PFS Watch: What Winning Federal Grant Applications Tell us about Pay for Success

Social Innovation Center Director Patrick Lester has produced an analysis of the winning “pay for success” (PFS) projects funded by the federal Social Innovation Fund (SIF), under the umbrella of the Corporation for National and Community Service. Lester conducted his assessment of each winner using documents obtained through the Freedom of Information Act.

PFS projects shift the burden of social investment off the government and onto private investors. Private sector investors front the capital for organizations to implement social programs. The government only pays the initial investor back, with interest, if a specific set of outcomes are met. So, in essence, the government is now paying for outcomes and not services rendered.

SIF’s pay-for-success awards were made not to support projects directly, but to help big-picture organizations assess the feasibility of various projects throughout the U.S. The claim by SIF is that the $12 million it is putting into this could prompt 100 sub-grants for projects.

Lester’s report, which you can read by clicking here is worth a read, because it succinctly breaks down what each of the eight winners has planned. But Youth Services Insider was most intrigued by some of the general patterns that emerged from his research.

National Leaders, Local Funders Emerging

In these nascent years of PFS projects, two organizations appear to be alpha dogs. Third Sector Capital Partners is, at least tangentially involved in a slew of PFS projects around the country. The nonprofit is serving as intermediary on a project in Massachusetts aimed at improving outcomes for young men exiting juvenile probation or incarceration.

Third Sector is also in on the feasibility phase of at least nine projects (at least six are youth-related), and assisting with project construction on four other projects (three of the four are youth-related).

The other big player is the Harvard Kennedy School SIB Lab; the SIB there stands for Social Impact Bond, which is one variation of a PFS project. The lab offers its services to governments pro bono, helping it emerge as an objective arbiter of feasibility. The lab will evaluate 10 projects with $1.9 million in support from the Social Innovation Fund.

As national leaders have developed, the money coming into PFS projects has become more localized. Early PFS ventures were financed with “outside investments by for-profit banks like Goldman Sachs,” Lester writes.

The SIF applications, he notes, reveal a few new national players – Nonprofit Finance Fund (NFF) and the Corporation for Supportive Housing (CSH) – and a bunch of regional and local PFS supporters.

The emergence of NFF and CSH are interesting, Lester notes, because both are Community Development Financial Institutions (CDFI), outfits that finance community businesses. NFF actually received an extra $1.15 million from SIF to invest directly into PFS projects, and the organization received another $1.3 million for that purpose from the federal CDFI Fund.

Another organization you might see using its CDFI status to lend into PFS projects: the Alliance for Strong Families and Communities, which incidentally is where Lester used to work as public policy director.

Alliance CEO Susan Dreyfus told YSI in an interview last January that “we’re going to diversify the lending portfolio and do more with CDFI,” including “social enterprise development…in our sector.”

Niche Intermediaries on the Rise

Lester notes in his report something YSI touched on earlier this year. Groups with more direct expertise in youth services are now ready to lead, not just assist, on PFS projects.

Leading the way is the National Council for Crime and Delinquency (NCCD), a nonprofit that balances research projects with a portfolio of analytics, assessment and assistance to the child welfare and juvenile justice sector.

NCCD took an early interest in PFS work, partnering with Third Sector in December of 2013 on a couple California projects that get underway soon.

Among the other organizations that won SIF grants and are looking to establish themselves in the PFS world:

Too Much Front-end Focus?

Lester alludes to what YSI believes is a critical point in the PFS boom: The discussion on PFS needs to move past structure and towards deliverables.

Of the winning applications, Lester writes: “Measurable outcomes define the ‘success’ in pay-for-success. These outcomes have not yet been established.”

YSI agrees. We don’t think it’s an overstatement to say that the longevity of PFS as a strategy is pegged to the outcomes agreed to in the early slate of projects. Two key aspects of PFS benchmarking:

Clarity: Grey-area agreements could spell real doom for PFS. Imagine the local headlines involved if project funders fought with government agencies about whether or not the goals were met, maybe even suing them for money. That’s enough to scare away prudent investors from getting involved.

Perverse incentives: Headlines over a funding squabble would be ugly for PFS, but they’d be nothing compared to what would happen if service providers put the public in danger to achieve goals.

NCCD succinctly summarizes this real challenge in its application: “The financial incentives tied to PFS-funded interventions should not influence service providers to engage in any behaviors that might inadvertently harm their clients.”

The application gives two good examples. A child welfare PFS project aimed at reducing the reliance on foster care should not lead to any child being kept in an unhealthy home. A juvenile justice project aimed at reducing the use of incarceration cannot lead to “extremely high-risk individuals” being released into the community “simply to save money on jail space.”

Youth Services Insider is mostly written by Chronicle Editor John Kelly.

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John Kelly
About John Kelly 1117 Articles
John Kelly is editor-in-chief of The Chronicle of Social Change.