Urban Institute
Research Analyst

What PFS investors and governments have in common – and where they are (surprisingly) different

November 10, 2017 - 11:41am

Given the significant challenges associated with pay for success (PFS) projects, it is natural to question why jurisdictions and organizations choose to do pay for success. (After all, even with these challenges, there are 20 PFS projects in the United States, with numerous more in development.) Or as one government official put it, “For the benefit of offloading risk and gaining the upfront commitment, is that worth all the effort of developing this model, the contracting, the evaluation, and all the rest of this system?”

To answer this question, we conducted a series of interviews with corporate and philanthropic PFS investors as well as government officials to probe the various motivations and perceived risks for doing pay for success project. Motivations, perceived risks, and risk mitigation techniques differed between investor and government interviewees, and are briefly summarized in the table below. Unsurprisingly, both investors and governments cited “improve lives” as a key motivator for doing PFS, but also concurred that “systems change” was another main motivation. According to one investor:

 “One of the reasons why many investors care about these projects is the hope that these can improve policy from the government side. If a wealthy person or a foundation is really able to achieve something beyond just a financial return, they get really excited. One way to leverage the impact they’re having is that the government is going to change the way they operate based on what they learned [in the project]. For a certain segment of investors, that’s the most important part.” 

Interestingly, the interviews provided anecdotal evidence against a common critique: that pay for success allows investors to profit from social services for vulnerable populations. One investor stated, “If it was just about the financial return of the deal, we wouldn’t have done it. The risk-adjusted return of most of the PFS deals to date, are terrible. Even if they work, and you get the full principal and interest, they’re lousy.”

The interviews shed light on the variety of factors that motivate stakeholders to do PFS, and the importance of understanding partner motivations. For example, one theme that emerged was the importance of strong partnerships in PFS, particularly as a way to mitigate certain risks, and is captured in the paper as a recommendation: when doing PFS, build on existing partnerships and look for partners that publicly value innovative, collaborative efforts. The full set of recommendations can be found in our new paper, Why Governments and Investors Choose Pay for Success: Perspectives on Motivations and Risks.


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