The mounting costs that result from these troubling social concerns at the local, state, and federal levels force officials to seek alternative ways to raise funds to deal with these issues. One such effort is to use a relatively new source of funding called “pay for success (PFS),” also known as “social impact bonds,” or “SIBs.” Currently, there are more than 40 PFS initiatives underway worldwide. A report by Emily Gustafsson-Wright, Sophie Gardiner, and Vidya Putcha discusses what PFS programs are and the lessons learned from using this type of financing to address pressing social issues.1 The following is a summary of their report.


Many nonprofit organizations both here and abroad often lack sufficient capital to maintain their operations. Moreover, efforts by governments to produce favorable social outcomes are similarly hindered by funding deficiencies. An alternative approach to generate funds to address social ills and promote positive outcomes was devised in the United Kingdom in 2010. For a detailed discussion of the origin and structure of PFS financing, see “Pay for Success: Financing Research-Informed Practice” by Noelle Baldini in this issue of Cascade. In short, the PFS approach relies on private investment capital to finance intervention programs to deal with social issues. Investors are repaid with interest only if predetermined goals are met. Thus, the risk of economic loss from an unsuccessful program is shifted from the government to the private sector.

The authors discuss the lessons learned from this new type of financing and assess its potential use to combat social problems.


The authors undertake a comprehensive study of the topic of PFS financing. Their analysis covers the experiences of programs using this type of financing worldwide. As part of their examination, they performed a thorough review of the literature on the topic using reports, working papers, and editorials among other types of documents. They also conducted numerous interviews with individuals who play a key role in the PFS arena. Additionally, the authors identified 38 PFS programs to study in depth and supplemented their study with surveys (in person, online, or over the telephone) with key stakeholders — investors, intermediaries, and service providers.

Insights from the Analysis

The authors draw several observations from their inquiry of a PFS financing approach, some of which are as follows:

  • The balance of PFS efforts thus far have centered on sectors and problems with certain characteristics. Some deal with areas in which the government has already engaged nongovernmental agencies to deliver services (e.g., programs concerning job and life skills training). Some involve issues in which “service inputs are fairly complex but the outcomes are simple to measure, such as homelessness, foster care, and prison recidivism.” Some also deal with matters outside core government services, such as job training for prisoners rather than law enforcement activities.
  • The authors weigh in on the issue of whether PFS programs or SIBs can attract a pool of private funding. They find there are several facets to the issue. The prospect of receiving a financial return on an investment that yields social benefits might be appealing to traditional private funders, such as foundations. The participation of these private funders in PFS initiatives might be in addition to their existing grant programs. SIBs might attract funding from new types of private funders seeking investment opportunities beyond traditional capital markets. These new funders might include high-net-worth individuals, credit unions, commercial investors and banks, and pension funds.
  • PFS programs potentially contribute to social service delivery but must contend with certain programmatic concerns. The development of deals that are an integral part of the financing approach can be challenging because of the difficulty in getting the many different types of players involved to collaborate. Further complications might be introduced with the complexity of multiyear contracts. Moreover, deal-making also can be made difficult when determining the appropriate outcome metrics as well as calculating the costs and benefits of the intervention being undertaken.
  • The authors find that there exists a great deal of variation in the PFS projects to date in terms of structure, mechanics, and stakeholder roles. This, according to the authors, bodes well for the future use of this type of funding, since there is tremendous flexibility in structuring a deal. This allows for deals to be tailored to the specifications necessary to address the social problem being targeted. The authors point out that the PFS model was devised as one of two models: either as an individual transaction dealing with a particular intervention, or as a fund intending to achieve a set of outcomes involving (potentially) multiple service providers.
  • In the authors’ assessment of the 38 PFS initiatives studied in detail, they recognize four factors that were key in structuring a deal: measurable outcomes, evidence of intervention impact, government support, and dedication and collaboration of the stakeholders. Most of the deals examined relied on administrative data or specific data collected in conjunction with the intervention impact. The outcomes or outputs of all the deals were identified, and there was evidence in many deals that the participating service providers were capable of delivering the services and achieving the outcomes. However, considerable variation existed in the robustness of the evidence. The authors attribute this to some degree on the level of risk the investors were willing to accept. The authors determine that none of the deals studied would have been possible without government support. They also report that the “stakeholders overwhelmingly highlighted the importance of all of the actors’ willingness to put in the necessary time and effort” to structure the deals.
  • According to the authors, it is too soon to tell whether PFS programs sustain impact. These initiatives might be a “passing fad and things will go back to business as usual after deals are complete.” However, the authors think the deals that provide multiyear contracting do achieve longer-term impact by providing consistent care over time and are a step in the right direction. Multiyear contracting also has an added feature in that it “helps to protect the provision of social services from politically influenced ebbs and flows of funding.”
  • The authors believe that over time the process of deal-making will become more manageable and that evidence of this is already occurring. Among the 38 deals studied, deal development ranged from six months to three years. In the UK, where the market for this type of funding is the most mature, the development of deals almost always takes six to nine months. The authors anticipate the development of standardized systems as lessons are learned and the resulting operating models are refined over time.
  • The authors indicate that only eight of the 38 deals studied made use of rigorous experimental or quasi-experimental evaluations of the deals for measuring impact as a condition for determining repayment. The majority (28) of the deals investigated used administrative data. The authors note further that the type of evaluation was determined to some extent by the nature of the intervention and, in part, by the desire of investors and outcome funders2 to verify the causality of the outcomes.
  • The authors find that a majority of the existing PFS initiatives do not achieve substantial scale. Twenty-five of the 38 deals serve populations with 1,000 or fewer individuals. The authors hasten to add that this does not mean that PFS programs are incapable of serving larger numbers of people. They point out that the Innovation Fund in the UK, which brings together multiple investors to jointly support a set of outcomes to be provided through many service providers in 10 deals, serves more than 16,000 individuals. According to the authors, the use of SIB funds supported by multiple large donor agencies might be one approach to tackle large-scale social issues. In many deals, the number of individuals who benefit from the intervention is dictated by the specific target population mandated in the specific PFS program.
  • While the authors feel the development of PFS programs has a bright future worldwide, the challenges in implementing them are likely to be considerable in developing countries. In these cases, the efforts and cooperation of the many parties involved in the deal-making process (concerning the choice of the target population, the government’s role, and the outcome and evidence identification) will be even more imperative. In order to assist in these contexts, the authors stress the crucial role that philanthropy might play. Philanthropists can help by funding the collection of data and evidence necessary to start the conversations about outcome-based financing with outcome funders.
  • The authors offer some guiding principles for the future of PFS programs. They think that meeting the challenges of complex deal-making in the future will be tempered by creative thinking and collective effort. Also, future use of this nascent form of financing might be enhanced by increased transparency and knowledge sharing. They suggest that the implementation of PFS initiatives can be nurtured by collaborating with those who have practiced this type of funding in addition to attending workshops and conferences on the topic as well as accessing readily available information online.

Closing Remarks

The preceding merely scratches the surface of the contribution made by the authors. They provide a wealth of knowledge gleaned from a comprehensive inventory of all active PFS initiatives contracted as of March 1, 2015. For more details on their work, see their full report.

The views expressed here do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

[1]Emily Gustafsson-Wright, Sophie Gardiner, and Vidya Putcha, “The Potential and Limitations of Impact Bonds: Lessons from the First Five Years of Experience Worldwide,” The Brookings Institution, July 2015, available at

[2]An outcome funder is the entity responsible for handling the pay for outcomes. It is usually a government agency, foundation, or development agency.