Pay for Success (PFS) financing mechanisms, including social impact bonds (SIBs), provide opportunities for multiple stakeholders with different expertise—government, private investors, foundations, and service providers—to work towards common goals. For government agencies at all levels, PFS mechanisms create opportunities for the public sector to reward “what works” or expand access to evidence- based preventive social interventions without requiring taxpayers to shoulder all of the financial risk upfront. But in order for these new mechanisms to work, government must retain a central and important position. Ultimately, it is the government’s responsibility to ensure that these mechanisms are fair and efficient. PFS financing, done well, has the potential to help society better identify and address some of the most endemic, intractable problems in our society in partnership with the private sector and civil society; yet each PFS deal, no matter how exciting, is just one step in a series.
The critical role for government is to first define the technical mechanisms, like SIBs, innovation prizes, or innovation funds that comprise PFS. Most importantly, the government needs to ensure that the mechanisms are used in a responsible, sustainable way, such that each deal is more than a one-off attempt, and to demonstrate a real impact in communities. This requires building a community of practice that convenes stakeholders, galvanizes interest and investment, and sets standards and norms for PFS transactions.This article was originally published in Community Development Investment Review.