One of the great policy challenges of our time is how best to address vexing social issues with limited public resources. Years of research have helped us develop a rapidly evolving evidence base about what works to address challenges like healthy child development, juvenile delinquency, and homelessness, but we often lack the funding flexibility to scale proven interventions and build evidence for promising new programs.
An innovative new approach to financing called pay for success (PFS) seeks to provide a solution.
PFS aims to drive government resources toward proven social programs that deliver better results to those in need. The model provides a way for state and local governments to tackle social problems by tapping private investors to cover the upfront costs of the programs. If the programs are successful, governments pay the investors back; if they are not, the investors absorb the cost and governments pay nothing.
The purpose of PFS is not to supplant existing government-provided services or increase privatization of social services. It is intended to allow local, county, and state governments to innovate and scale what works without the burden of financial risk and failure— something many cannot afford to do today. PFS also builds in rigorous evaluation to measure actual impact and strengthen the evidence base for the program implemented.
While these new social financing strategies have the potential to improve our communities, current deals are also complex. Such grand endeavors require coordination to ensure rigorous, transparent, and objective guidance and support. We believe that the Urban Institute is well-suited to help play that role.
Today we announce that the Urban Institute is receiving $8.4 million in funding from the Laura and John Arnold Foundation to help launch the Pay for Success Initiative.
Over the next three years, Urban researchers will help guide, design, and assess PFS transactions across the country. We will create tools to support PFS efforts and share lessons learned with governments at all levels, as well as other key stakeholders including researchers, service providers, funders, and local and national public leaders.
Already this is an exciting and rapidly growing field. Urban aims to support and complement the work of a number of other organizations and public leaders who have created a strong foundation for others to follow. Ultimately, we want to help accelerate what we are all going to learn together.
Through this project, Urban will serve as an “objective knowledge intermediary,” using our scholars’ expertise to make sure deals are rooted in the best available research on social programs and evaluation. We plan to act as advocate for the evidence to make PFS deals more effective and efficient and creating pathways to building a broader evidence base to inform future interventions.
The goal of this new initiative is to ensure that the increasing numbers of PFS transactions are deeply grounded in research and evidence. While there are currently few PFS transactions (which include social impact bonds), the total number is expanding rapidly. PFS has grown from four deals last year, at approximately $50 million annually, to as many as 25 deals in FY15 at $250 million annually. After another three years, it is likely that up to $1 billion will have been invested in these transactions.
The stakes are high, and there is an urgent need to ensure these projects are well-designed, informed by up-to-date research and analysis, and delivering outcomes as intended.
We believe this partnership has the potential to focus government and the PFS field on evidence-based outcomes, and in doing so, to help maximize the potential of these new opportunities to improve public well-being.