Pay for Success
Harnessing Private Finance to Solve Public Problems
"Pay for Success" is a means of obtaining financing allowing a government agency to pay for programs where returns to investors are based on the success of those programs, measured by quantifiable metrics. The way it works is that a private financing organization (e.g. an investment bank), through a newly formed intermediary organization, enters into an agreement with a federal, state or local government agency to fund a public service program that has measurable metrics that can be used to define its success (e.g., recidivism rates). These metrics are typically causally related to budgetary results (i.e., lower recidivism rates result in lower prison construction and operation costs).
The financing organization works with philanthropic and other private investors to raise the working capital necessary to fund the intermediary organization which is responsible for financing the program. If the program goes on to achieve certain success milestones set forth in the agreement (as determined by an independent third-party auditor), the government agency agrees to pay the intermediary organization back its initial investment and a return based on the degree of success achieved. If, however, the program does not reach the defined success milestones, the government agency pays nothing and the investors lose their investment.
"Pay for Success" aligns the interests of governments, investors, and non-profit service providers by providing a mechanism for piloting or expanding social programs, while also shielding the government from financial risk. Specifically, successful programs direct investments to prevention services as opposed to costly remedial programs, thereby reducing demand for expensive safety-net services. "Pay for Success" reward service providers who create effective programs and enable them to scale up when they show success.
Can Pay for Success Work in Georgia?
The Pay for Success Project is a detailed Georgia-specific assessment of this new method of obtaining funding for social benefits projects. Lead pro bono law firm, DLA Piper (USA), will complete its analysis of the legal viability of this financing mechanism in Georgia and will identify any statutory or policy changes that would be necessary for Pay for Success to be used in the state. The firm will also work with Georgia Appleseed and other stakeholders to identify candidate projects that could be used for the Pay for Success pilot or demonstration initiatives.
Georgia Appleseed is seeking funding for a research grant that will underwrite a detailed research assessment of Pay for Success and other social enterprise funding mechanisms by a respected Georgia-based academic institution.