient.

PFS in practice

Consider a county trying to address a growing homelessness problem. Perhaps the number of homeless people, or the costs associated with the population—their emergency room visits or stays in the county prison—has increased. The county does not currently have the funds for a new prevention program, but recognizes that the cost of doing nothing, both from a moral and a financial standpoint, is high.

PFS is attractive in situations like this because it allows the government to transfer some of the risk of starting a new program to the private sector, and only puts the county and taxpayers on the line if the funded intervention works.

If the county chooses an evidence-based program for PFS financing, there is a good chance the intervention will achieve its intended outcomes for the homeless population, the investor will make a return, and the county will contribute to an existing evidence base behind the intervention.

If the county chooses an innovative program, it is more likely to fall short of its intended outcomes and the investor may not make a return, but the county and others will still learn something important about what works and what doesn’t.

The choice between programs is not necessarily a reflection of the county’s ambition or risk tolerance. Perhaps the county’s biggest problem is a funding shortage, and it wants to use PFS to get the infusion of up-front capital it needs to start a program it already knows works. Maybe the county is eager to try alternatives to existing interventions, but faces political barriers to supporting its homeless population through traditional revenue sources.

PFS is in itself an innovative, ambitious strategy

Different interventions might be better or worse suited to different problems, but no matter what the motivations, PFS is inherently innovative and ambitious because it is a departure from the traditional way governments fund social programs, and adds to our knowledge of what programs are successful.

Just considering PFS as a solution helps governments reflect on the effectiveness of the programs they fund, and whether other programs with a stronger track record of success might be better for their communities. The fact that PFS allows them to test this theory before making a financial commitment is innovative even when scaling a program that has been proven to work before.

For governments with an ambition to create a culture of evidence, PFS can lead to a contagion effect, helping policymakers focus on outcomes and innovation beyond the scope of the project itself.

Here at Urban, we are building the tools to develop and scale the PFS sector, with the goal of helping governments pursue PFS projects that are rooted in evidence and measured with integrity. We believe this is an ambitious and innovative goal in and of itself.

Sunrise silhouettes the U.S. flags surrounding the Washington Monument in Washington, Wednesday, July 9, 2014, on a cloudy morning in the nation's capital. Photo by J. David Ake/AP

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