At the heart of Pay for Success, or PFS—also called social impact bonds—is a government contract in which the government agrees to pay for specific outcomes. It is the fact that the government only pays when social outcomes are achieved that makes the concept especially appealing in tight budgetary times. Likewise, it is the government’s promise to pay when the contracted outcomes are achieved that attracts investors to provide capital to programs that they believe can achieve those outcomes.
Two questions that have proven particularly important for every PFS arrangement are: What is the right price for an outcome? And how should government calculate that price? This issue brief provides guidance for government agencies on how to value outcomes.
Initially in the United States, governments have tried to establish a price by calculating so-called cashable savings—the number of dollars the government will save if and when the outcome is achieved. For example, a decline in crime would lead to a reduction in future incarceration costs. While this may be the right calculation sometimes, this methodology undervalues the true benefit of the outcome to government in many cases. Thus, it unnecessarily narrows the circumstances to which PFS can be applied.
Given that PFS is still in its infancy, many governments are finding that setting the right price is a particular challenge and the cashable savings concept can constrain their ability to deploy PFS successfully. As PFS financing moves forward, it is important that governments adopt a broader set of considerations for deciding how much they are willing to pay for outcomes. Specifically, governments should take into account three factors in deciding the value of an outcome:
- Well-being benefits: the improvements that accrue to individuals and communities when the outcome is achieved
- Public’s willingness to pay: the outcome is deemed to be worth the investment
- Cashable savings: the savings that accrue to governments when the outcome is achieved
Taking this more holistic perspective on funding outcomes can dramatically reshape the PFS field and better target society’s finances to produce the greatest social impact.