What is pay for success (PFS)?
Pay for success (PFS) is an innovative financing mechanism that shifts financial risk from a traditional funder—usually government—to a new investor, who provides up-front capital to scale an evidence-based social program to improve outcomes for a vulnerable population. If an independent evaluation shows that the program achieved agreed-upon outcomes, then the investment is repaid by the traditional funder. If not, the investor takes the loss.
Six key actors are typically involved in a PFS project:
- Governments identify problems to target with the pay for success project and pay for the successful attainment of project goals;
- Funders provide up-front capital to launch or scale the program on the promise of a return if the program meets agreed-upon goals;
- Financial intermediaries structure the financial deal and solicit investors to provide the up-front capital;
- Independent evaluators determine if the results of the social program meets its targets;
- Service providers provide the evidence-based social program for the project;
- Knowledge intermediaries use evidence to find high-performing programs, price the PFS instrument, inform rigorous evaluation, and oversee implementation.
Why pay for success?
- Pay for outcomes: With PFS, the government only pays for new programs if they meet agreed-upon results, shifting away from traditional outputs-focused funding that does not account for whether a program is having the intended impact;
- Scale evidence-based policymaking: PFS funds tests of potential social programs, amplifies the evidence-base around promising programs, and scales proven programs with a strong evidence base, allowing governments to invest in what is working;
- Shifts risk to new actors: Setting up a new program is risky for governments, both financially and politically. PFS shifts that risk to an outside funder and bypasses typical bureaucratic challenges.
Today, governments bear all the risk of programs intended to serve the public interest. PFS transfers the risk of program innovation to private and nonprofit funders. PFS ensures that the government pays only for programs that improve social outcomes. Additionally, PFS can help advance evidence-based policymaking and strategic thinking more broadly within government systems.
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