University of Wisconsin–Madison

A Guide to Evaluating Pay for Success Programs and Social Impact Bonds

Type Policy Brief or Report
Year 2015
Level City or Town, County, State
State(s) All States
Policy Areas Democracy & Governance, Finance & Procurement
Pay for Success (PFS), or Social Impact Bonds (SIBs), are an alternative private financing model often promoted as cost-free, risk-free silver bullets to support underfunded public services. In PFS and SIB funding models, investors provide the up-front funding for services with the expectation of receiving a profit on as the government repays the loan with interest if pre-determined social outcome targets are met. In theory, this model is effective if the private investment dollars can fill a funding gap where governments don't have adequate financial resources. However, this presumes that governments ultimately reap financial savings through foregone budget dollars spent to address future costs that have been avoided by present action even after paying the investors and service providers. In reality, SIB and PFS have high transaction costs beyond the loan and interest and are a more expensive way to finance public programs than traditional borrowing or direct expenditures. Further, PFS and SIB programs focus on narrow definitions of success and savings that preclude investment in primary prevention, and typically do not address the root causes of these social ills.

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