State & Local Government Policy, Business and Technology

Paying for success

American City and County: Several local and state governments are pioneering a new investment model to finance projects in their areas that uses success as a payment benchmark.

Social impact bonds (SIBs) — also known as pay-for-success models — involve public-private partnerships (P3s) in which private entities invest in public projects that are overseen by governments, organized by nonprofit intermediaries, executed by service providers and are ultimately evaluated by independent entities. Such projects generally tackle social issues like homelessness or family welfare, and they aim to reduce government dollars spent on existing measures.

Unlike a municipal bond, an SIB has no fixed rate of return for investors. An SIB’s ROI yield depends entirely on the project’s success, based on outcomes defined in the SIB contract. At pre-defined points in the project’s execution, a study of the program’s effectiveness will be carried out, and the government will accordingly pay funders pre-defined amounts based on how certain benchmarks are met.

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