Considering fiscal and non-fiscal benefits in pay for success projects (Urban Institute)

By Stan DornJustin MilnerMatthew Eldridge

A popular benefit of the pay for success (PFS) model is its potential to finance programs that, if successful, will save governments more than they cost. For some governments, cost savings may be what first attracted them to PFS. But in practice, this approach greatly limits the number of programs eligible for PFS financing. A narrow focus on net public-sector savings also incorrectly assumes that most governments are solely interested in cost savings, without valuing the social outcomes, like reduced recidivism, increased school attendance and graduation rates, decreased long-term homelessness, and fewer emergency room hospitalizations.

With this reality in mind, our new paper outlines a framework that integrates fiscal and non-fiscal benefits, providing policymakers with clear and simple benchmarks for weighing potential PFS projects. Our proposed approach is holistic, including both fiscal and non-fiscal outcomes, and integrated, combining all outcomes into clear criteria for policymakers.

The approach has five key steps (see figure below), and is centered on a pair of questions:

  • How much are policymakers willing to pay overall, taking into account both up-front costs and near-term public savings, in order to achieve specified outcomes?
  • If performance exceeds expectations and saves additional money for government, how much of those extra savings will policymakers share with the private investors who furnished up-front funding?

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This alternative frame offers several benefits. Perhaps chief among them, the approach could expand the use of PFS for interventions that are not clearly known to produce net, public-sector cost savings—at least not in the near-term. Many programs have demonstrated the ability to reduce some public-sector expenditures, but it’s often hard to know for sure whether net savings will result within the timeframe that many policymakers consider in assessing fiscal effects. This integrated PFS approach allows for projects where proponents are confident of achieving some cost savings but cannot guarantee that such savings will soon exceed program costs.

Other benefits of this approach include:

  • Enhanced project credibility and investor interest because outcome forecasts can better incorporate uncertainty;
  • A sharpened focus on reliable and verified outcomes by separating evidence of impact from assurance of net cashable savings; and
  • A clear and logical starting point for dividing responsibilities between agencies.

For more details on the approach, its benefits, and examples of its use, we encourage you to read our paper. For questions about applying this and other PFS methods in a strategic way to your jurisdiction, we encourage you to contact our support center at pfssupport@urban.org

Have a Pay for Success question? Ask our experts at PFSsupport@urban.org!

As an organization, the Urban Institute does not take positions on issues. Scholars are independent and empowered to share their evidence-based views and recommendations shaped by research. Photo via Shutterstock.