Here's what Pa. can learn from the first 10 U.S. pay for success projects - Generocity Philly

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Jun. 20, 2016 11:33 am

Here’s what Pa. can learn from the first 10 U.S. pay for success projects

There's no one-size-fits-all for the cross-sector funding model, but Pennsylvania should leverage the working relationship between partners Social Finance and Center for Employment Opportunities.

Ten pay for success projects have launched in the U.S., and Pennsylvania is on deck.

(Photo by Flickr user Ken Teegardin, used under a Creative Commons license)

The pay for success market in the U.S. is still young and unproven, with only 10 pay for success projects launching in the country since 2012. Now that Pennsylvania is on deck with two pending initiatives aimed at reducing recidivism, the question is, what lessons can the state, its partners and potential investors learn from the first generation of projects?

For one, said Nonprofit Finance Fund‘s Pay for Success Program Manager Dana Archer-Rosenthal, the next phase of pay for success projects should know there is “no one-size-fits-all” with regards to evaluation, repayment and investment structure.

Archer-Rosenthal served as lead author on Pay for Success: The First Generation, an evaluation of the first phase of projects to launch across the country. Ultimately, she said, pay for success initiatives are multi-stakeholder projects — and that’s been reflected in approaches taken to the nascent funding model thus far.

“There’s been some convergence, but there’s also been a fairly broad range of approaches and that reflects the fact that these are multi-stakeholder projects,” Archer-Rosenthal said. “Different stakeholders are motivated by different reasons to participate in pay for success projects. That’s why you can have a project where investors lose money and government doesn’t pay anything. Government could call that a success.”

"Different stakeholders are motivated by different reasons to participate in pay for success projects."
Dana Archer-Rosenthal

That’s been one of the reasons why pay for success, a cross-sector mechanism for funding social change that was introduced in the U.S. just four years ago, has had a difficult time attracting private capital. The whole allure of pay for success for government and taxpayers is that the financial risk is shifted to the private sector.

And considering returns on pay for success are at or below market value, that’s not a risk most private sector investors like community development financial institutions (CDFIs), banks and venture capitalists necessarily want to take.

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“It’s a very different proposition for commercial entities to finance and underwrite based on performance risk, not financial risk. Even for CDFIs, pay for success is something different because it’s underwriting human capital and social outcomes, which are extremely complicated,” Archer-Rosenthal said. “The challenge is also around understanding evaluation and how rigorous an evaluation is. It’s very challenging and not an area of expertise most investors have.”

That’s why all 10 pay for success projects in the U.S. to date have relied on philanthropy in varied ways. It’s been a major driver behind pay for success’s growth and development. Philanthropy, Archer-Rosenthal said, has been footing the bill that enables transaction coordinators, evaluators and service providers to do the actual work.

“I don’t think it’s realistic to think the private sector would play that role in general market development,” she said.

Besides just market development, the costs associated with pay for success projects are daunting. Here’s an overview of the 10 projects to launch to date.

payforsuccessmarketoverview

(Image via Pay for Success: The First Generation)

What kind of costs can Pennsylvania anticipate, considering the state is launching two projects simultaneously aimed at reducing recidivism rates?

“I do think there’s a trend away from projects that are smaller than $10 million,” Archer-Rosenthal said. “I think that’s because of the economics of doing projects. The transaction costs remain pretty high and the return is at or below market. I think there’s a need to express interest on the part of investors in larger projects.”

The overview provides another insight and avenue for opportunity for Pennsylvania: The state has contracted nonprofit Social Finance as an intermediary in the deal and has selected nonprofit Center for Employment Opportunities as one of two service providers. That’s good news, Archer-Rosenthal said, because the two have history.

Both worked on the pay for success project launched in New York in 2013.

“I think the opportunity for the state of Pennsylvania is to leverage [that relationship] as a selling point with investors,” she said. “It is an experience, not just doing the intervention. I think that in itself is just a powerful thing. It’s an established partnership between the two.”

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