Nowadays, despite the programs of public funding that show little efficacy in the areas they target and that are continued to get funded, new encouraging developments are emerging and are acting as new business models in communities around the world to deliver more real and efficient services to citizens at a reduced cost by government. An approach, known as “Pay for Success”, is gaining more and more accomplishment because its strategy is based on defining real outcomes and using data and evidence to measure progress.
This model attracts taxpayers, governments, philanthropy and the private sector because it represents a unique partnership model that join together private sector resources to fund evidence-based involvements in areas stretching from education to healthcare to unemployment. Funding occurs at the front end of program delivery and needs government to pay for services only when results are delivered. If results aren’t attained, the government may not pay anything; if results are attained above a specific threshold, the investors of the private sector will not only have their money back, but they can see a return on top of the amount originally invested.
In too many publicly funded programs, there is little data or not at all to decide whether investments are generating the expected results. By adopting a model for funding that can introduce new private sector capital in the beginning, new rigorous steps are put in place so that the government only pays when results are attained. These new models can show what works and what doesn’t in business and optimize the delivery of services and the taxes.
Another sexy characteristic of the “pay for success” models is the “blended” approach. While the private capital is set at the front end of a program by the means of a bond as an investment tool, philanthropy will support any “first losses” restraining thus any possible investor losses if the program doesn’t give the wanted results. This will radically decrease the risk for private sector investors, while preserving the likely benefits for investors should the program give results.
But why would philanthropy support any potential losses? Usually in philanthropy, when you write a check for a donation, the given amount will be spent and entirely used. With pay for success, these underwriting “guarantees” are only called if the program doesn’t succeed to reach its targets. So philanthropists may never need to really expend funds if the program is successful. Moreover, this model of potential funding infuses new private capital into social programs, increasing and scaling what philanthropy and governments typically fund.
Despite its positive side, the “Pay for Success” model is said to be simply too good to be true, and that it’s impossible to put it into practice. Other persons declare that there is not enough evidence to show that this approach works. But to others, this model could well embody a new way forward as the needs of our communities develop and government resources continue to come under pressure.