The PFS Incentive Fund RFI Response
Strategies to Accelerate the Testing and Adoption of Pay for Success (PFS) Financing
Models
Docket ID TREAS-DO-2013-0006
December 2, 2013
Submitted by:
Social Finance, Inc.
77 Summer St, 2nd Fl
Boston, MA 02110
Jane Hughes
Director of Knowledge Management
[email protected]
617.939.9900
Lara Metcalf
Managing Director
[email protected]
617.939.9900
Executive Summary
The President’s FY2014 Budget proposes to employ the $300 million Pay for Success
(PFS) Incentive Fund to “encourage innovation and accelerate the use of evidence-based
approaches by lowering the risk associated with initial investments.” As a social
innovation financing intermediary that has engaged with many service providers on
various state- and municipally-driven PFS procurement processes, Social Finance is
pleased to submit this response to the Treasury’s Request for Information.
The Incentive Fund may play an important role in catalyzing this market. Support may
be divided into three categories – outcomes payments, credit enhancement, and capacitybuilding, as follows:
 First, using the Fund as a supplemental outcomes payor would help to catalyze the
sector by seeding demonstration projects and by reflecting the full range of
public-sector benefits accruing from PFS projects, e.g. through federal Medicaid
dollars.
 Next, financing support through the Fund is also conceptually valid and may
prove less cumbersome to implement than including the federal government as an
outcomes payor. Federal officials have experience in providing credit
enhancements (e.g. guarantees through the Small Business Administration), and
the power of a federal guarantee for all or some of a program would greatly
enhance the attractiveness of the transaction to potential investors. In particular,
federal funds may be used to allay appropriations risk, which is otherwise
daunting to many investors.
 Finally, capacity-building among state and local governments is another potential
use of Incentive Fund dollars. Many governments lack the administrative data and
technical expertise that are fundamental to the building of evidence-based
programs. Investing in initiatives to develop data collection, sharing, and
matching across various agencies and levels of government would be a major step
forward for the PFS sector. Similarly, providing funds to support the work of
local governments in developing PFS projects would be a useful exercise.
Overall, monies under the Fund should be directed to the most promising program areas
and projects, which include chronic illness, early childhood education, maternal and
infant health, and recidivism. We believe that early PFS contracts should look to attract
impact investors, i.e. those who actively seek opportunities that reflect their values and
generate rewards for society as well as themselves. Accordingly, early PFS contracts
should look to attract this type of capital by employing proven, rigorously tested
interventions delivered by service providers with a high-quality evidence base of
successful outcomes.
Perhaps most important, at this stage each PFS project is bespoke. While the
development of norms and standards is a worthy goal, the market is not yet this far
developed; ongoing experimentation and on-the-ground experience are needed in order to
determine standards and best practices going forward.
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Question 1: Instead of focusing on particular programs, the budget language proposing
the Fund is broad in scope. What agencies and/or program areas are best suited for the
Fund and why? What level of evidence exists in these areas about interventions that
work? What is the threshold of evidence that a program should have in order to merit
consideration for a PFS approach? What other factors should be considered in setting
resource priorities for the Fund?
Program areas best suited for PFS
The President’s FY2014 Budget proposes to employ the $300 million Pay for Success
(PFS) Incentive Fund to “encourage innovation and accelerate the use of evidence-based
approaches by lowering the risk associated with initial investments.”1 Social Finance is a
social innovation financing intermediary that has engaged with many service providers
on various state- and municipally-driven PFS procurement processes—including those in
Colorado, Denver, the District of Columbia, Illinois, Massachusetts, Michigan, New
York, and South Carolina. We are committed to identifying PFS-suitable programmatic
areas and interventions.
Core to our mission at Social Finance is the development of PFS-based financial
innovations, such as Social Impact Bonds (SIBs). PFS projects have the potential to
enhance taxpayer efficiency and public accountability through their emphasis on
outcomes. However, they are not a panacea; not every social ill can be addressed through
PFS-based programming. Partners—including governments, service providers and
market intermediaries—must undertake stringent evaluation of various success criteria
before deciding whether or not to launch a PFS project. The points below detail general
criteria for assessing the viability of a PFS project:

First, do no harm: Those initiating a PFS project must determine, first and
foremost, that their work will not cause any negative, unintended consequences to
the population that they hope to serve. For example, could excluding some needy
individuals from services in order to provide a control group cause harm? Could
family restoration services actually prove counterproductive? If the answer is yes,
then the project must be redesigned or abandoned.

Do the right service providers exist? A successful PFS project rests upon the
ability of dedicated and skilled service providers to deliver social interventions on
a larger scale. These organizations must have a ready supply of knowledgeable
personnel with roots in the community and must be able to deploy proven social
interventions.

Is the financial case convincing? Rational investors will expect to see a solid
financial case for a PFS program; there must be a strong investment thesis that the
1
"The Budget for Fiscal Year 2014: Department of the Treasury," The White House,
http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/treasury.pdf.
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expected payout from the program is greater than the cost of providing it. In other
words, projected returns should exceed the cost of setting up, running, and paying
for the interventions financed through a PFS contract. This assessment is part of
our due diligence process at Social Finance.

Are the outcomes measurable and verifiable? Evaluators must be able to measure
outcomes using clear, objective data. Outcomes should be evaluated against a
counterfactual—either by projecting historical data forward or by establishing a
control group—in order to demonstrate that benefits arose as a result of the
intervention and not an external factor.
At Social Finance, we believe that the most promising areas for PFS contracts are those
that include three key elements:



Evidence-based intervention: Programs have been evaluated by independent
parties and found to be effective;
Sufficient net savings within time horizon: Results should be realized within a
time frame that suits the needs of investors;
Replicable and scalable: The interventions can be expanded to serve a larger
population. Service providers exist in the sector with the capability to scale up.
Figure 1: Promising Applications for SIBs
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PFS Evidence Base
While some service providers have a solid, consistent evidence base that demonstrates
successful outcomes, many others do not collect and assess data with the same rigor.
Social Finance has sought to identify interventions and organizations that are supported
by high quality evidence derived from randomized control trials (RCTs) and other robust
experimental evaluation methods over a significant period of time. In the past year,
Social Finance completed a “Non-profit Service Provider Analysis,” which sought to
identify top-tier “SIB-ready” service providers culled from 10 different evidence-based
registries (e.g. the Coalition for Evidence-Based Policy’s “Social Programs that Work”
and the Washington State Institute for Public Policy cost effectiveness studies).
Preliminary analysis suggests that only 20-30 providers employ “SIB-ready”
interventions based on our research into their outcomes, evidence base, reputation, scope
of operations, scale, and leadership. Of these, perhaps 15-20 were Tier 1 or Tier 2
organizations, largely due to an evidence base supported by at least one RCT or multiple
non-RCT experimental studies. Further research and analysis may indicate a broader
range of SIB-ready interventions, especially as social service organizations focus more
attention on evidence-based work.
The following provide examples of such high-quality interventions:

Center for Employment Opportunities (CEO): CEO provides life skills,
transitional jobs, job placement support and post-placement services to
individuals recently released from prison in order to decrease recidivism and
enable these persons to become productive members of society. MDRC, an
independent social policy research organization, conducted a 3-year randomized
control trial of CEO’s services and concluded that the intervention significantly
reduces recidivism at every level of the criminal justice system—including
arrests, convictions, and incarcerations. According to the study, CEO’s impact
only increased with the more disadvantaged or higher risk individuals.2

Multisystemic Therapy (MST): MST is an intensive, family-focused and
community-based treatment program for (often justice-involved) youth that
addresses an array of systems in an adolescent’s life. MST aims to help caregivers
manage and nurture challenging adolescents more effectively. MST has been
evaluated in eight RCTs involving over 700 violent and/or substance abusing
juvenile offenders. MST evaluations demonstrated a 25-70% reduction in longterm re-arrest rates, a 47-64% reduction in out-of-home placements, decreased
substance abuse, and better functioning families for male and female youths
ranging in age from 12 to 17 and across ethnic groups. Additionally, follow-up
2
Megan Milenky, Cindy Redcross, and Timothy Rudd, "More Than a Job: Final Results from the
Evaluation of the Center for Employment Opportunities (CEO) Transitional Jobs Program," MDRC:
Building Knowledge to Improve Social Policy, http://www.mdrc.org/sites/default/files/full_451.pdf, V.
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studies (such as that of the Missouri Delinquency Project) have further bolstered
the evidence of MST’s long-run impact.3

Nurse-Family Partnership (NFP): NFP pairs expectant first-time, Medicaideligible mothers with a nurse who provides home visits from early in pregnancy
until the child’s second birthday. The NFP service delivery model is a product of
almost four decades in the research laboratory and over a decade of field
implementation. Multiple (30+) NFP evaluations—including three well-designed
RCTs dating from 1977, 1988, and 1994 with different populations and
geographies—have demonstrated that the program achieves significant, sustained
outcomes for high-risk families. Across a range of outcomes, the program’s
impact is more pronounced for higher-risk mothers who are living in communities
of concentrated social disadvantage. NFP benefits include but are not limited to a
16% reduction in preterm first births, a 24% reduction in very closely spaced
births (within 15 months postpartum) and a 31% reduction in child maltreatment
through age 15.4
PFS Evidence Threshold
When considering a “threshold of evidence” for programs meriting PFS financing, the
relatively nascent state of the market must be considered. As of yet, there is no single,
proven approach to structuring PFS projects. For the foreseeable future, transactions will
be done in a bespoke fashion, varying greatly depending on the policy priorities of the
procuring government and the available evidence base of various service providers.
Social Finance is dedicated to drawing private sector capital into the PFS space because
we believe this ultimately represents a larger and more sustainable pool of funds than
philanthropic dollars. In order to create a capital structure with significant funding from
mainstream impact investors, PFS interventions will likely need an evidence base that is
convincing and solid enough to attract investors. These investors will be interested in
scaling what works, rather than developing new and innovative service platforms.
However, for various reasons governments may be willing to consider interventions with
weaker bases of evidence when procuring for a PFS contract. For example, a government
may be interested in funding promising but novel interventions yet to undergo
independent evaluation. Or, it may want to run two evidence-based interventions
3
"Evidence-Based Treatment, MST Proven Results from MST Services," Multisystemic Therapy,
http://mstservices.com/proven-results/proven-results; "Multisystemic Therapy: Research at a Glance,"
Multisystemic Therapy: Breaking the Cycle of Criminal Behavior,
http://mstservices.com/outcomestudies.pdf.
4
Findings from these randomized controlled trials in Denver, Elmira, and Memphis have consistently
demonstrated that NFP improves prenatal health and birth outcomes, child health and development,
pregnancy spacings and economic self-sufficiency of families. See
http://www.nursefamilypartnership.org/proven-results/published-research, including: Kitzman et al.,
Journal of the American Medical Association, 278:8, 644-652, 1977; Olds et al., Pediatrics, 77:1, 16-28,
1986; Olds et al., Pediatrics, 110:3, 486-496, 2002.
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concurrently, examining whether this produces amplified impact for a targeted outcome.
Governments may be willing to test out less proven interventions/designs for
experimental purposes; in this case, PFS financing based on philanthropic rather than
mainstream investors could provide a more accommodating financing method as
compared to typical budgeting procedures.
It should be noted, however, that using PFS to finance unproven interventions is risky.
Such a project would be less likely to attract private capital, making it more dependent on
philanthropic funding until the intervention develops a solid evidence base. In summary,
the threshold of evidence required for a PFS project will depend heavily on the target
investors, a government’s preferred cost of capital, and public sector policy objectives.
Other Factors to Consider
A $300 million federal PFS fund could go a long way toward catalyzing PFS contracts
across a wide array of governmental jurisdictions and programmatic areas. Importantly,
Social Finance believes that the true innovation of PFS is channeling a substantial,
sustainable pool of private capital towards interventions that are designed to generate
positive social outcomes for beneficiaries, create government/taxpayer benefits, and
produce financial returns for investors. Indeed, evidence suggests that many investors are
actively seeking opportunities that reflect their values and generate rewards for society as
well as themselves.5
Consequently, we believe that early PFS contracts should look to attract this type of
capital by employing proven, rigorously tested interventions. If the PFS market takes
flight, philanthropic dollars can be directed elsewhere. For example, these dollars can go
towards running demonstration projects or evaluations for promising but unproven
interventions that may one day be good candidates for PFS financing.
Question 2: The budget proposal encourages maximizing the leverage of Federal funds
by engaging intermediaries, including state, local and tribal governments. What other
kinds of groups should be considered as intermediaries? Are there other organizational
constructs that should be considered? The ability to demonstrate whether a PFS
intervention produces the desired results is the backbone of the model. How can the
Federal government encourage the adoption of low-cost yet rigorous outcome measures?
What are some of the barriers to using administrative data in a PFS scenario, and how
might they be addressed?
5
In its 2013 Insights on Wealth and Worth, U.S. Trust found that six in 10 wealthy individuals feel that
they can influence society through their investments, and 46% would be willing to accept a lower return
from investments that generated a greater positive impact on society. The full report is available at:
http://www.ustrust.com/publish/content/application/pdf/GWMOL/UST-Highlights-Brochure-Insights-onWealth-and-Worth-2013.pdf.
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The Role of Intermediaries in PFS Contracting
Intermediaries such as Social Finance have played an integral role in developing the US
PFS market. Indeed, social impact financing is not easy. Intermediaries can take on the
tough and complicated work of creating a structure that will optimize incentives for
service providers, offer a compelling investment opportunity to draw in new pools of
capital, and promote beneficial use of scarce resources for governments and taxpayers.
An intermediary is a party that facilitates the structuring and negotiation of a PFS
contract between other stakeholders in a transaction—such as the government, service
providers, and investors. The UK’s SIB Knowledge Box explains:
Intermediaries have played a pivotal role in the development of social impact
bonds, most notably Social Finance that originally developed the model and
implemented it with the Ministry of Justice as the first social impact bond in
Peterborough. A social impact bond could, theoretically, be developed without an
intermediary. It could also involve more than one, playing different roles.6
Intermediaries may offer a variety of services, including:








Identify and conduct due diligence on potential service providers and
interventions
Conduct financial modeling and structure the PFS program
Establish outcome metrics and evaluation methodology with all partners
Negotiate PFS contracts to align incentives among stakeholders
Develop the financing vehicle and raise investor capital
Manage performance and spearhead mid-course corrections as needed
Work with independent evaluators to assess performance outcomes
Educate the market and serve as a knowledge resource for others
A 2012 McKinsey report spells out the knowledge base and skill set necessary for an
intermediary operating in this space:




Deep knowledge of the relevant social issue
Financing expertise: how to conduct due diligence, raise capital from investors,
and structure deals
Project management competence
Collaborative and consensus-building skills7
6
"The Knowledge Box," Cabinet Office: Centre for Social Impact Bonds, 18 Apr. 2013,
http://data.gov.uk/sib_knowledge_box/.
7
Laura Callanan, Jonathan Law, and Lenny Mendonca, "From Potential to Action: Bringing Social Impact
Bonds to the U.S.," Mickinsey & Company, May 2012,
http://mckinseyonsociety.com/downloads/reports/SocialInnovation/McKinsey_Social_Impact_Bonds_Report.pdf.
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Including an intermediary in a PFS-based project confers a number of advantages. The
intermediary is able to facilitate negotiations by acting as a neutral broker among all
stakeholders and by translating among partners who may not normally work together. An
intermediary may contribute skills and experience that the other parties need but do not
yet have in areas such as financial analysis, social programming, and negotiating a multiparty deal. This may significantly shorten the development time for a project. If the
intermediary develops a strong track record of delivering results, investors may commit
to a PFS project because they have confidence in the intermediary, although they may not
yet have that same confidence in the service providers and/or interventions being
delivered.8
Including an intermediary may add to the costs of a transaction, but a high-quality
intermediary should add value in terms of deal efficiency that more than offset those
costs. Additionally, intermediaries may be willing to take a portion of their fees in the
form of project-related success payments. This means that intermediaries assume some of
the risk around performance outcomes, further aligning the incentives of all key
stakeholders. Also, future intermediary organizations will, for the foreseeable future,
likely remain nonprofits with access to philanthropic support that subsidizes some of the
early-mover costs involved in developing PFS transactions.
Intermediary Constructs
This RFI response contains multiple references to the fluid nature of the US PFS market,
and the intermediary role is not unique in this regard. Procuring governments may have
differing or ambivalent views towards intermediary participation, giving rise to multiple
constructs:
8

No intermediary: The UK Cabinet Office Social Outcomes Fund does not require
any intermediary participation in its PFS contracts. Additionally, some US state
governments have shown interest in direct contracting with service providers,
bypassing an intermediary.

Single, full-service intermediary: This construct has the benefit of limiting parties
to the deal, while also having in place a knowledgeable, non-partisan
organization touching all aspects of the PFS transaction. There are currently only
two US organizations specifically constituted to fulfill this full-service role:
Social Finance and Third Sector Capital Partners. However, organizations in the
evaluation, philanthropy, community development financial institution, and other
sectors may be looking to enter this space as well. Intermediary organizations
need not be exclusively focused on PFS development, but intermediary growth
will be essential to developing the PFS pipeline.

Joint intermediation: This approach has the benefit of specialization, in which
"The Knowledge Box," Cabinet Office.
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one party could focus exclusively on the financial side of the PFS contract, while
another could have programmatic responsibility, ensuring the intervention is run
with fidelity-to-model and outcomes are achieved. Social Finance and the NFP
National Service Office (NSO), to cite one example, are looking to structure PFS
contracts with this dual governance structure. As the financial intermediary,
Social Finance would be responsible for contract negotiations, financial modeling,
developing a fundraising strategy, raising money, and managing investor
relations. As the program intermediary, the NSO would shoulder primary
responsibility for identifying service providers, designing the program, and
managing the project/making course corrections (see Figure 2 below).
Figure 2: Example of Co-Intermediary Division of Responsibilities
NSO Lead Responsibilities
 Program design /
project development
 Service provider selection,
contracting, and
management
 Performance
measurement design
 Program management
SF Lead Responsibilities
 Fund-raising strategies
and implementation
 Investor relations and
ongoing reporting
 Financial modeling
 Capital market relations
management
Shared Responsibilities
 PFS
contract
negotiation, project
management,
and
stakeholder
management
 Modeling assumptions
 Investor disclosure data /
documentation
 Evaluation design in
conjunction with the State
PFS Outcome Measures and Administrative Data
The ability to properly demonstrate causation and measure outcomes is foundational to
PFS contracts. The entire construct is premised on the concept that taxpayers should only
pay for verifiable outcomes achieved. There is, however, some tension between the most
rigorous outcomes measurement instrument (randomized controlled trials, or RCTs) and
time/money constraints. RCTs are expensive and time-consuming compared to other
outcomes measurement techniques, as they add operational complexities and additional
requirements with regard to population and control groups. Thus it could be argued that
top tier service providers like NFP—which have already proven their effectiveness
through multiple RCTs—do not require additional RCTs with each new PFS contract.
Additionally, researchers are working to design outcomes measurement techniques that
place fewer demands on resources.9 Different statistical methods may offer viable results,
9
Jon Baron, "Rigorous Program Evaluations on a Budget: How Low-Cost Randomized Controlled Trials
Are Possible in Many Areas of Social Policy," Coalition for Evidence-Based Policy,
http://coalition4evidence.org/wp-content/uploads/2012/03/Rigorous-Program-Evaluations-on-a-BudgetMarch-2012.pdf, 3: Under certain conditions, low-cost ($50,000-$300,000) RCTs, the most rigorous
evaluation method available to-date, may be carried out in a variety of policy areas. In traditional RCTs,
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while the use of a lower-cost counterfactual may also be acceptable with proper statistical
analysis. Indeed, one potential use for the Fund may be to support projects where RCTs
are not included in the outcomes measurement, especially if RCT evidence for the
intervention has already been established. The development of lower-cost, less
demanding but still rigorous outcomes measurement techniques would streamline and
stimulate PFS development.
According to the Harvard Kennedy School SIB Lab, historical baselines determined
through the use of administrative data are often necessary to determine value from
improved outcomes. These baselines are essential for intermediaries to model public
sector benefits resulting from scaled interventions.10 To date, PFS outcomes have been
measured for a period of at least five years (and payments may be made on outcomes a
decade or more beyond the contract’s length), so accurate and comprehensive
administrative data is essential even at the due diligence and contract negotiation stages.
This data only becomes increasingly important as the parties develop an adequate
evaluation methodology.
For many PFS projects, outcomes measurement may require data to be matched across
data sets that reside in multiple government agencies. For example, a list of recently
released ex-offenders may be matched to data sets regarding subsequent
convictions/sentences or reported income records in an unemployment insurance system.
In order for government agencies to properly match administrative data sets, lawyers
often establish inter-agency Memorandums of Understanding (MOUs), and adequate
information technology infrastructure and staff must be in place. If this infrastructure
does not exist, PFS contract stakeholders may need to procure the assistance of outside
data consultants (local universities can also assist in this endeavor). A high degree of
security must be insured for individual data used, while also allowing the intermediary
and evaluators to perform their roles.
There are examples of extant administrative data systems that meet the requirements
necessary to conduct a rigorous, low cost RCT. For example:

A $225,000-300,000 RCT was carried out to determine the impact of the Positive
Parenting Program (Triple P)11 in 18 rural and urban counties in South Carolina.
This study found reductions in child maltreatment, out-of-home placements and
the rate of hospitalizations for child maltreatment injuries. Low-cost, yet rigorous
outcomes could be obtained using routinely collected data (e.g. child
maltreatment records), rather than necessitating new collection techniques such as
data collection comprises the largest share of costs. However, by using administrative data already gathered
by public agencies in order to measure treatment and control group outcomes, collection and study costs
may be greatly reduced, while still producing “valid evidence that is of policy and practical experience.”
10
Jeffrey Liebman and Alina Sellman, "Social Impact Bonds: A Guide for State and Local Governments,"
Harvard Kennedy School Social Impact Bond Technical Assistance Lab, June 2013,
http://hkssiblab.files.wordpress.com/2013/07/social-impact-bonds-a-guide-for-state-and-localgovernments.pdf.
11
For more information on Triple P, see http://www.triplep.net/glo-en/home.
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surveys.12

As part of a New York City Teacher incentive program, an RCT was conducted
between 2008 and 2010, which measured a sample of 396 low-performing schools.
If the treatment group produced positive impacts in student achievement,
attendance, graduation rate, behavior or GPA, then teachers would be awarded a
bonus of up to $3000. The $50,000 RCT used administrative data, such as state
test scores, to determine improvement, rather than designing a new, costly system
to do so. Through this evaluation, the program was determined to have produced
no statistically significant effects, leading the city to cancel the initiative in order
to direct resources elsewhere.13
As Social Finance, Center for Employment Opportunities and New York State have
worked diligently to structure a PFS-contract related to prisoner recidivism and
employment, the process has been smoothed by the State’s robust administrative data
infrastructure. However, this is not true nationwide. Many other states have different data
centers and face both technological and political issues when attempting to match data
sets. Even in well-matched systems, timeliness of data retrieval is an issue and delays are
common. As mentioned above, these shortcomings may necessitate the hiring of outside
contractors in order to integrate data sets within agencies and across silos. However, this
may create new issues around privacy (e.g. de-identification of data, application for data
access, etc.). Social Finance has experienced these issues while trying to obtain and
analyze patient records in a Fresno, CA asthma-related demonstration project (dealing
with data from insurance providers, as opposed to governments). These concerns may be
especially relevant in the likely event that health-focused PFS contracts are pursued in the
future.
Enabling administrative data systems to actively integrate and communicate across silos
would be a major step forward for PFS contracting. A federal PFS Incentive Fund could
earmark money specifically for this purpose. Support through the PFS Incentive Fund
could take different forms. For example, the federal Fund could target administrative data
integration at the state level using a broad net. (This action would have the advantage of
positive spillover effects beyond PFS contracting). The Fund could also support
initiatives within government to augment systems for data collection and analysis, to
ensure that data is high quality, in a digitized format, and collected in a consistent manner.
Alternatively, monies could be doled out to improve data collection and analysis
specifically for individual transactions in jurisdictions procuring for PFS. In scalpel-like
fashion these funds would be deployed to ensure successful due diligence and evaluation
for PFS projects in active development.
Questions 3: Outcome payments and financing support (e.g. credit enhancement, loans
12
13
Baron, “Rigorous Program Evaluations on a Budget,” 6.
Ibid. 7.
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or advances) are two forms of assistance meant to complement one another in stimulating
PFS approaches. What criteria should be used to decide how to split the Fund between
these two forms of assistance? Should a certain proportion of the fund go toward outcome
payments versus financing support, such as 50/50, 30/70, etc.?
Question 5: Among the possible forms of financing support, would credit enhancements,
loans or advances be most helpful? What role would financing support play in the overall
structure of a PFS structure?
We have chosen to respond to these questions together under the broad umbrella of how
to optimize outcome payments and financing support through the federal Fund.
In order to catalyze the market, the federal Fund could provide either supplemental
outcome payments or financing support for early PFS transactions. Some examples and
the issues surrounding these forms of assistance are covered below.
Supplemental Outcome Payments
Using the Fund as a supplemental payor of outcomes for PFS financings would help to
catalyze the sector, facilitating transactions that may not otherwise get off the ground.
Because the federal government would be a significant beneficiary of many PFS projects
either directly or indirectly—federal Medicaid dollars is but one example of this potential
benefit—there is a strong conceptual argument for including it as a payor. In fact, the
federal government has already begun to implement this approach. In September 2013,
the US Department of Labor awarded nearly $24 million in PFS grants to New York and
Massachusetts, monies earmarked towards payments for employment and recidivism
outcomes among formerly incarcerated individuals.
The use of Fund monies for outcome payments would facilitate the development of PFS
programs by seeding demonstration projects and by reflecting the full range of publicsector benefits accruing from PFS projects, as follows:
Seeding demonstration projects: The Fund could be used to help provide outcome
payments for new PFS applications, in order to incentivize state and local PFS
development. Because the PFS approach represents a new way of doing business in the
provision of social services, some governments may be reluctant to take up PFS on their
own. For example, after Goldman Sachs, J.B. Pritzker, and the United Way of Salt Lake
City crafted the first US SIB demonstration project related to early education (see our
response to Question 6 for more detail), the Utah State Legislature narrowly missed
passing the “Results-Based Early Education Act,” which would have enabled the state to
act as outcomes payor. Consequently, the United Way agreed to provide outcome
payments of up to $1 million for the first year of the project. The federal Fund has the
potential to play a similar role, seeding the space with demonstration projects to help
build a track record for the market.
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Outcome payments from the Fund could also incentivize PFS launches by helping to
overcome the issue of silos across different government levels and agencies. The costs
related to social challenges are unevenly distributed across various public-sector levels
(federal, state, local) and agencies (e.g. corrections, criminal justice, health). Similarly,
the benefits associated with a successful PFS program that addresses these challenges are
also unevenly distributed. As a recent University of Pennsylvania study notes,
“Bureaucracies are necessary to public administration; they are how government gets
things done. But dysfunction arises when threatening social problems or national crises
require simultaneously addressing the needs of the whole person but the boundaries
between bureaucracies are too rigid to permit coordination and collaboration.”14
This picture greatly complicates the economics for many contracts that would otherwise
be a good fit for a PFS. Using the Fund to top up outcome payments would incentivize
the appropriate public-sector groups to work together on multidisciplinary PFS programs
that bridge gaps across traditional dividing lines.
Encompassing holistic public-sector benefits: At this point, procuring states are inclined
to structure outcome payments based on strict budgetary savings that accrue over a
relatively short timeframe, which makes political sense. However, a federal government
Fund can and should take a broader view, accounting for value in addition to budgetary
savings reaped through Medicaid and other programs. PFS projects may create social
value (e.g. better quality of life, lower crime rate) that does not accrue directly to state or
federal budgets, as well as cost savings that materialize beyond the duration of the
investment.
An excellent example of this type of project is early childhood education programs,
which include a range of comprehensive supports for at-risk children and their families
from the prenatal period through the first five years of life in order to give children in
poverty the best chance for success in school and in life. Over 20 years ago, studies such
as the Perry Pre-School Study and The Carolina Abecedarian Project, articulated the
significant impact of effective early childhood programming on the long term outcomes
of children. Organizations like the Ounce of Prevention Fund support programs
built upon this solid foundation of research and evaluation to “narrow the academic
achievement gap for children in poverty.” Today, the Ounce is engaged in multiple
research studies to prove the value of its early education programs for at-risk children in
the current climate. The multi-year cross-sector impact of early education programs, like
those provided by the Ounce, is apparent for individuals and communities that benefit
from this type of programming.15
14
Dennis Culhane, John Fantuzzo, and Heather Rouse, “Actionable Intelligence for Social Policy:
Using Integrated Data Systems to Achieve a More Effective, Efficient, and Ethical Government”
(University of Pennsylvania, November 2013), 5.
15
"Early Childhood In The News," The Ounce of Prevention Fund - Giving Children in Poverty the Best
Chance for Success, http://www.ounceofprevention.org/home/index.php.nce.
14 | P a g e
However, much of this value is long-term in nature and not easily quantifiable. Without
these benefits, some evidence-based interventions may not generate the proper economics
for PFS transactions. In this context, the federal Fund could fulfill an important,
supplementary role. Fund monies would incentivize states to launch PFS projects with
the potential to deliver more holistic public-sector benefits, encompassing both long-term
budgetary relief and societal value.
However, despite these potential benefits from federal participation, designing and
implementing a complex contract with multiple outcome payors can be cumbersome.
Traditional federal grant guidelines and rules may not be easily adaptable to pay-forsuccess contracting, and federal involvement could also add indirect expenses and time to
complete the transaction. As a general rule, mainstream impact investors prefer
simplicity; a more complex contractual arrangement is by definition less streamlined, less
attractive to investors, and less replicable. Thus it is important to ensure that federal
participation through the Fund be as straightforward, streamlined, and simple as possible.
Financing Support
Using the Fund to provide financing support, including credit enhancements and/or
subordinated loans, could also help to drive the PFS market forward.16 Outcomes
payments largely serve to catalyze state and local government participation in PFS
programs, while financing support centers around catalyzing investor participation in
these programs.
The federal government is already involved in providing similar types of financing
support, if not in the PFS sphere. One Small Business Administration (SBA) program
guarantees up to 85% of commercial loans to small businesses. Additionally, Fannie Mae
and Freddie Mac have been used to enhance access and reduce costs related to home
ownership for low- and middle-income Americans. Two lesser-known examples of
federal activity in this realm are included below:

The California FreshWorks Fund: The fund aims to “increase access to healthy,
affordable food in underserved communities, spur economic development, and
drive innovation in healthy food retailing.” The debt facility for this project totals
$132.5 million, with $7.5 million acting as catalytic first-loss capital (CFLC). The
California Foundation put up one-third of the CFLC, in order to increase
financing for healthy food access, and opened initial negotiations that led to the JP
Morgan Chase Foundation’s $2.5 million CFLC contribution. Additionally,
through its Community Development Financial Institutions (CDFI) fund, the US
Treasury provided $2.5 million to CFLC. As a consequence of this multi-sector
co-investment, it became easier to attract FreshWorks investors at both the senior
16
Financing support includes various forms of credit enhancement that reduce an investment’s risks and
cost of capital, such as a guarantee for all or some of an investment’s principal; preferred status for private
investors; and insurance against certain types of losses.
15 | P a g e
and junior tranche levels. For individual credit facility loans, losses of up to $7.5
million will be absorbed by the CFLC in order to protect senior investors.17

Democracy Prep Charter School: This 2008 project aimed to turn a dilapidated
church vestry in Harlem into an “inspiring, yet affordable” space for students. The
total school investment is roughly $5 million, including $300,000 in first-loss
capital from Civic Builders. Civic Builders received this money as part of an $8.3
million grant from the US Department of Education credit enhancement facility,
meant for Civic’s charter school capital projects. As in other projects, Civic uses
the education money in conjunction with its own equity investments, which the
CFLC protects.18
The PFS market would be a beneficial target for federal credit enhancement. This is
particularly true for promising interventions without a long track record of experimental
evidence. In a PFS project, especially at this early stage, mainstream impact investors are
generally more concerned with protection of principal than with maximizing return—
making federal principal protection (in whole or part) a valuable lure.
The Australian experience provides a good example of the value of governmentsupported credit enhancements in catalyzing the PFS market. The first Australian Social
Benefit Bond (SBB) was issued in spring 2013 with a guarantee of 50-75% of investor
principal. The second, launched in October 2013, featured a two-tiered credit
enhancement structure. Investors in the lower-return, lower-risk tier enjoy a 100%
guarantee of principal but only 10% of their return is dependent on outcomes, while
investors in the higher-return, higher-risk tier put their capital at risk but also have up to
30% of their return tied to outcomes.
In financing the first US PFS contract, the Goldman Sachs Urban Investment Group
(UIG) provided a $9.6 million loan to support programs aiding juvenile offenders at
Rikers Island correctional facility. Given the esoteric nature of this transaction,
Bloomberg Philanthropies furnished a $7.2 million grant, guaranteeing a large portion of
Goldman’s loan (in the event that outcomes are not met) and covering some of MDRC’s
pilot and intermediary costs. If program outcomes are achieved, Bloomberg and MDRC
will work to repurpose the grant toward future efforts. In this fashion, philanthropic
capital worked to catalyze the still nascent US PFS market. Other early-stage projects
seem likely to include similar forms of financing support, although probably at lower
levels as time goes on. Foundations have limited capital and resources, which leaves a
gap that the federal Fund may fill.
Below are a few additional considerations with regard to the federal government’s
potential role as provider of credit enhancement for PFS financings:
17
Amit Bouri and Abhilash Mudaliar, "Catalytic First-Loss Capital," Global Impact Investing Network,
http://www.thegiin.org/binary-data/RESOURCE/download_file/000/000/552-1.pdf, 16-17.
18
Ibid. 17-18.
16 | P a g e




A PFS financing with the full faith and credit of the federal government behind
some portion of the investors’ principal would be much more attractive to
investors than a deal without such financing support, which would lower the
deal’s cost. However, the government should be ready for a robust response to
potential inquiries about why it is supporting private—either philanthropic or
commercial—investors (e.g. helping to catalyze a market that directs taxpayer
dollars to social programs that reliably produce positive outcomes).
Credit enhancement by the Fund may eliminate or greatly reduce investor
demands that the state government escrow funds for outcome payments, making
PFS projects more attractive to state officials.
Timing is critical in the capital markets, so Fund administrators would need to
develop a streamlined and straightforward process for implementing a guarantee
facility. This process should be quick and fluid in order to meet the needs of
investors; excessive delay in processing the facility would render it useless in the
context of the capital markets.
The Fund should lay out a concrete strategy, either generally or in regard to
individual PFS grants made, regarding what would happen to grant monies that go
unused in a successful PFS financing. In NYC, the Bloomberg funds would be
rolled into future projects.
Conclusion
The federal Fund can catalyze the PFS market through either outcome payments or
various forms of financing support. Given that the concepts and processes of certain
financing support structures are familiar to federal officials; this may make financing
support facilities easier to develop than outcome payments. However, financing support
may be more difficult to justify politically, for it could be seen as propping up wealthy
investors or well-endowed philanthropies.
At this stage in the market, it would be premature to establish a fixed proportion of the
Fund for outcome payments or financing support. Both are conceptually valid and have
the potential to add great value to PFS financing. Initial PFS projects are still bespoke in
nature rather than standardized, meaning that one may have different financing
requirements than another. Over the longer term, learnings from early projects can and
should be used to determine the practical advantages and disadvantages of each strategy.
Question 4: Is there an optimal structure for both the timing and tiering of outcome
payments? For example, should the projects allow for some degree of “progress
payments” based upon achievement of early outcomes? Should the projects allow for
“bonus payments” for extraordinary performance? What are the trade-offs of adapting
different structures to different projects versus supporting a standardized approach?
At this still early stage of PFS development—a period in which key stakeholders may
have little experience working together—a federal Fund must retain a high degree of
17 | P a g e
flexibility in order to stimulate growth and best practices. Currently, it is too early to
determine what the optimal structure for timing and tiering of outcome payments might
be; indeed, there is a distinct danger to standardizing before on-the-ground lessons have
clarified the benefits and issues associated with various structures.
Within these broad parameters, outcome payment structures will necessarily be
customized depending on the specific characteristics of a transaction. For example, the
state may target a promising yet unproven intervention or holistic combination of
evidence-backed interventions that have yet to be evaluated in unison. Under these
circumstances, a PFS project would depend on support from philanthropic investors, and
payments may be tiered depending on the willingness of investors to take on the inherent
increase in risk associated with the project. Conversely, for a single intervention like
Nurse-Family Partnership—which is backed by multiple longitudinal RCTs and would be
more appealing to mainstream impact investors—using tiers as a method of protecting
investor principal may not be necessary.
Ongoing experimentation is needed in order to develop norms and standards around these
issues. However, some guidelines for this customization should be noted:




19
Progress payments (i.e., providing some portion of outcome payments along the
way rather than at the end of the project) could add significant value to a project
by increasing investors’ internal rate of return (IRR). Progress payments could
also facilitate programs with longer timelines to realize measurable outcomes,
such as early education. Investors would be more willing to invest in longer-term
programs if they received some portion of outcome payments during the course of
the project.
The Harvard Kennedy School SIB Lab has warned against the use of interim
payments for financing the work of service providers, as follows: “While it will
often be appropriate to make interim performance-based payments before the end
of the project, to avoid shutdown risk in the event that early performance targets
are not met, these interim payments should not be used to finance service
provision. Social impact bond projects should be designed with a long enough
duration of services to allow for learning and mid-course corrections to occur.”19
Bonus payments for exceptional outcomes could add significant value by
increasing IRR for investors and by incentivizing service providers to maximize
outcomes. However, bonus payments could trigger a public backlash if they are
perceived as too generous to investors. Bonus payments could also create perverse
incentives if they are not carefully structured, e.g. by incentivizing service
providers to “cherry pick” subjects who are most likely to succeed over the short
term. On the other hand, bonus payments to service providers would enhance risksharing and the alignment of incentives among project partners.
Most important, whatever structure offers the greatest chance of success for an
individual project should be utilized. As noted above, PFS-based financing in the
Liebman and Sellman, "Social Impact Bonds: A Guide for State and Local Governments.”
18 | P a g e
social sector is highly customized at this stage, so flexibility is more critical to
success than standardized structures.
At the same time, there is value in standardization once the market has developed beyond
its initial stages of experimentation and learning. Eventually, standardization in overall
PFS structure will allow investors to gain greater comfort with the instrument, enabling
intermediary organizations to increasingly attract private capital into PFS deals.
Additionally, as more PFS contracts are negotiated, the process will be increasingly
streamlined, decreasing the time involved for all parties to bring such contracts to
fruition. Standardization, to the extent that it proves possible for this market, will only
help this process along.
Question 6: Please suggest one or more examples of promising PFS projects or
programs. For each example, what are its characteristics or features that make it a good
candidate for PFS? Who would be the key partners and what would be their roles? How
would the activity be funded? How would risks be shared and interests aligned among the
partners? What might be appropriate outcomes and metrics? Over what timeframe would
outcomes be determined?
Examples of promising PFS program areas and projects
As noted above, a project may be a good candidate for PFS if it features a strong
evidence-based intervention, sufficient cashable savings within a reasonable time frame
as well as substantial social value, and a model that is both replicable and scalable. In
assessing whether a program is appropriate for PFS, it is also important that the right
service provider(s) exist in the given issue area and geography.
In accordance with these guidelines, Social Finance has identified four issue areas that
meet these criteria and offer substantial potential for a successful PFS program: chronic
illness, early childhood education, maternal health, and prison recidivism. The following
describes each of these issue areas, including key partners and funding models associated
with promising projects. With the exception of recidivism, all of these projects are in the
pilot or development phase.
Chronic Illness: The US spends far more on per capita health care than any other
industrialized nation, roughly 2.5x the OECD average.20 According to the Centers for
Disease Control, more than 75% of healthcare costs can be traced back to chronic
illnesses, although these are generally among the most preventable and/or manageable
conditions. The combination of need and the potential of preventative interventions make
this area ripe for PFS financing.21 A promising PFS project in this area is:
20
"Americans Spend over Twice as Much Per Capita on Healthcare as the Average Developed Country,"
Peter G. Peterson Foundation, http://pgpf.org/Chart-Archive/0006_health-care-oecd.
21
"Chronic Disease Prevention and Health Promotion," Centers for Disease Control and Prevention,
19 | P a g e

Fresno, CA: Fresno is one of the nation’s asthma hot spots; around 20% of its
children have been diagnosed with the disease, which takes an especially heavy
toll on poor communities. In their roles as project intermediaries, Social Finance
and Collective Health are currently engaged in a demonstration project meant to
improve the health of low-income children with asthma. Initiated in the spring of
2013, the program is funded by a $660,000 grant from The California
Endowment. This two-year project, evaluated through an RCT, is designed to
show the effectiveness of up-front investment in asthma care by focusing on
performance management and reducing asthma-related ER visits (>30%) and
hospitalizations (>50%). The Central California Asthma Cooperative and Clinica
Sierra Vista, two service providers with proven track records, will work with the
families of 200 low-income children to provide home care, education, and support
in reducing environmental triggers ranging from cigarette smoke to dust mites.
Individuals in local Medi-Cal plans will be referred through two insurance
providers: Health Net/CalViva Health and Anthem Blue Cross. This project is
illustrative of the role philanthropic capital can play in paving the way for a PFS
contract, which would be the nation’s first focused exclusively on health
outcomes.
Early Childhood Education: President Obama’s 2013 State of the Union outlined a
“comprehensive early learning agenda,” which included the “Preschool for All
Initiative.” The Administration has also promoted the “Race to the Top: Early Learning
Challenge.”22 As the White House has noted, early education programs are both essential
to increasing economic opportunity and (from a government perspective) offsetting
remedial education, grade repetition, special education, and future safety-net costs. As
New York Times journalist Nicholas Kristof notes, “Mountains of research suggest that
early childhood initiatives are the best way to chip away at inequality and reduce the toll
of crime, drugs and educational failure. Repeated studies suggest that these programs pay
for themselves: build preschools now, or prisons later.”23 Promising PFS projects to
expand early childhood education programs include:

Salt Lake City, Utah: In August 2013, the Goldman Sachs Urban Investment
Group (UIG) formed a partnership with the United Way of Salt Lake (the
program intermediary) and J.B. Pritzker to create the first PFS demonstration
project designed to finance early childhood education. The Utah High Quality
Preschool Program consists of a high impact and targeted curriculum focused on
increasing school readiness and academic performance among at-risk 3 and 4 year
olds. The education program uses a locally-designed, structured curriculum to
better prepare children for kindergarten, close the achievement gap and help them
http://www.cdc.gov/chronicdisease/.
22
"Early Learning," The White House, http://www.whitehouse.gov/issues/education/early-childhood.
23
Nicholas D. Kristof, “Oklahoma! Where the Kids Learn Early,” The New York Times, November 9,
2013, http://www.nytimes.com/2013/11/10/opinion/sunday/kristof-oklahoma-where-the-kids-learnearly.html?_r=0.
20 | P a g e
remain on track through high school, while decreasing the use of special
education and remedial services in elementary school. This results in cost savings
for local communities, the school district and the State.
Groundwork was laid for this project beginning in 2010, when Voices for Utah
Children, Granite School District, and United Way of Salt Lake launched a multiyear study of academic results and cost savings related to early education for
children at risk for needing special education. The evidence base derived from
this study is convincing. About one-third of the children who enter the program
score so poorly on a certain picture-based vocabulary test that they are likely to
need special education and other costly interventions in elementary school,
according to Bill Crim, senior vice president with United Way Salt Lake. After
going through the United Way program, about 95% of those children catch up to
their peers and do not need additional services.
The contract represents a “tiered” investment structure: Goldman invested $4.6
million, while Pritzker provided an additional $2.4 million.24 The Pritzker money
represents a “subordinated loan” that will only be repaid after Goldman has
recouped its money, reducing the bank’s risk. Pending the passage of legislation
that would enable the state to act as payor, the United Way will act as the
outcomes payor for the first year of the project. (For more information, please see
Question 3/5.)
"There is an incredible track record and body of evidence to suggest this
intervention works," said Alicia Glen, managing director of the Urban Investment
Group at Goldman Sachs. "We feel pretty good about our assessment of the
[investment] risks."25

Michigan: In Michigan, 14,000 high school students drop out and 15,000 more
fail to graduate on time each year. Consequently, when Michigan released an RFI
for PFS financing in early September 2013, Social Finance and Communities In
Schools (CIS) partnered as financial and program intermediaries, respectively, to
frame a potential PFS contract. CIS pioneered the “Integrated Student Services”
model, which provides wraparound community services within a school based on
its specific needs (e.g. attendance problems, parent engagement). Additionally,
CIS works with school and juvenile justice agency leaders to identify at-risk
students for targeted intervention. When ascribing value and determining state
payments, CIS and Social Finance believe that grade promotion and high school
graduation rates are outcomes that would facilitate PFS financing, while other
outcomes could be used to monitor program efficacy. In this structure, some
24
Kristina Costa and Sonal Shah, "Social Finance: A Primer - Understanding Innovation Funds, Impact
Bonds, and Impact Investing," Center for American Progress, http://www.americanprogress.org/wpcontent/uploads/2013/11/SocialFinance-brief.pdf.
25
United Way of Salt Lake, United Way of Salt Lake Announces Results-based Financing for Low-income
Preschool Students, 13 June 2013, http://www.uw.org/news-events/media-room-/newsreleases/uw_resultsbasesfinancingnr.pdf.
21 | P a g e
budgetary savings and long-term social value would clearly accrue outside the
PFS window (e.g. increased revenue from better employment, decreased future
safety-net usage), which could be accounted for when contracting for outcomes
payments.
Maternal and Infant Health: The Affordable Care Act provides $1.5 billion in funding
for the Maternal, Infant, and Early Childhood Home Visiting Program (MIECHV), which
seeks to extend evidence-based interventions to serve at-risk children and families. In his
2013 State of the Union, President Obama proposed to extend funding for this program
by 10 years.26 Effective home visiting programs have the potential to enhance family
outcomes in criminal justice, education, foster care, health, and other important ways.
The US Department of Health and Human Services Home Visiting Evidence of
Effectiveness effort analyzed 35 interventions eligible for MIECHV funding.27 Of these,
14 were deemed evidence-based programs due to their evaluation by at least one RCT
and/or additional experimental trials, as well as evidence of statistical significance in
various buckets related to maternal and infant health, school readiness, and child
maltreatment. Additionally, Social Finance conducted its own in-house analysis of
effective interventions related to infant and maternal health outcomes. In addition to
home visiting programs, interventions like Triple P America and Centering have been
evaluated through RCTs and shown to have significant effects on birth outcomes and
child maltreatment.28 These too may be options for future PFS financings.

Michigan, New York, South Carolina: Multiple jurisdictions have run
procurements either specifically focused on or including the proposal of PFS
structures targeting improved birth outcomes. Social Finance and the NurseFamily Partnership (NFP) National Service Office have partnered on proposals to
expand NFP in both urban and rural geographies. In these proposals, the State
would act as the payor when NFP achieves certain outcomes, such as preterm
birth reduction and increased birth spacing. These outcomes have a direct
connection to significant state Medicaid savings within the contract timeframe
while also serving as proxy metrics proving fidelity-to-model. These metrics
would allow governments to justify some level of investor repayment related to
longer-term savings in areas such as criminal justice. This structure could be
largely private capital-driven, as NFP has a robust evidence base, including three
longitudinal RCTs.
Recidivism: US criminal justice costs are the second fastest growing area of state
expenditures, outside of Medicaid. In the US, within three years of prison release, two26
“Early Learning,” The White House.
"Home: A Better Way to Get Care," Centering Healthcare Institute,
https://www.centeringhealthcare.org/index.php.
28
"Home: Triple P Takes the Guesswork out of Parenting," Triple P: Positive Parenting Program,
http://www.triplep.net/glo-en/home; U.S. Department of Health and Human Services, Administration of
Children and Families, "Models," Home Visiting Evidence of Effectiveness,
http://homvee.acf.hhs.gov/programs.aspx.
27
22 | P a g e
thirds of individuals are rearrested and roughly half go back to prison.29 New York State,
which spends roughly $3.6 billion on prisons, has been at the forefront of changing this
dynamic by promoting PFS contracts that look to move formerly incarcerated individuals
into productive employment.30

New York City: The first US PFS contract, which was announced in August
2012, focuses on recidivism. The Goldman Sachs Urban Investment Group
provided a $9.6 million loan to support programs aiding juvenile offenders at
Rikers Island. The intervention is a holistic program utilizing cognitive behavioral
therapy techniques in order to reduce recidivism. MDRC is overseeing the
program as intermediary, setting up the financial arrangements and managing
program implementation. In order to offset the risk inherent to this new form of
transaction, Bloomberg Philanthropies offered a $7.2 million grant to guarantee a
large portion of Goldman’s loan and cover some of MDRC’s operating costs. In
this fashion, philanthropic capital worked to catalyze the development of the still
nascent US PFS market. If the program succeeds, New York City will pay MDRC
the principal plus a performance-based return, monies which MDRC will use to
repay Goldman’s initial loan. In this scenario, the Bloomberg grant would be
repurposed for future projects.

New York State: As part of a competitive procurement process, Social Finance
was selected by New York State Department of Labor (DOL) to serve as the
intermediary for the State’s response to the US Department of Labor Workforce
Innovation Fund PFS solicitation. Social Finance and the NYS DOL worked in
close coordination to develop its application and succeeded in securing a $12
million grant (the largest awarded) from the US DOL.
The partners are developing a PFS contract to expand the work of Center for
Employment Opportunities (CEO), a leading provider of prisoner re-entry
services. CEO will provide services aimed at increasing employment and
reducing recidivism for recently released residents of New York City and
Rochester. In New York State, this population has an average unemployment rate
of 53%, which ranges up to 69% in certain communities.31 As mentioned in
Question 1, CEO has been subject to a three-year RCT conducted by MRDCs,
which found a range of positive impacts for various subgroups. The largest were
for treatment group members who received CEO services shortly after being
released from prison. This group saw decreases in arrests (49% compared to 59%
for a control group), crime (44% compared to 57%), and incarceration (60%
29
"Reentry Trends in the U.S.: Recidivism," Office of Justice Programs: Bureau of Justice Statistics,
http://www.bjs.gov/content/reentry/recidivism.cfm.
30
"The Price of Prisons - New York: What Incarceration Costs Taxpayers," Vera Institute of Justice,
http://www.vera.org/files/price-of-prisons-new-york-fact-sheet.pdf.
31
New York State, "Governor Cuomo Announces $12 Million Federal Grant for 'Pay for Success',"
Governor Andrew M. Cuomo, http://www.governor.ny.gov/press/09232013-pay-for-success-grant.
23 | P a g e
compared to 71%).32 Additionally, early on in the program CEO produces a large
increase in employment through its transitional jobs program, although this
impact faded after the first year.33
Additionally, state and local governments across the US are exploring PFS projects and
procurements aimed at reducing homelessness (e.g. 2012 Massachusetts RFR) and
targeting children dually-involved in the foster care and juvenile justice systems (e.g.
2013 Illinois RFP). However, the US is not alone in exploring PFS deals in novel areas of
social impact. For example:

Australia: The New South Wales (NSW) government has been at the forefront of
Social Benefit Bond (SBB)34 development in Australia. In March 2013, the NSW
government announced Australia’s first, the Newpin SBB. This project will
provide A$7 million to fund UnitingCare Burnside’s “New Parents and Infant
Network” (Newpin), which works to keep struggling families together. In June,
Social Ventures Australia completed the capital raise. The NSW government
provided a substantial credit enhancement for this transaction, guaranteeing that
investors would lose no more than 25% of their principal if the project fails in the
first four years, and 50% if failure occurs in the last 3 years. The NSW
government’s second SBB contract was signed in June 2013, funding the
Resilient Family Service intervention provided by The Benevolent Society. The
program aims to strengthen family functioning and relationships, ensuring child
safety and preventing out-of-home placements.35

United Kingdom: In 2012, the Consortium of Voluntary Adoption Agencies
(CVAA), Baker Tilly and Social Finance UK structured a first-of-its-kind £5
million, two-year PFS contract, which aims to place 300 children annually into
adoptive families. The CVAA will serve as program intermediary. The program
will target children from minority ethnic backgrounds, those with medical or
clinical conditions, and kids over four years old or in sibling groups. Each of these
characteristics makes placement more difficult. According to an evaluation of
permanence in adoption and fostering, the program has the potential to achieve
£22 million in social benefits for children, allowing investors to recoup their
principal and earn some rate of return. Social Finance UK and Baker Tilly will
collaborate on the transaction’s capital raise.36
While the aforementioned transactions by no means fully detail PFS work going on
abroad, they are indicative of an active international market exploring diverse areas of
32
Milenky, Redcross, and Rudd, "More Than a Job," ES-13.
Ibid. ES-7.
34
“Social Benefit Bond” is the term used for SIBs in Australia.
35
"Social Benefit Bonds Trial in NSW," NSW Government: The Treasury,
http://www.treasury.nsw.gov.au/site_plan/social_benefit_bonds/social_benefit_bonds_trial_in_nsw_FAQs.
36
Corinne Gladstone, "Social Impact Bond," Baker Tilly, http://www.bakertilly.co.uk/media/news/socialimpact-bond.aspx.
33
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potential social impact. When surveying the US PFS landscape, there is at this point
broad diversity regarding payors, financing and programmatic structures, and geography.
When deploying a federal PFS incentive Fund, this current flux should be recognized.
The Fund should seek to both grow the market and assist in identifying an optimal,
sustainable PFS structure through seeding differently constituted projects nationwide.
PFS Risk Alignment and Management
PFS financings are centered on the transfer of financial risk from the public sector to the
private sector. All partners in a PFS project—investors, government, service providers,
and intermediary—experience risk in different ways and to differing degrees. The basic
risk buckets in PFS are as follows:








Performance risk: the risk that pre-agreed outcomes will not be achieved,
resulting in loss of capital and/or subpar returns to investors
Data/statistical risk: the risk that data and statistical analysis do not accurately
reflect project performance
Sovereign risk: the risk that government will lack the will and/or ability to make
outcomes payments related to the project
Financial risk: risks related to financial markets and the financing of the project,
such as interest rate risk, illiquidity, and early termination
Economic/demographic risk: the risk that unexpected demographic or economic
changes have an unforeseen or uncontrollable impact on the project
Reputation risk: the risk that a poorly performing project has a deleterious impact
on any or all of the participants’ reputations
Force majeure: the risk that natural and unavoidable catastrophes restrict
participants from fulfilling their obligations in the project
Legal/contract risk: the risk that statutes, regulations, or contracts underlying a
PFS financing could harm the project
The basic principle of risk management in financial transactions is to allocate risks in the
partnership in meaningful ways, with the ultimate goal of reducing the overall risk
associated with the transaction. This means that risks should be allocated fairly, so that no
one partner bears an undue portion of risk. It also means that risks should be allocated to
incentivize; the party that has the power to mitigate a risk should be the one to bear it. For
example, the service provider has power over the quality of execution, so should incur
some loss for failure to execute properly – as well as, perhaps, a bonus for outstanding
execution. By the same token, the intermediary has power over performance
management, so should incur some loss for poor implementation of midcourse
corrections. These considerations should result in the design of a risk allocation matrix
for each PFS transaction aimed at allocating risks to the party or parties most able to bear
these risks and take action to mitigate them.
Question 7: What process would be most helpful to states, local governments and tribes
to apply for either outcome payments or financing supports? What do states and localities
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need in order to be ready to participate in a competitive process and resulting projects?
As a market intermediary, rather than government office, Social Finance respectfully
defers to the greater knowledge of those directly participating in the application process.
From our perspective, all levels of government need to ensure that they have the capacity
and human capital to participate in PFS-based transactions. These transactions are often
highly time-critical and complex, requiring partners who have the skills to participate
effectively in such projects.
Ultimately, PFS projects are financial instruments. Participating in a financial market for
social outcomes is a very different process from normal government procurement and
should not be handled in the same manner. Some of the standard practices in government
procurement may not be effective for PFS. At all levels, government officials who take
part in PFS financings should be comfortable with the timing, concepts, and practices of
financial markets.
Some portion of the Fund may be allocated to training and capacity building among key
government officials, at both the state and federal levels. For example, the Harvard
Kennedy School SIB Lab, with Rockefeller Foundation as well as other philanthropic
support, provides technical assistance to state and local governments that are
implementing early-stage SIB programs. In January 2013, the SIB Lab launched a
nationwide competition and ultimately selected Chicago/Illinois, Colorado/Denver,
Connecticut, Michigan, New York, Ohio and South Carolina to receive its technical
assistance. (The SIB Lab also continues to assist Massachusetts on PFS development).
However, winning jurisdictions were selected from 28 entries, indicating a significant
level of unmet demand for assistance in building governmental capacity for PFS projects.
A $300 million federal fund could expand similar assistance, driving PFS procurements
on a much greater scale.
Question 8: The ability to ensure that outcome payments are available for successful
projects, either directly or via credit enhancement has been a significant risk that the
Fund would help to address. Are there other functions that the Fund should serve to
accelerate adoption and testing of the PFS model?
Allaying Appropriations Risk
Appropriations risk, the risk that state and local governments will not appropriate money
in future years for outcome payments under a PFS contract, is daunting to many potential
investors. In most governments, appropriated funds must be spent within the current
fiscal year. However, PFS contracts can be anywhere from 3 to 8-plus years in length,
making them subject to greater appropriations risk.
So far, Massachusetts is the only state that has enacted legislation to mitigate this risk. As
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the Harvard Kennedy School SIB Lab explains in its “A Guide for State and Local
Governments,”
[This legislation gives] the Secretary of Administration and Finance the authority
to enter into up to $50 million in pay for success contracts backed by the ‘full faith
and credit’ of the Commonwealth. In addition, the legislation establishes a sinking
fund and requires the Secretary to request appropriations in each year equal to the
maximum performance payments that may ultimately be needed based upon the
services delivered in that year. This helps ensure that funds are available when
performance payments are due, and avoids the need for large one-time
appropriations in payment years.37
However, in other states the process is more opaque. As noted above, most state budgets
only allocate funding for one year at a time—creating a significant level of appropriations
risk that is likely to be unacceptable for many mainstream impact investors. One of the
most valuable uses of the Fund could be mitigation of this risk. This could occur through
at least two different mechanisms:
1. The Fund could be used to incentivize the passage of legislation in other states
that is similar to the Massachusetts example, which would allay appropriations
risk in relation to PFS financings.
2. The Fund could be used to provide some form of limited insurance for investors
against appropriations failure in selected states.
Other Potential Fund Functions
A central goal for the Fund is to incentivize state and local governments, investors, and
service providers to participate actively in PFS-based projects. It could be used, for
example, to encourage federal and state agencies to work together across silos when
benefits accrue to multiple agencies and levels of government. Alternatively, federal
money could be used to build capacity among government officials or to provide firstloss guarantees for investors. A few examples of specific functions for the Fund are:
37

Motivate states to participate in PFS: Early stage project development suggests
that PFS deals need an avid and committed government champion to launch the
project and keep it going. In states where this champion does not exist, the Fund
could be used to incentivize participation by providing financial support. For
example, the Fund could be used to cover a state’s administration or evaluation
costs in launching a PFS project or to co-fund outcome payments.

Guarantee investor principal: As discussed above, one of the most efficacious
uses of the Fund may be in providing a guarantee for some portion of investor
principal, as the NSW government does in the abovementioned Social Benefit
Bonds. This would encourage investor participation in the deal and lower the cost
Liebman and Sellman, "Social Impact Bonds: A Guide for State and Local Governments.”
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of capital for the state. Moreover, the funds would recycle if the project is
successful, remaining available to support future projects.

Insure investors against state appropriations risk: Under this option, the Fund
would be used to mitigate appropriations risk, rather than provide a blanket
guarantee on investor principal. Because appropriations risk may be a binding
constraint for many investors, this option would offer a relatively low-cost
opportunity for the Fund to incentivize participation in PFS financings – with all
of the abovementioned advantages.
It is important to ensure that the application process for federal monies does not slow
down or overly complicate deal development, since financial markets tend to work on an
expedited timeline.
Question 9: Please address any other factors you believe important for consideration in
development of the Fund. You may also provide examples to illustrate how the fund
could be used to accelerate or enhance implementation of PFS.
This RFI primarily addresses the US PFS deal development pipeline and other factors
specific to the United States context. However, PFS transactions are being actively
considered or carried out across the globe, from Canada to Australia. The United
Kingdom example, in particular, may provide some insight into how a federal-level fund
may be deployed to grow the US PFS marketplace. In the UK, the government has
actively catalyzed the PFS market through accommodative policies as well as the
establishment of various funds and offices to support this market, which will be described
below.
PFS in the UK
In the fall of 2010, Social Finance UK, our sister organization, launched the world’s first
SIB. The program aims to reduce re-offending among men released from Peterborough
Prison through financing interventions delivered by experienced social sector
organizations. These organizations provide intensive support to 3,000 short-term
prisoners over a six-year period, both inside prison and after release, to help them resettle
into the community. If their work reduces re-offending by 7.5 percent or more, the
government will repay investors from a share of the cost savings. If it delivers a drop in
re-offending beyond 7.5 percent, investors will receive an increasing return of up to 13
percent based on success in achieving the social outcomes.
The UK currently has 14 active PFS projects. Much PFS momentum can be traced to
proactive, accommodative central government policies. Because the UK has a unitary
system, the central government naturally has a more active role in PFS development.
However, the US PFS Fund could look to the UK as an example for innovative practices
that include support from the highest level of government.
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Accommodative PFS policies: The UK government has already announced a tax relief
scheme intended to benefit investments in social enterprises, including PFS contracts.
HM Treasury and the Department for Business Innovation and Skills are currently
exploring potential designs for the announced plan. Additionally, the government
initiated the “Red Tape Challenge,” which aims to remove conflicting rules and
exclusions in the current legal and regulatory structure governing PFS contracts. The aim
is to update the Financial Services Bill in order to ensure that PFS-relevant regulation
takes into account the non-financial goals of this project, while also aiming to simplify
understanding of fiduciary duties through the Law Commission review.
Cabinet Office, Centre for Social Impact Bonds: The Centre is the UK’s “central
authority on social impact bonds. It works to increase understanding of SIBs across
government and to provide support to SIB developers.”38 The Centre aims to increase
capacity for SIBs in order to improve social outcomes while reducing costs, increase
innovation in public service delivery, contribute to social investment market growth,
generate public sector savings, build an evidence base on interventions that work, and
share information more broadly. Starting in April 2013, the Centre began to maintain the
Social Impact Bond “Knowledge Box,”39 an online compilation of current information
and thinking on PFS contracts, including details of current projects and templates for PFS
procurement procedures.
American jurisdictions have, for the most part, launched procurement processes with a
“Request for Information” stage, seeking general knowledge regarding local service
providers, intermediaries, SIB designs, etc. In order to streamline this process, the federal
Fund could be used, in part, to create a central and constantly evolving depot of PFS
information that may be drawn upon by interested parties.

Social Outcomes Fund: Launched in November 2012, the Social Outcomes Fund
serves as a government-sponsored support structure for PFS deals, and has been
influential in early deal generation and completion. Specifically, it works
alongside the Centre for SIBs by topping up outcomes payments for promising
projects that generate social value above-and-beyond their budgetary savings
reduction or generate a complicated mix of budgetary savings across agency silos.
In the former case, without the Fund to act as payor based on social value, the
cost-benefit analysis for certain projects may not justify PFS financing, even if
they were to produce a net gain when considered from a broader societal
perspective. In the latter case, Fund payments drastically reduce repayment
complications by avoiding the need to disaggregate savings and make payments
out of specific agency budgets. The £20 million fund is managed by the Cabinet
Office and helps catalyze new project development.
38
"Centre for Social Impact Bonds," Cabinet Office,
http://blogs.cabinetoffice.gov.uk/socialimpactbonds/about-sib/.
39
"The Knowledge Box," Cabinet Office.
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The Social Investment Business Group: The Social Investment Business Group is one of
the largest social investors in the UK, comprising the philanthropic Adventure Capital
Fund (ACF) and its social enterprise counterpart, The Social Investment Business
(TSIB). The ACF focuses on providing investment to community enterprises with the
potential to transform neighborhoods across the UK. The charity disburses funds in two
major areas: loans and/or grants to enterprises that can potentially make a major
contribution to their communities, and Business Development Grants, which are smallscale disbursements targeting community enterprises in early stage development. 40
TSIB has made and managed over 1,300 investments in civil society organizations
ranging from roughly £5,000 to almost £7 million. TSIB looks to invest in viable, nonbankable projects, facilitating greater scale (when normal loan options are not available),
and investing in promising and innovative ideas.
TSIB also collaborates with the Cabinet Office to run the Investment and Contract
Readiness Fund (ICRF).

Investment and Contract Readiness Fund (ICRF): This £10 million fund,
managed by TSIB on behalf of the Office for Civil Society, supports social
ventures “to build their capacity to be able to receive investment and bid for
public service contracts.”41 Specifically, it provides grants of £50,000-£150,000 to
support the development of investment-ready social ventures, enabling them to
raise at least £500,000 or bid for contracts over £1,000,000. ICRF aims to ensure
that social ventures achieve adequate scale in order to secure new forms of
investment and compete for public service contracts.
Big Society Capital (BSC): Launched in April 2012 with up to £600 million in capital,
BSC is a financial institution focused on social investment. Its goal is to “improve access
to finance for social sector organizations and … raise investor awareness of investment
opportunities that provide a social as well as a financial return.”42 Using the 2008
“Dormant Bank and Building Society Accounts Act,” the UK government pledged to
seed BSC with “every penny of dormant bank and building society money.” According to
the legislation, BSC could not directly invest in “frontline organizations.” Rather, BSC
acts as a social investment wholesaler, investing in “social intermediary organizations in
order to develop a broader market for social investment.”43 Consequently, BSC is the
cornerstone investor, along with the Omidyar Network and others, in the Bridges Social
Impact Bond Fund, which invests up to £3 million in individual PFS deals. The Fund
40
"Home: The SIB Group," The Social Investment Business Group, http://www.sibgroup.org.uk.
"Investment and Contract Readiness Fund," The SIB Group,
http://www.sibgroup.org.uk/beinvestmentready/.
42
"About Us: Big Society Capital is the World's First Social Investment Wholesaler," Big Society Capital:
Transforming Social Investment, http://www.bigsocietycapital.com/about-us.
43
"Frequently asked questions about the Big Society Capital ," U.K.
Government, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/85855/Big_So
ciety_Capital_FAQs.pdf.
41
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already sponsors four UK PFS contracts. In this fashion, the central government laid the
regulatory and financial groundwork for indirect co-investments in PFS contracts.
Big Lottery Fund (BIG): The Big Lottery Fund is responsible for distributing 40% of all
monies raised “for good causes” by the UK National Lottery, which comes to around
£600 million annually.44 It also distributes non-Lottery funding on behalf of public
entities such as the Department for Education and the Office for Civil Society. The BIG
assisted in the creation of the Cabinet Office Social Outcomes Fund, while also
authorizing the Commissioning Better Outcomes fund, both of which are aimed at
national PFS development. Since June 2004, BIG has awarded over £6 billion to projects
focused on health, education, environment, and other charitable purposes.

Commissioning Better Outcomes Support Contract: BIG has appointed Social
Finance UK in partnership with the Local Government Association (LGA) to
offer a support package for entities developing PFS-based social investment as
part of Commissioning Better Outcomes. Social Finance and LGA will work to
engage and encourage the development of PFS proposals that could benefit from
the £40 Big Lottery Fund’s Commission Better Outcomes Fund or the Cabinet
Office’s £20 million Social Outcomes Fund. Social Finance and LGA will
provide a range of support, including the publication of technical guides,
development of online tools, holding webinars and production of podcasts. These
organizations will also offer workshops and diagnosis of further development
needs. This will support proposals that may then apply for and receive technical
development grants from Commissioning Better Outcomes, leading to a possible
contribution to outcomes payments from one or both of the outcomes funds.
A Comprehensive Vision for PFS
All of these entities and initiatives represent a concerted commitment on the part of the
UK government to support PFS, an example that the US federal fund may choose to
emulate. The UK government is seeding various facets of the PFS market through
specifically dedicated funds and entities, while also analyzing the possibility of bettering
market outcomes through tax and regulatory adjustments. The US federal fund may
amplify its impact by following the example of the UK’s central government PFS
strategy. The aforementioned initiatives do far more than provide credit enhancements
and outcome payments to investors—they represent a comprehensive vision for federal
assistance in developing the PFS market.
44
"About BIG," Big Lottery Fund: UK, http://www.nof.org.uk/about-big.
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