What can the Australian Job Services System teach us about Pay for Success? (Third Sector Capital Partners)

By John Grossman and Kevin Tan.

Pay for Success (PFS) holds promise.

By diverting resources to programs that are measurably successful, the PFS model could move the needle on many seemingly intractable social problems.

In the United States, however, PFS is still a niche concept. In the three years since the first PFS contract was signed in New York, only seven more PFS projects have been launched in the United States. This is reason for reflection. Observers and practitioners in the field alike should think deeply about why the national momentum behind the model has been slow to crystalize into launched projects. What obstacles prevent PFS from becoming the norm?

A study in contrasts is often helpful. In search for an answer, we start by looking at a system where PFS contracting is already an everyday occurrence. The Australian jobs services system is an intriguing example.

Why look to Australia?

Australia has a large government jobs services system that operates almost entirely on a PFS contracting model. Jobs services include training and placement with employers, and providers of such services receive the bulk of their compensation only when their clients achieve successful outcomes. In FY2013, the Australian government spent AUD$1.24 billion on its Jobs Services Australia program, working with 730,000 job seekers and resulting in more than 330,000 job placements that year.

In the United States, two obstacles prevent PFS contracting from attaining Australian scale. First, raising upfront financing from multiple third party funders takes time and sophisticated financial modeling. Second, governments and service providers have had to re-select outcomes and re-price outcome payments for each contract. The ways in which the Australian workforce system tackles these two problems could inform the way we approach PFS in the United States.

Implementing PFS Contracting Without Social Impact Bond (SIB) Financing

At Third Sector, we believe it is important to distinguish between PFS contracting and Social Impact Bond (SIB) bridge financing. PFS contracting, where a provider only gets paid on proven results, generates a timing gap between service delivery and payment – a gap that SIBs are used to bridge.

The Australian jobs services system reduces the need for upfront financing by encouraging large service providers to fund services from their own balance sheet. There are many large providers in the system; there are over 2,000 job training sites around Australia, but these are operated by only around 100 for-profit and non-profit service providers.

The Australian jobs training system shows us that in certain cases large providers may have enough cash flow to engage in PFS contracting without SIB financing. Doing so could encourage the mainstreaming of PFS.

Standardizing Outcomes Prices Using a Rate Card

In the Australian jobs services system, the government has pre-determined the outcomes that it is interested in paying for. It has then published the amount of money it is willing to pay for that outcome. This list of outcomes with corresponding payment rates is called a “rate card”.

The rate card in Australia lists how much the government is willing to pay for outcomes such as job placements and sustained employment for each consecutive 13 week period up to a cap . To mitigate incentives to pick only the easiest to serve individuals (called “creaming”), the rate card also adjusts for the type of job-seeker that a service provider is treating, so that service providers are paid more if the job-seekers they are serving likely require more assistance (e.g. ex-offenders). The use of a rate card allows a government to do its homework just once on how much it should be paying for a given outcome, after which it can contract with multiple providers.

Rate cards could substantially reduce the time and resources needed to construct a PFS contract. In fact, rate cards have also been used to construct some PFS contracts elsewhere in the world, including in the U.K. For example, the Department of Workforce Services (DWP) Innovation Fund published a rate card that listed the amount they were willing to pay for the attainment of national vocational qualifications and job placement, amongst other outcomes. The fund then launched 10 different PFS projects in a year based on the same rate card.

This is not to say that the Australian system is perfect, or that it could simply be grafted onto U.S governments and service providers. Some smaller nonprofits may indeed require SIB bridge financing, and the difference between geographies and levels of government may make a standardized rate card difficult to create. The key lesson from the Australian jobs services system is that it is possible for PFS to step outside the cloisters of special projects and into the wider world of government contracting. It remains for us to think of ways to accelerate this transition in the United States.

John Grossman, Co-President, and Kevin Tan, Associate, work from Third Sector's Boston office. For more information, please contact Kevin here.