The social impact bond or pay for success program ("PFS
program") is an alternative private financing model used to
test social impact programs before governments step up to finance
such programs. In these programs the government contracts
with a private sector intermediary to obtain social services.
The intermediary obtains funds for the services by raising capital
from private commercial and/or philanthropic groups. The
intermediary uses these funds to pay a service provider to deliver
the social services. Over a set period of time, performance
of the social services is measured, usually by a third party
consultant, based upon up-front established criteria. After
the review period, the government pays the investors only if the
performance targets are met.
As of the end of 2015, there were eight (8) established PFS
contracts in the United States and more in the pipeline. The
Corporation for National and Community Service through its Social
Innovation Fund launched a PFS program and selected eight (8)
initial grantees through which 43 programs are receiving technical
assistance. Banks such as Goldman Sachs, Northern Trust, Bank
of America, Merrill Lynch and Santander Bank have invested capital
in PFS programs. In addition, federal legislation, known as
the Social Impact Partnership Act, has been introduced to help
establish PFS programs, and six (6) states (Colorado, Idaho,
Massachusetts, Oklahoma, Texas and Utah) have passed PFS enabling
legislation. Other states are considering legislation or
participating without legislation.
Despite the trend toward expanding PFS programs, there are some
criticisms. PFS programs can be more expensive than direct
government funding due to costs of legal services, program
administration and loan management. There are also questions
about how outcomes are measured, since the "success" of
most programs is measured in a relatively short time frame
considering the deep-rooted social problems that are being
addressed. In addition, data suggest that investors want to
minimize risk and back programs where there is more evidence of
possible success. Detractors of PFS programs argue that governments
should finance these programs themselves based upon the probability
of success. Despite the questions and criticisms, it appears
from the significant increase in PFS programs that this type of
investment tool is here to stay, at least in the short-term.
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