PFS + ECE: Program Funding and Financing

Identifying reliable revenue streams for repaying PFS project funders is critical to attracting the up-front capital that shifts risk away from government. To secure both private and philanthropic investors, governments must ensure they can repay funders throughout a project’s life as outcomes are met and success payments come due. Different funders—given their different motivations for becoming involved in PFS—will be willing to tolerate different levels of risk and, therefore, may require different safeguards against a failure to repay according to the terms of the contract.

This report describes program funding in early childhood PFS projects, with a focus on early childhood education. It is part of a larger toolkit for states, localities, and investors considering early childhood PFS projects. Its content is based partly on stakeholders’ experiences with ongoing PFS projects.

First, we describe funder incentives for entering a PFS contract. We consider key questions about structuring repayments, including considerations about who will be the outcome payers and how governments can provide funds for repayments. We then describe strategies for mitigating appropriations risk, such as placing repayments into sinking funds or escrow accounts, or running a one-year ramp-up or pilot period. Last, we discuss considerations for passing PFS-specific legislation and the optimal size of a PFS contract.