A report by Omar Carrillo for the Joint Center for Housing Studies at Harvard University and NeighborWorks America, Pay for Success: Opportunities and Challenges in Housing and Economic Development, assesses the costs and benefits of the Pay-for-Success (PFS) model and examines three PFS housing initiatives for the homeless in Denver, CO; Santa Clara County, CA; and Massachusetts.
In the PFS model, a public agency contracts with a private or non-profit organization to provide a public service. The service organization is paid by the agency only if it achieves pre-determined, measurable outcomes. Outside investors, who tend to be foundations, philanthropic intermediaries, commercial banks, and community development financial institutions, cover the service provider’s upfront costs and receive back their money, and a potential profit, only if the provider achieves the specified outcome(s). The model gives service providers greater flexibility in determining their approach to providing services. Proponents of PFS suggest this combination of accountability and flexibility can lead to greater innovation and cost-efficiencies in the provision of public services. Moreover, the public sector does not have to pay for public services that fail to produce the required outcomes.
A benefit of the PFS model is that its evaluation needs provide an incentive to develop reliable sources of data and to use such data to measure outcomes. PFS projects, however, have significant transaction costs because of the complex financial arrangements and intensive evaluation necessary to determine whether the measurable outcomes are met. The report finds that it is not clear whether PFS improves the efficiency of social spending given the complex structure of the PFS model, the time needed for program development, and financing costs. Also not clear is whether the private sector is willing to fund untested innovations and new ideas or take on more high-risk outcomes, like reducing the number of jail-days for homeless individuals frequently in prison, as opposed to low-risk outcomes. In short, the report finds that the benefits of PFS may not outweigh its costs. PFS, however, has pushed public agencies to give more attention to measurable outcomes and to consider cross-sector collaboration.
Pay for Success: Opportunities and Challenges in Housing and Economic Development is available at: http://bit.ly/2vmJHll