Federal Reserve Bank of San Francisco
I first read about the social impact bond in Emily Bolton and Louise Savelle’s excellent 2010 report, Towards a New Social Economy: Blended Value Creation through Social Impact Bonds.1 In it, Bolton and Savelle predicted that the bond could someday be “a significant source of finance for effective services addressing a range of social issues, delivering attractive returns to a wide range of investors and improving people’s lives.” Their prediction proved prescient. Social impact bonds have become a global phenomenon—now being tested in the United Kingdom, Australia, Canada, and more recently in New York, Massachusetts, and Ohio.2 As they increase in popularity, however, it’s useful to position the bond in a larger context. The “big idea” behind the social impact bond isn’t actually the bond itself; it’s that the social sector should be held accountable through ex post payments for evidence-based results rather than ex ante payments for promising programs. This idea, encapsulated in the phrase “Pay for Success,” promises to transform the social sector into a competitive marketplace that efficiently produces poverty reduction.
This issue of the Community Development Investment Review attempts to do two things. The first is to serve as a comprehensive resource for the most current thinking on the origins, models, and potential implications of Pay for Success. The second is to encourage readers to weigh its exciting potential against its possible pitfalls. Pay for Success is a tantalizing idea but it raises important questions. Are we privatizing important government services that should remain under public control? How can we accurately measure and enforce “success?” Can we guard against fraud? Can we effectively balance our often-conflicting goals of equity, efficiency, and efficacy? Understanding and answering these, and other, questions is a crucial first step before widespread adoption of Pay for Success tools.
Thirty-nine authors contributed to this issue of the Review. This diversity of opinion allowed us to present Pay for Success as a constellation of important concepts—not just as a monolithic idea rooted in the social impact bond. Our hope is that this diversity will help policymakers, investors, service providers, and foundations better understand their roles in future Pay for Success transactions. The volume is loosely organized into three sections: 1) Background and Context, which highlights potential benefits and hazards, including ethical implications; 2) Roles and Responsibilities, which explores the participants involved in Pay for Success contracts and their respective responsibilities; and 3) Applications and Models, which profiles existing service interventions ranging from homelessness to foster care, and the various Pay for Success financing structures that support them.
As Daniel Stid points out in this issue, Pay for Success is not a panacea. Nevertheless, it offers an attractive alternative to the status quo of paying for programs instead of results. Despite our best efforts, the poverty rate today is roughly what it was when the War on Poverty began in 1964.3 We are winning important battles but losing the war. A new social policy paradigm is needed. Pay for Success financing has the potential to improve the social sector’s effectiveness by rewarding programs that work, encouraging innovation, validating progress, and attracting private capital to the anti-poverty cause. As George Overholser and Caroline Whistler write in this issue, it would “redirect and refocus our abundant resources, relentlessly, toward the innovations that demonstrate an ever-improving ability to deliver the results our communities need.” Certainly, important questions remain about Pay for Success. Equally important, however, is can we afford to pay for anything less?
* It takes a village to publish a journal. In particular, I would like to thank Caroline Whistler and Steven Godeke for their counsel from the outset and for introducing me to the rich community of practice that supports Pay for Success efforts around the world. I would also like to thank David Erickson, Scott Turner, Ellen Seidman, and Theresa Stark for their invaluable feedback and edits. This journal would not have been possible without their support.
1. Emily Bolton and Louise Savelle, “Towards a New Social Economy: Blended Value Creation through Social Impact Bonds.” Social Finance UK, March 2010.
2. Robert Hahn and Peter Passell, “Bonds, Social Impact Bonds.” US News and World Report Economic Intelligence Blog, November 15, 2012.
3. The official national poverty rate dropped from 17.3 percent in 1964 to 15 percent in 2011. U.S. Census Bureau, Annual Social and Economic Supplement (ASEC) to the Current Population Survey (CPS).
The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System. Material herein may be reprinted or abstracted as long as the Community Development Investment Review is credited.
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