More than 250 government and business leaders packed Newcomb Hall at the University of Virginia recently to learn about a creative financing tool aimed at solving social problems.
Under the innovative funding mechanism — known as pay for success bonds, or social impact bonds — private investors put up money and manage a public project. They are usually targeted at improving outcomes for at-risk populations, with the end goal of reducing government spending on those populations in the long term.
There are no upfront costs to the taxpayers, and because the desired outcomes are performance-based, the return that investors receive is dependent upon how well the program works.
“Social entrepreneurship at the University of Virginia is really interested at looking at how we can collaborate across sectors,” Dr. Christine Mahoney, associate professor at the Batten School of Leadership and Public Policy at UVa, said at last Friday’s conference.
“We know that the biggest challenges facing us locally, nationally and globally require coordination across the private sector, the government sector and the nonprofit sector,” Mahoney said. “None of these sectors is going to be able to solve these intractable challenges alone, and that’s why we were so excited to host this social impact bond, pay for success conference.”
Michael Cwidak-Kusbach, a senior associate with Third Sector Capital Partners — a nonprofit adviser in the social impact bond arena — said the focus of pay for success projects is fundamentally different from traditional investment.
“When we talk about pay for success, we try to emphasize that we’re helping people,” Cwidak-Kusbach said. “That, at the core, these are people and we’re helping them.”
Gerald Croan, a senior fellow with Third Sector Capital Partners, said that government is a key player in pay for success, and that governments often see a transfer of financial risk and enhanced accountability, while the pay for success practice encourages private sector engagement and collaboration with government.
“We have a long history of bonds in this country, but normally they are for capital projects,” Croan said. “This is a way to take that into a service sector.”
Charlottesville City Councilor Kristin Szakos said projects that receive funding are often crises, and asked what keeps the achieved outcomes sustainable after success is reached and the pay for success project ends.
Cwidak-Kusbach said that once a project ends, the government then has evidence to show that the project worked. At that point, he would encourage governments that choose to continue running a program to exercise consistent program evaluations.
The financing model, however, doesn’t come without challenges, Croan said. Hang-ups can include government agreeing to relinquish control of a program, approving the outcomes to be measured, a lack of access to high-quality public data and the concept’s novelty.
“You’ve really got to bring all of the players into the discussion early in the process,” Croan said. “This takes a fair amount of time.”
Despite the obstacles, Croan said the concept’s goal is a common one.
“Everyone has the same incentives, that’s the nice part,” Croan said. “Everyone wants to hit the targets.”
Mahoney suggests that interested parties visit www.sibreview.com, a website maintained by Joshua Ogburn, a UVa graduate student studying pay for success projects. Ogburn’s site aggregates social impact bond resources and offers a newsletter.