Pay for Success: Financing Research-Informed Practice

Published Tuesday, October 27, 2015 | by Noelle S. Baldini, Community Engagement Associate, Federal Reserve Bank of Philadelphia

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Undercapitalization of nonprofit organizations and years of seemingly stagnant results in addressing certain social problems have led many to hope that “pay for success (PFS) financing” will bring solutions in the form of new capital to support program delivery, improved accountability, and increased rigor in performance measurement. PFS financing, sometimes termed “social impact bonds (SIBs),” shifts the risk of a preventive social service’s success from taxpayers to investors who finance programs and receive government repayments if, and only if, an agreed-upon performance metric is achieved. Through the use of a third-party evaluator tasked with measuring a program’s success, this new financing strategy encourages research-informed practice that can deliver measurable results. This article explores the structure and potential benefits of PFS financing, as well as assesses challenges and opportunities.