With Democrats now in control of both the House and Senate, the Biden Administration has a once in a generation opportunity to “build back better,” kickstart the economy, and tackle the Covid crisis. Now is the time for policymakers to broadly adopt the Pay for Success (PFS) model.
The pandemic has decimated state budgets and increased the demand for social services, forcing public officials to explore new ways to raise capital and allocate funds towards projects that are both cost-effective and impactful.
PFS is an innovative public-private partnership that brings together government agencies, nonprofit service providers, and investors to scale and provide financing for essential social services. The concept is simple. Governments pay for outcomes rather than projects that don’t always work.
Already, there are more than 25 PFS projects in the United States. With the federal government as a catalyst, PFS can be used to address some of the biggest ruptures caused by the Covid-19 pandemic. The model can be used to construct affordable housing units and connect those most at risk of homelessness with resources to combat housing insecurity. It can help immigrants and laid-off workers prepare for a post-Covid economy. And finally, it can provide employment opportunities and career guidance to past offenders to decrease recidivism and the transmission of Covid-19 in prisons.
To do so, the government sets a funding priority, investors raise funds, and the capital is provided upfront to a nonprofit service provider. The three parties agree on a series of metrics that are monitored by a third-party evaluator, such as a university or a data analytics firm. If the project fails, the government walks away and the investors lose their money. If the project succeeds, the investors receive their principal with interest, and the government identifies a proven partner.
The advantages of PFS are plentiful. For the government, the model shifts the cost of spending and risk of failure towards the private sector. If the project fails, the government doesn’t owe a dime. PFS also presents a cost-effective way to determine which projects are worth funding.
For the private sector, PFS provides an opportunity to earn a financial return and placate shareholders concerned with different environment, social, and governance issues.
And for nonprofits, the model provides a large amount of flexible, upfront capital. PFS contracts have fewer reporting requirements than government grants, freeing up staff to focus on their programming.
In other words, everyone can win. Policy makers should consider the following.
Congress should allocate funding to states and nonprofits to do PFS and conduct feasibility studies. In the 2020 December spending deal, a bipartisan Congress allocated $100 million dollars to address recidivism in the criminal justice system and earmarked up to $7.5 million towards PFS. What is unique about this legislation is its flexibility; States can choose their programs, so long as a project falls within the PFS framework.
With a few strokes of a pen, Congress can include a broad PFS clause in the next iteration of the CARES Act to shore up the social safety net.
It’s been done before. In the 2018 Budget Bill, Congress reauthorized the Maternal, Infant, and Early Childhood Home Visiting Program (MIECHV), a funding stream that committed $400 million a year to support child development. States were given the “option to fund evidence-based home visiting on a pay for outcome basis”—in other words, pay for success.
In 2018, Congress passed the Social Impact Partnerships to Pay for Results Act (SIPPRA), which created a $100 million standing fund to finance feasibility studies and PFS projects. The legislation also created the SIPPRA Commission and Interagency Council to vet prospective projects. These positions are selected by Congressional leadership and the President. However, neither the Council nor the Commission have met since 2019.
The Democratic Congress and the President should amend the SIPPRA Act to cover Covid-relief, ensure it is fully funded, and nominate a new slate of leadership to the Council and Commission who will not skirt their responsibilities during this crisis.
In their amendments, Congress should also consider whether PFS projects must include a Randomized Control Trial, as this significantly reduces the number of potential projects (see here for an in depth guide on PFS legislative considerations).
PFS can be harnessed to free up government spending, and build back better. The question before Congress and the Biden Administration is – are they ready to meet the moment?
Ibrahim Rashid is a masters candidate in public policy at the Harris School of Public Policy at the University of Chicago.