Community Development Investment Review
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Social Impact Bonds: Lessons Learned So Far
Although Pay for Success (PFS) contracts have received widespread attention in the United States and abroad, there is nothing fundamentally new about governments paying for outcomes. Performance clauses in construction contracts are common, and the Department of Defense has procured services using performance-based contracting for years. Many state and local governments now use performance clauses in their procurement of human services, for example by providing bonuses to contractors administering job training programs based upon the number of clients who obtain and/ or retain jobs. What makes recent PFS initiatives distinctive is that they are focused not simply on creating additional financial incentives for contractors to produce better outcomes, but more broadly on overcoming the wide set of barriers that are hindering the pace of social innovation. For sure, these barriers include a lack of performance focus and outcome measurement, but they also include political constraints that prevent government from investing in prevention, the inability of nonprofits to access the capital needed to expand operations, and insufficient capacity to develop rapid and rigorous evidence about what works. In some of these new models, the amount of performance risk shifted from taxpayers to those on the hook for producing the outcomes is much greater than under traditional performance contracts, requiring the participation of socially-minded investors to make the projects feasible.
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