In August of 2012, former New York Mayor Michael Bloomberg announced a project through which his foundation and Goldman Sachs would pay for a project aimed at lowering the recidivism of adolescent males incarcerated at Rikers Island, New York’s massive and potentially doomed prison-plex.
If the project lowered recidivism by 10 percent, the city would pay the private funders back. Better returns on investment would be repaid with a bonus.
The project did not yield success, for several reasons. The private investors lost their money, the government did not. And thus was the story of America’s first pay-for-success (PFS) project, a model also known as a “social impact bond” that uses private investment to give state and local governments a sneak peak at expanding a social intervention strategy.
Rikers is still the only PFS that has come to a close in the United States. There are 19 more active ventures in America right now, with many more in the planning and feasibility test phase.
America’s active PFS outlay is low on projects but high on dollars. The U.S. accounts for fewer than 20 percent of the 108 projects that have launched worldwide, but it accounts for about half of the total funding committed to PFS ventures, according to new numbers released by Social Finance, one of the lead organizations overseeing several American PFS projects.
Youth Services Insider talked to Tracy Palandjian, Social Finance co-founder, about where we are in the American pay-for-success experience and what her organization is working on.
Several years into the experiment, what would you say are the absolute, quintessential hallmarks of a pay-for-success project? What are the things that MUST be present to be considered a PFS?
To start, data around the issue area. There are certain issue areas that lend more easily to data than others. So do we have data on target population, data on outcomes?
Second, an economic analysis that gets to the importance. The term usually used is cost-benefit analysis. But it’s not just cost savings, but the more nuanced thinking about the implications and outcomes. The more tangible and direct-cost benefits are related to savings, but a project also could have value to society that’s broader and more intangible.
Then, just because we have a problem doesn’t mean we have an evidence-based solution to it, so the ability to identify an intervention that has a rigorous track record and demonstrates effectiveness. That’s really important, some track record of success. It would be inappropriate to use private capital to test a new intervention in this way.
So data, an economic analysis that makes sense, availability of an intervention, and high-quality providers to do it.
What one or two American projects do you consider to have the most promise?
We don’t have data on the 19 projects that are “in play,” so it’s too hard to stand one up. One of my personal favorites, not because of results yet, but the sentiment of the times we’re in, is the Massachusetts Pathways to Economic Advancement. It’s a $12.5 million project to scale a program that will provide ESL and training to 2,000 immigrants and refugees in Massachusetts.
The test is wage mobility and educational attainment. We were able to enlist the participation of a diverse group of investors, Prudential, all the way to donor-advised funds and foundations.
Tell us about one or two that haven’t launched that you are particularly excited about.
We got a [U.S.] Education Department grant a couple months ago to work in four jurisdictions: Texas, California, Ohio [and New York]. It’s a high school setting for PFS, and we’ve never really cracked that K-12 nut.
It’s career and technical training to determine, can we help get vocational skills while in high school or in community college settings and launch them productively into the labor market? This is the career academy model that we’re testing.
The only project that has wrapped up in America so far, the Rikers Island one, did not succeed. Obviously, you don’t root for any single one to fail, but do you think it’s good for the health of the model that some are paying out and others aren’t? Is that a testament to the fact that it is innately a gamble?
For the market to exist, by definition you want some projects to succeed and fail, and I’d put fail in quotes. The whole point is to have that transfer of risk. Some would say the Rikers project worked as intended. The government didn’t pay, and Goldman and Bloomberg lost money.
You need to have points on both sides of the ledges if there is indeed risk to be transferred. If every project paid out handsomely, one could question if this was structured well for governments.
The real test of this model is if it prompts a more traditional, entrenched investment in the services that prove themselves. Have you seen examples yet of governments paying out and then adopting and assuming the burden going forward?
This is the million dollar question, is pay for success going to drive systems change so that government independently spends money? Because at end of day, this is the second best. The optimal is for government to look at budgets, and then spend money to get results. And be rigorous about the outcomes you’re getting, and sunset programs that don’t work, and have an active reallocation of resources.
That is the holy grail. But you know, we don’t have that system right now.
One mayor we worked with told me, “You know the true power of pay for success? It’s not the capital or the stuff about investing in prevention; we sit here and know these are good. But the system makes it difficult to have staid attention on change.” A mayor announces a new initiative, and there’s a big press conference that we talk about, then nobody asks three years later, what happened to that?
PFS obligates everyone to stay focused on the issue. Government should be doing that … they don’t need private capital.
Do we have a National Association of Pay-for-Success Providers yet? Are people in this space connecting and sharing information and ideas?
We’ve got quite an ecosystem now. The Nonprofit Finance Fund, the “backbone” if you will, launched a website called PayForSuccess.org, with all the latest and greatest news.
Those are all meta-PFS conveners; there’s not an association, but this is playing a role. You have all the signs of a young, yet flourishing industry. Social finance is 10 years old in the U.K. now, but really we’re just in the first or second inning here.