Philanthropy has always helped support and grow programs that address a range of social challenges. But to move beyond pilots and demonstrations to begin moving the needle on broad social challenges, government is a critical partner. Bringing together the early-stage work of foundation-supported social programs and the scaling capacity of government has proven challenging. Pay for Success financing helps bridge this gap, offering foundations a path to effective partnership with government, sustainability for high-performing grantees, and a chance to amplify social impact by leveraging resources in new ways.
Why Foundations are Engaging with Pay for Success
Pay for Success deploys new streams of funding for service providers and gives foundations the opportunity to recycle funds for more sustainable support.
Pay for Success advances an outcomes-mindset in government and in the social sector, promoting the use data and performance management to achieve social progress.
Pay for Success projects offer a pathway to shift government resources toward prevention and away from costly remediation, leading to better outcomes and lower costs.
Pay for Success brings together diverse stakeholders working with shared purpose, and can enhance the quality of cross-sector collaboration.
Pay for Success offers an opportunity for foundations to deploy program-related investments and grants through direct investments in human capital.
Pay for Success ensures the public sector is getting real value for its money and increases taxpayer accountability, while also allowing government to innovate and learn what works.
How Philanthropy Can Get Involved
Program-Related Investments, Mission-Related Investments, Recyclable Grants & More
Foundations and philanthropies can catalyze participation from other impact investors with their participation in a Pay for Success project. Philanthropy can lend expertise to the creation of strong projects because they often know the challenges and opportunities of a particular local context. In every project, there are opportunities to provide an early investment, which signals confidence in the project design to other investors. Foundations often do this by committing to participate in a first loss or junior position in the capital structure. Foundations can also provide credit enhancement to the project by providing a funded or balance sheet guarantee for individual impact investors or others. Social Finance can facilitate philanthropic investments of many types—program-related investments (PRIs), mission-related investments (MRIs), recoverable or recyclable grants, funded or unfunded guarantees, and other investments.
Philanthropic organizations or individuals can support feasibility studies to lay the foundation for strong Pay for Success projects. Feasibility analysis, which could include an assessment of the social problem, examination of evidence-based interventions, identification of growth-ready service providers, and modeling of a potential transaction’s economics, can prepare investors and government payors to pursue a Pay for Success project. A feasibility study also identifies any additional capacity needed by the service provider to pursue Pay for Success, often including staff to focus on data, evidence, outreach, and fidelity.
Field Building and Research
Additionally, philanthropic organizations and individuals can support market education, thought leadership, research, advocacy, and analysis to support the development of a strong and sustainable Pay for Success market.
Grants—the traditional tool of foundations—can support the Pay for Success market in many dimensions. Grants can support feasibility studies, build capacity among different Pay for Success stakeholders, catalyze project development by supporting project pilots or evaluation costs, build the field through market education, mitigate risk, and pay for outcomes.