Philanthropy & Funding
After the Pandemic: Addressing the Permanent Crisis With Pay for Success Programs
Governments have an opportunity to partner with impact investors and philanthropists to turn emergency spending into long-term impact.
By Tracy Palandjian & Paul Brest Mar. 31, 2020
(Photo by iStock/Bulat Silvia)
Federal, state, and local governments are spending trillions of dollars to combat the new coronavirus pandemic. But as government agencies and officials work urgently to respond to this crisis of unprecedented scope, they also have an extraordinary opportunity to ensure that programs born of an emergency can achieve measurable outcomes that strengthen our social infrastructure for decades to come.
This is true for philanthropy and impact investors, too. Many donors and foundations are reacting generously to provide aid to those most affected by this crisis. Some impact investors, for example, are providing zero percent bridge loans to nonprofits, and some corporate philanthropies are supporting small businesses. These funders have an opportunity to think beyond immediate challenges and give policymakers the support needed to achieve long-term impact.
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Following Machiavelli’s oft-repeated advice—never to waste the opportunity offered by a crisis—we urge leaders from across sectors to consider opportunities to transform short-term emergency efforts into sustainable systems change.
We are not suggesting that anyone stop the important and all-consuming work they are doing to respond to this crisis in its early stages. But when it is safe and reasonable to do so, pay for success (PFS) offers a promising framework for addressing the deeper and ongoing problems laid bare by COVID-19. In the meantime, the principles of PFS can be put to work immediately.
In PFS projects, instead of simply paying for services (which sometimes works, but often does not), government agrees to pay for measurable impact. But many nonprofits that provide shelter, medical care, job training, and other services can’t afford the time-lag between delivering services and demonstrating outcomes, or the risk of underachieving. That’s where philanthropists and impact investors come in. In a social impact bond (SIB), an important adjunct to PFS, philanthropists and impact investors provide service-delivery organizations with working capital. Government agrees to release success payments to them only to the extent that agreed-upon outcomes are achieved.
Paying for outcomes is a powerful public policy idea. Transferring this risk from governments to impact investors is an essential aspect of the PFS system. It is also part of a new accountability framework for public spending—one that enables governments to get real value for their taxpayer dollars and provides great service delivery organizations the support and flexibility needed to get good outcomes for the people they serve. PFS core principles include robust performance measurement of vital social outcomes, decision-making based on reliable data, and strong yet agile governance allowing for rapid programmatic adaptation.
The new coronavirus pandemic and the resulting government response have already revealed several areas in which PFS principles can turn emergency measures into sustainable social programs to achieve lasting outcomes. To do this, however, calls for unprecedented commitments and collaboration by all of the actors in the PFS ecosystem. Here are two examples.
Housing the Homeless
People experiencing homelessness are at high risk of contracting COVID-19 because it is difficult for them to self-quarantine and access basic sanitation and essential medical services. They are much more likely to get sick and to die than the general population. This sad reality, and the prospect of wider community spread, has spurred some government leaders to take extraordinary actions. For example, California Governor Gavin Newsom dedicated $150 million to purchase more than 1,300 Federal Emergency Management Agency trailers and lease thousands of rooms in hotels and motels across the state.
How can we turn this kind of monumental short-term energy and governments’ willingness to spend money into something lasting? Further investments could transform emergency fixes like Governor Newsom’s into permanent supportive housing, a widely-embraced, evidence-based approach. Among the challenges of supportive housing is finding and engaging the most vulnerable homeless individuals, and then providing the intensive, wraparound supports needed to help them remain in housing over the long term. The current crisis presents an opportunity to help our most vulnerable neighbors emerge from homelessness for good.
Alleviating homelessness is a familiar application of PFS and SIBs. In 2014, the Commonwealth of Massachusetts collaborated with nonprofit service providers, philanthropists, and investors to create 500 additional housing units and provide intensive support services to people experiencing homelessness across the state. Today, almost 1,000 people have achieved housing stability and improved health, while socially-motivated investors stand to recoup their principal and receive a modest return.
This work continues today. Social Finance, Third Sector Capital Partners, the Corporation for Supportive Housing, and others have collaborated with state and local governments to expand supportive housing programs and address homelessness in Alaska, California, Colorado, and Texas. These projects operate on PFS principles: they use real-time, cross-agency data to identify and enroll those most in need, and pay for performance based on key policy goals, such as long-term housing stability, better health, and fewer criminal justice interactions. Governments, service providers, continuums of care, case managers, landlords, philanthropists, and impact investors have come together to achieve sustainable outcomes.
Where these efforts are already in development, they should be accelerated. And where emergency resources are offering opportunities for new efforts, we can apply the same commitment to data and outcomes to ensure that public funding is directed to those most in need.
Expanding Online Training
In a time of widespread stay-at-home orders, and with unemployment skyrocketing, we have an unusual opportunity to tap digital technologies to help laid-off workers gain new skills and expand their earning potential. Postsecondary institutions and other education and training organizations are rushing to adopt online learning technologies. Might policymakers, philanthropists, and impact investors harness this momentum to help low-wage workers access effective credentialing programs and pathways to upward mobility?
Today, many Americans face an access gap: They can’t afford the cost of high-quality training programs and lack the credit to obtain additional loans. Those who can pay tuition still face barriers to completion, including the burdens of transportation, family caregiving, and other competing priorities. These individuals typically resort to low-wage jobs in hospitality and food service that have quickly disappeared in the pandemic.
In these times, we should lower barriers to online credentialing programs in sectors such as information technology, nursing, and allied health fields, while simultaneously filling critical gaps in the workforce. Parallel investments in wraparound supports, like one-on-one coaching and emergency loan funding, would further enrich this approach, making it easier for program participants to persist, graduate, and find good jobs.
Workforce development PFS initiatives are working to facilitate access, completion, and employment. Social Finance recently launched the career impact bond, which enables low-income individuals to access quality job training and credentialing options that can propel them into well-paying middle skills jobs in relatively recession-resistant industries such as information technology and health care.
The newly-signed federal Families First Coronavirus Response Act suggests a pathway forward by relaxing some unemployment claim rules and allowing laid-off workers to receive benefits without actively seeking new employment opportunities.
Strong partnerships among workforce development agencies, training providers, and impact investors can accelerate these ideas to prepare for effective workforce retraining at scale in economic recovery.
Helping Now and Building for the Future
Vulnerable people have been the first to suffer from the pandemic, and they will be the last to recover. But in this moment of crisis, we can lay the foundation for a more equitable future. Pay for success offers unique opportunities to increase public accountability, while unleashing the entrepreneurialism of the social sector. Governments, service providers, philanthropists, and impact investors can harness the principles of PFS to steer this unprecedented emergency spending toward catalyzing enduring improvements in the lives of society’s least well off.
Tracy Palandjian is the co-founder and CEO of Social Finance, and vice chair of the US Impact Investing Alliance.
Paul Brest is professor emeritus (active) at Stanford Law School, former president of the William and Flora Hewlett Foundation, and co-author of The Pay for Success Handbook.