In Social Finance’s work with foundations, we have found that they are focused on deepening impact, replicating success, and accomplishing more with their dollars. These priorities have placed philanthropy at the forefront of the impact investing movement, which is challenging foundations, individuals, and others with capital to reconsider how they might invest – and spend – to produce both social and financial returns. A new impact investment tool, called “Pay for Success,” allows philanthropic or private investors to fund projects aimed at reducing or solving social ills. If predefined outcomes are achieved, a government entity repays investors their principal, plus a modest rate of return. This allows governments to test promising approaches while shifting the risk to private parties with more latitude to take on that risk.
PFS projects are a win-win for the government, as governments pay only if projects prove successful, and provide an opportunity to reflect on lessons learned if project outcomes are not achieved. They also hold promise for investors, offering the chance to earn financial returns while also addressing social issues. Perhaps most importantly, they bring services to those vulnerable populations that governments aim to serve. The first Pay for Success project, launched in 2010 in the United Kingdom, sought to reduce recidivism of adult men with short-term prison stays. In the years since, the United States has seen the adoption of ten PFS projects spanning a wide array of issues from recidivism, to family stability, to health.
Earlier this year, The Duke Endowment, other philanthropic partners, and Social Finance proudly announced the nation’s first PFS project focused on improving health outcomes for mothers and children living in poverty. In partnership with the state of South Carolina, the project scales nonprofit service provider Nurse-Family Partnership to serve an additional 3,200 first-time, low-income mothers across the state. Philanthropic partners will provide $17 million in upfront working capital and Medicaid will contribute close to $13 million of the project’s costs.
Expanding NFP is momentous for South Carolinians and for the PFS field. By working with mothers early on in their pregnancies, NFP has been rigorously proven to reduce the number of preterm births. If the objectives of the project are achieved, the state is contractually obligated to invest up to $7.5 million of escrowed funding into NFP to provide its evidence-based program to more mothers and babies in South Carolina. Furthermore, if the project is successful, the state is much more likely to support NFP indefinitely, increasing public health and saving public dollars.
This project leverages private capital to advance the public good, and will afford new opportunities to mothers and babies in South Carolina. It’s a testament to what we can achieve when diverse leaders think creatively and work together.
Endeavors such as Pay for Success are not without risk, but they allow foundations to approach problems from new angles and to think about grantmaking and investing as complementary tools. We’re excited to have partnered with The Duke Endowment on this project and look forward to tracking its progress and results.