Pay for Success: Living Cities’ Initial Screening Criteria
This blog, originally published on LivingCities.org, outlines our initial criteria for investing in Pay for Success projects. A critical element of these criteria is the potential of a project to close racial gaps: Does the program recognize and target disparities? Is data being disaggregated by race and/or ethnicity?
In our 25th Anniversary compendium of essays, Xavier De Souza Briggs of the Ford Foundation wrote:
The economy does not simply operate according to the invisible hand or ‘natural’ laws of the market place. It is structured by the rules we choose socially and politically.
At Living Cities, our impact investing work is focused on driving capital markets to be a tool to get better outcomes for low-income people. This requires, as De Souza Briggs notes, changing the rules. One example of how we are contributing to this movement is through our Pay for Success initial screening criteria.
Pay for Success is an experimental contracting model that obligates governments to pay for social programs only when agreed-upon outcomes are achieved within a specific time frame, as opposed to providing the up-front payments of a traditional government service contract.
PFS financings raise funds from private investors — both philanthropic and market-rate impact investors — to pay for the provision of a service and bridge the timing gap between service provision and outcome payments. If the service delivers as promised, thereby creating better societal outcomes and financial savings (or avoided costs) for the government, investors receive success payments from the government.
Private investors assume the risk by financing the services up front, getting repaid by the government only if agreed-upon measurable social outcomes are achieved. In exchange for taking on the risk, the investors receive a financial return. This means that precious government resources are spent only in the event of proven success and government savings.
Living Cities is one of the earliest investors in PFS transactions in the United States. Each project we’ve been involved with–whether or not we ultimately invested — has informed our thinking on the potential PFS has to be a tool to get better outcomes for low-income people and people of color. Now, with six investments under our belt, the Living Cities team has been in a unique position to grow the field, contributing our lessons and resources for future investments.
A New Screen for a Growing Field
Our initial screening criteria designed to assess whether a project is a good use of the PFS model, and if it is a good fit with Living Cities’ programmatic priorities. We look for: impact; innovation; collaboration; a government champion; and programmatic significance.