*Various models for impact investing, including Pay for Success, have taken off in 2014. This Throwback Thursday, we’re looking back at John Grossman’s tips for governments looking to implement Pay for Success. The post originally appeared on April 30, 2014.
There’s been an explosion of interest in Pay for Success, the use of private capital to fund preventive services to improve social outcomes and – often – save government money. As an active intermediary in Pay for Success projects (including the $27 million Massachusetts Juvenile Justice Pay for Success Initiative, the largest such transaction in the world as of today), we’ve worked closely with governments, lenders and service providers to structure and implement these projects. Governments in particular often ask us for guidance. Here are five things we’ve learned that should be useful:
1. It’s Gonna Be Hard, So Get Ready
Pay for Success projects will turn up the heat on bureaucratic inertia and force changes in the way systems work. In order to do that, governments need a high-ranking champion to rally the troops and keep things moving. They also need the continuous engagement, beginning in the early planning stages, of managers at the agency or agencies that will be responsible for project operations. Also, know that it will take time to lay the groundwork for and negotiate these highly complex initiatives, given the cross-sector collaboration and coordination required.
2. Focus on Data Early and Often
Data, even more than money, is the lifeblood of Pay for Success. It’s the basis for structuring the project, for monitoring progress, and for proving results. If you don’t have the data to support a Pay for Success project, start there.
3. Cashable Savings May Not Always Be There — and That’s OK
In many cases, the fiscal savings resulting from a successful intervention will be realized across too many silos, or over too long a time period, to be the sole justification for a a Pay for Success project. Increasingly, however, we’re seeing governments pursue these projects, even if the savings aren’t intuitive, quantifiable, immediate or cashable, because they believe that the positive social outcomes are worth the effort and investment.
4. Scale Matters
Pay for Success projects require a minimum scale in order to work. The sample size has to be big enough to demonstrate statistical significance in a rigorous evaluation, as well as to to justify the cost of the project itself.
5. Don’t Assume Funders Will Trust You to Pay at the End of the Project
Investors rely on appropriations from government for repayment. With that comes risk that the funds might not ultimately be appropriated. Governments that have successfully closed projects have mitigated this risk by putting some or all success payments aside before they are actually due or, in the case of Massachusetts, pledging the full faith and credit of the state.
Reading through these lessons, Pay for Success may seem daunting. But the potential of Pay for Success is so profound for society that it’s worth all the hard work.