Considering “Pay for Success” Procurement

The first U.S. social impact bond began about two years ago as a program to reduce recidivism of 16- to 18-year-olds in New York City’s Riker’s Island jail.

by / January 6, 2014

Over the years, governments have tried any number of procurement models -- from lowest cost, to best value, to strategic sourcing and more – in an attempt to find the least expensive, most effective way to do business. Because public money is being spent, government has integrated a long list of checks and balances into the process, many of which slow procurement so much that the technology may be outdated by the time the contract is signed.

In addition to the slow pace of procurement, the complex rules and liability guidelines may scare off innovative companies, according to former Oregon CIO and Procurement Director Dugan Petty.

More recently, some jurisdictions have been experimenting with something called “pay for success” or “social impact bonds.” In that model, the vendor must meet results-based goals in order to receive payment. No results = no pay.

The first social impact bond in the United States began about two years ago as a program to reduce recidivism of 16- to 18-year-olds in New York City’s Riker’s Island Jail. Under terms of the contract, interventions carried out by the contractor were intended to reduce recidivism, and if they were successful, the contractor would receive payment from money saved by recidivism reduction. No reduction, no pay.

One catch with this type of agreement? It takes even longer than traditional contracting. In fact, it may take years to prove success, and few providers can wait that long to get paid. Improving health-care outcomes, for example, might take a decade or more to substantiate, and so the provider must procure funding, usually from a bank or third party, in the form of a social impact bond.

According to Government Executive, pay for success is not foreign to the public-sector, since highways, power plants, low-income housing and infrastructure projects are often structured that way.

The Nonprofit Finance Fund, financed by a grant from the Rockefeller Foundation, has more information on pay for success contracting in government. Though primary examples are in social services, using such a model for large IT projects could prove highly beneficial for the public sector.