Pay for success does not always mean ‘everybody wins’

Pay for success is a nascent, super intricate public-private funding strategy designed to scale social services that have proven to be effective.

It’s also designed to save taxpayers money by having private sector funders supply the cash up front, with no promise of return until the public sector gets its desired results.

And while the social services are proven, the funding strategy itself is not. Private sector funders like financial institutions and foundations have lost money on transactions like this in the past. Take, for instance, the first U.S.-based pay for success project in New York City: The endeavor was ultimately a failure, as Bloomberg Philanthropies ended up fronting $6 million to float the $7.2 million lost by Goldman Sachs.

As we reported last spring, the Commonwealth of Pennsylvania has two pay for success projects underway, set to launch in 2017. The undertaking was recently overviewed by WHYY Newsworks in a report which stated the following:

“Theoretically, though, everyone wins: service providers have long-term commitments from funders to do good work; funders get to invest their money in programs they believe in; the government saves money and serves people in need; and people in need get tangible, effective help.”

In theory, yes, everybody wins. In practice, not so much — yet.

There’s been hesitation on the side of private sector funders outside of philanthropy, and transaction costs are still costly for the public sector. But with dollar signs for pay for success deals expected to increase with the second generation of programs led by Pennsylvania, how much will the strategy continue to rely on philanthropy? Better yet, who will be funding the programs in Pennsylvania?

The biggest question will be how the state, with help from veteran intermediary Social Finance, will set outcomes for the programs. Pay for success’ biggest, most dangerous problem is the public sector failing to adequately state their desired results.

“We run into issues with government about being really crystal clear and specific about which outcomes they’re trying to achieve. That’s something every organization deals with,” Jeff Shumway, Social Finance’s VP of advisory services, told us last spring.

We’ll be watching the state’s dual pay for success projects as they continue to develop.