Social-Impact Bonds Need to Focus on Results (Chronicle of Philanthropy)

To the Editor:

Over the past several years, the pay-for-success movement has enjoyed exciting growth — from the first project introduced in the U.S. in January 2013 to the 45 projects that have been launched globally, and with more in development.

As is the case with many social innovations, this excitement has triggered a degree of "buzz" that sometimes seems to outpace on-the-ground achievement.

Between the hype and the daily reality of developing pay-for-success projects and social-impact bonds, it is refreshing and welcome to hear from such a thoughtful skeptic as Clara Miller, president of the F.B. Heron Foundation. In her opinion piece "Can Social-Impact Bonds Really Have Big Impact?"she raises thoughtful questions deserving of a careful response.

At Social Finance, we work every day to promote and expand the pay-for-success model, yet we fully agree with Ms. Miller that this model is not a panacea. But where we may respectfully differ is in our confidence — as practitioners — that the model’s inherent strengths are sufficient to overcome its challenges, and our conviction that in the face of a status quo that leaves too many people underserved, we need new approaches.

Our fundamental reason for embracing the pay-for-success approach is somewhat different from Ms. Miller’s assessment of the model. In her telling, the primary goal is to deliver government savings through prevention of bigger problems down the road (for example, reducing prison recidivism to save the higher costs of incarceration).

But financial savings are not our primary motivation, nor are they what brings our government, nonprofit, and investing partners to the table. Rather, progress toward social outcomes is the key motivator — supporting people in their efforts to get and keep jobs, build healthy families, improve educational opportunities; in short, finding ways to help our society’s most vulnerable reach their potential. Yes, the potential cost savings for government in the long term are compelling, but only because it offers a path to meaningfully solve or reduce problems that have stubbornly persisted even in the face of decades of effort.

Our focus on improved social outcomes has implications for each of Ms. Miller’s specific and legitimate concerns.

First, Ms. Miller questions the complexity of the pay-for-success model. She rightly points out that it is difficult to structure a project that involves up to five different parties (government, investor, nonprofit, intermediary, and evaluator).

Like the social challenges they are designed to tackle, pay-for-success projects are indeed complex and multidimensional. When the goal is straightforward cost savings, that complexity may be a deal-breaker. When the goal is social outcomes, we view it as a challenge that must be overcome.

Our five years of on-the-ground experience suggests that complexity is not insurmountable, nor is it necessarily bad. Sometimes it takes precision to best align interests, mitigate risks, and prevent unintended consequences. Seven pay-for-success projects have been launched in the U.S, and each project pushes us farther along the experience curve. Social Finance also works closely with our sister organization in the United Kingdom, where there are 31 active projects, to apply the lessons of a more developed market to our own work. What is complex and time consuming to structure today may become more routine in a few years’ time.

Ms. Miller’s second concern is that "Nonprofits often take more risk than they should, and investors take less."

This observation contradicts our experience. Across a wide range of projects, we’ve witnessed sophisticated and capable nonprofits assess these opportunities and choose to participate because they believe the pay-for-success approach reconnects them to their mission, rewarding them for results and allowing them to focus resources on achieving impact, not fundraising. Moreover, the process of putting together a project focuses the organization on outcomes in ways nonprofit executives describe as positive and clarifying.

As for investors, the simple fact is that they bear the financial risk. If a program fails to deliver the agreed-upon results, investors lose their money and government does not pay. That is the very heart of the pay-for-success idea, creating incentives to drive more resources to programs that can demonstrably improve lives. We can debate who wins more — investor, nonprofit, or government — but when we help people access the support they need to thrive, the biggest winner is undeniably society.

That brings us to the third concern, which is that pay-for-success projects "tend to focus financial resources on remedies that have the most reliable and short-term savings."

Although remedies for some issues — teen pregnancy, prison recidivism, early childhood education, and so on — may produce short-term savings, they are not low-hanging fruit. These are persistent challenges and addressing them effectively does more than save money in the short term. For society, expanding solutions to these challenges creates long-term social benefits. For individuals, it changes lives.

Even when pay-for-success projects are supporting providers with a strong base of evidence and an established track record of operations, the fact is that these nonprofits entered into the contract precisely because traditional funding sources have not allowed them to scale to meet the challenge. As articulated by Results for America, most government procurement in social programming is not data-driven; as a result, outstanding, mediocre, and subpar programs are equally likely to be funded. The pay-for-success model exists precisely to ensure that programs that work get the resources to have a positive impact on as many lives as possible.

We welcome the opportunity for robust and thoughtful conversation in the government, philanthropic, nonprofit, and impact-investing communities on the pay-for-success model. If it is to thrive over time, we will need the best thinkers in the industry to continue challenging assumptions to ensure, ultimately, that pay-for-success projects are achieving measurable outcomes for those in need.