Two years ago, we began reporting on Social Impact Bonds (SIBs), but lately their close relative – Pay for Success (PFS) contracts have picked up momentum. At that time, the concept seemed like a wonderfully intangible idea that might or might not be able to scale. Today, though, SIB activity has exploded worldwide, moving from theory to full implementation to near results phases. This momentum is fueled by our focus on impact investing, investment by the federal government and the careful work of many social entrepreneurs to make the theory reality through technical assistance. Check the graphic below to discover if your state has SIB/PFS activity. For more detailed information on SIBs and which states are working with them, please refer to our latest report.
U.S. investors, intermediaries and service providers are paying close attention to the positive results coming from the first SIB model, which was implemented in the UK to reduce recidivism rates among prisoners. Incredibly, investors in this project are on track to receive an initial payment next year as long as the drop in recidivism rates continues to remain above the target of 7.5 percent. As similar projects in the U.S. begin yielding results, we can expect an expansion in PFS activity. In fact, several states in the West – Idaho, Nevada and Arizona – are already exploring possibilities.
A key, though, to that expansion is simplification of the process. One of the latest trends in impact investing is the rise of technical assistance (TA) providers, who are helping connect all the dots between investors, government and nonprofits. These entities help ensure the success of SIBs and will become increasingly important as the market grows.
What Roles Are Technical Assistance Providers Playing?
Since impact investing can be complex, TA providers have assumed leadership roles in helping communities structure PFS contracts. The Social Impact Bond Technical Assistance Lab and Third Sector Capital Partners have highly developed processes to guide PFS construction. Others, like Ready Nation and Center for Health Care Strategies, have begun specializing in providing assistance for PFS contracts focused on early childhood and health, respectively.
- Readiness Test – The key role technical assistance providers are playing is assessing the readiness of PFS contracts in communities. As with any new initiative, conducting a feasibility study to increase the probability of success can save time and money. Given the complex nature of PFS contracts, their multi-million dollar investments and the number of people they will affect, evaluating factors, such as need in the community, organizational readiness and more, is extremely valuable before participants fully commit to the process.
- Connecting the Dots – Technical assistance providers have also been orchestrating the complex collaboration between governments, investors, providers and intermediaries to finalize PFS contracts. This includes securing multi-year commitments and authorization from state legislatures, identifying and selecting potential service providers that have capacity to reach the scale required of PFS contracts, identifying and securing the commitment of investors and monitoring the success of the project.
- Show Me the Money – Finally, technical assistance providers have been instrumental in structuring the financing of PFS contracts. They develop financial models to test the cost-benefit of interventions in the feasibility phase, determine the necessary cash flow schedule for investor payments and negotiate the government payout schedule when providers are successful in achieving performance targets.
With technical assistance providers increasingly sharing their expertise and “connecting the dots,” we expect to see more positive outcomes generated by early SIB/PFS models and are excited to see where this leads. We invite the experts in the field to share your latest PFS best practices with our Social TrendSpotters.