UP FOR DEBATE: Government

The Payoff of Pay-for-Success

Pay-for-success contracts, also known as social impact bonds, have been widely touted as a clever way to fill the funding gap plaguing social programs by attracting a tranche of the trillions of dollars in private return-seeking capital. Although that scenario is not likely, the pay-for-success model will have a positive impact, just not in the way that many proponents think.


George Overholser
Cofounder and CEO of Third Sector Capital Partners

Tracy Palandjian
Cofounder and CEO of Social Finance
Jeff Shumway
Vice president at Social Finance

Mark Hand
Venture Partner at UnLtd USA
Margo Johnson
Social Work Practitioner

It is important to include return-seeking investors and end beneficiaries in the design of Pay-For-Success programs.

Christopher Spera
Division Vice President, U.S. Health, at Abt Associates
Jeffrey Lubell
Director of Housing and Community Initiatives at Abt Associates

The lack of rigorous evidence about the effectiveness of most social programs puts constraints on how widely Pay-For-Success can be implemented

Mark T. Fliegauf
Fellow in Innovative Government at the Berlin-based think tank stiftung neue verantwortung

The important payoff of pay-for-success is that it will encourage governments to spend more money—more wisely—on social programs.

V. Kasturi Rangan
Malcolm P. McNair Professor of Marketing at Harvard Business School
Lisa A. Chase
Head writer and editor at Harvard Graduate School of Design

Last Word: V. Kasturi Rangan and Lisa A. Chase respond to the eight people who commented on their article examining the pay-for-success model.

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  • Jeffrey C Walker's avatar

    BY Jeffrey C Walker

    ON August 23, 2015 03:19 PM

    The Payoff for Pay-for-Success article was very well done…well researched and really hit home on the key issues of Pay for Performance.  There has been much talk but not enough large deals to attract large funding.  We need more sizable deals.  Specifically, there are a few underway in the Global Development world and involve the World Bank and a variety of local and international players.  Malaria Bonds (bonds that could be issued by a multi-lateral and countries that receive bed-nets would promise to pay the bonds back after ten years once the benefit of the bed-nets runs through the economy).  There is also work being done on Human Capital Bonds that would be issued to support the building of a health workforce/community health workers who, by bringing better health to the country’s citizens, help create higher Gross National Product for the country (in current studies there is a 10 to 1 payback).  More specific cases are clearly needed.  It seems like pay for performance can be used by philanthropy to leverage its impact but it isn’t likely to be a substitute for philanthropy.

  • BY Lars Boggild

    ON August 24, 2015 08:27 AM

    Dear Kash and Lisa,

    Thank you for the great article on Pay-for-Success. We’re also glad that our SIB tracker has been of some use. We’ve recently refreshed this with more data across all projects to provide better insight which you can find here: http://financeforgood.ca/social-impact-bond-resources/sib-tracker/ at this point 48 projects are active globally, with a particular surge of activity in the UK in the first half of 2015.

    I think this article does a great job at articulating a plausible role for mission-driven investors in the future of the market. We believe that the US, given its scale and the pace of development under the SIF, is a true living laboratory for project structures and targeted outcomes, and which has better communicated with the capital suppliers in the market by more effectively describing “Pay-for-Success” instead of “Social Impact Bonds”. 

    At the same time, we think the UK has been an absolute leader in advancing the government contracting of these projects. This critical side to the market is under-discussed in this article. Looking at the Fair Chance Fund and the Youth Engagement Fund, we have two examples of outcomes funds which issued multiple contracts. These examples point to a way forward for addressing the “many-pocket-problem” in government where value is accrued across many siloed departments, and also indicate a more efficient contracting model where common outcomes and measurement protocols across multiple projects reduce transaction costs significantly for all players (effectively common terms were presented at the outset that projects bid within). This could go a long way to reducing the costs within the project development phase (where philanthropic capital has so far been indispensable), and within contracting, potentially freeing cash to either reduce outcomes payments or offer projects with less need for credit enhancement.

    We think it’s worth considering the dynamics on both sides of the market, as they’ll together shape a future course for Pay-for-Success

    Lars Boggild, VP, Finance for Good

  • Joshua Genser's avatar

    BY Joshua Genser

    ON September 2, 2015 09:38 AM

    The authors and the responders and commentators of “The Payoff of Pay-for-Success” are missing an important facet of Social Impact Bonds and Pay-for-Success programs.  They all seem to assume that the only reason a government or other payor would want to use SIBs or PFS is to increase the availability of funds for social programs by using private investment to pay the up-front costs and then having to pay them back only if financial savings are realized as a result of the program.  While that is, indeed, a powerful argument for the use of SIBs and PFS programs, it is not the only one.  SIBs and PFS programs also have the virtue of shifting the risk of failure of the program away from the payor and onto the investors.  Thus, even if the program to be funded with SIBs would not result in financial savings, a payor might opt to use such a structure to shift the risk of failure to the investors.  For example, assume a municipality wants to undertake a public health program, and has a budget of $10 million for it.  If the municipality invests the $10 million and the program does not generate results, the municipality has lost its $10 million and received no benefit, other than a difficult lesson.  However, if the municipality, instead, finances the program by issuing SIBs, and keeps its $10 million in reserve to pay off the investors if and when the program succeeds, then the municipality is out its $10 million only if the program succeeds.  Of course, the municipality will have to pay the investors a return on their investment, meaning that the municipality will have to sell less than $10 million worth of SIBs so that it has some left over to pay the investors their return on investment, so the municipality must decide whether the reduced principal investment is worth the transfer of risk.  On the other hand, it is possible that the privately-run program may be more efficient than if run by the municipality, enabling the program to be as effective as it would have been had it been run by the municipality at a cost of the entire $10 million.

  • Madly Bodin's avatar

    BY Madly Bodin

    ON March 28, 2016 09:00 PM

    Dear Kash & Lisa,

    Many thanks for your article on SIBs/PFs arrangements. It is worth clarifying that The Benevolent Society Social Benefit Bond ended up having a two-tiered capital structure, where the returns are linked to the performance of the bond. Our latest update is available on http://www.benevolent.org.au/sib.

    Warm regards,

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