To get comfortable investing in a Pay for Success project, it’s important to be confident that the government will be an engaged, long-term partner; committed to both launching and funding the project.

In our last few posts, we explored how, Pay for Success (PFS), an innovative model that drives new resources toward better, more effective programs, requires that project investors consider the “4Ps”—Partnerships, Program, Policy and Process—to evaluate the likelihood that the project will succeed in meeting the social impact targets and, in turn, payback investors. Today, we’ll examine “Policy.”

One of the key innovations of the Pay for Success (PFS) model is the opportunity for governments to test new approaches that have promising, but not yet proven results (as we saw in Cuyahoga County), and/or take existing evidence-based approaches (like the ROCA model in Massachusetts) to scale. Through rigorous evaluation methods, evaluators track outcomes and governments pay investors only if and when the PFS project achieves predetermined and agreed upon outcomes. For the model to work, the investor must be confident the funds will be available, and paid, if the project succeeds, even if it is years after the initial project is launched.

If you had to prioritize one of these three roles, which do you think is most important? Add your thoughts 

This confidence comes from understanding whether the government has both the commitment and the policy framework necessary to support a successful project. There are three ways we’ve evaluated this framework: the public sector’s role as 1) influencer, 2) champion and 3) payer.

1. Influencing the issue area and outcome selection.

The public sector is the bellwether of the PFS project. It decides the issue or policy area it wants to address, the program or intervention it wants to implement and/or scale, the outcome(s) it wants to measure, and how much it is willing to pay for the outcome(s). So, it is important that the outcomes selected are the the right indicators that the government has achieved its ultimate goal.

Let’s say a city wants to improve the four-year high school graduation rate so its teenagers have better employment opportunities after high school. Doing a four-year longitudinal study for one cohort of students may or may not be realistic, so the local government could choose to measure one or two indicators of success such as a decrease in truancy decrease in suspensions, or the pass rate of state exams like the NY Regents exams. From an investor’s perspective, it’s important to feel confident that the outcome(s) selected are strong indicators of the change desired and that there are data and tracking systems in place to objectively measure the outcomes achieved.

2. Identifying a government “Champion.”

Because PFS projects often span several years (and potentially several political terms), it is critical that at least one person is a “champion” of the project and is committed to its success from beginning to end. This person or group of people often acts as the “go-to” on the government side to help problem-solve any issues that may arise and keep the project on track. The champion can also be the glue that keeps the project moving forward amidst changes in administrations or senior leadership. PFS projects often require significant appropriations and pretty heavy lifts by the impacted agencies/departments. To get that done it’s important to have someone running the program that has the ear of policy/budgetary decision makers and the clout to underscore the importance of the initiative.

3. Ensuring a Policy that allows for future outcomes Payment.

With every PFS project, there is an appropriations risk, or the possibility that the funding required to make future payments will not be appropriated to the PFS project by a legislative body. Investors can understand—and potentially minimize—this risk by asking the question, what is the likelihood that the government will have money available to pay when the outcomes are achieved? While governments tend to regard the appropriation risk as minimal due to the reputational and financial harm that would result from defaulting on a contract, there are additional measures that governments can take to assure investors that the future outcome payments will be made.

Here are a few approaches we’ve seen used in PFS contracts to date:

Policy Payment Options in PFS Projects

To get comfortable investing in a PFS project, it’s important to be confident that the government will be an engaged, long-term partner; committed to both launching and funding the project. Having a government champion that is committed to PFS not only strengthens the current deal, but can lead to enduring change in how the public sector delivers outcomes beyond the individual transaction.

What other ways have you gotten comfortable with the government’s commitment to a project? Add your thoughts 

At Living Cities, we are encouraged by the number of local and state governments recently selected as sub-grantees of Federal Social Innovation Fund (SIF) who are interested in utilizing PFS to provide better outcomes for their residents.

Next week we’ll dig into the last of the 4Ps of PFS: Process. Stay tuned and sign-up to learn more.

Don’t miss the first few blogs introducing the 4 Ps of PFS, P for Partnership and P for Program. We encourage you to keep the conversation running in the comments section. Thanks to all that have commented to open up the dialogue and share your insights.