pay for success/social impact bond discussion social impact bonds overview september 24, 2014 1
TRANSCRIPT
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Agenda
• Innovative Public Private Partnerships• Overview:– Social Impact Bonds & Pay for Success Financings
• How SIBs & Pay for Success Work• Where its Happening?• Discussion/Q&A
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Systematic ChallengesFunding What Does Not Work1
US $10 BillionAnnual Expenditures
Public Sector
Service Providers
Funders
Silos – Limiting Effective Coordination
Drive Innovations Services That Build Sustainable Outcomes
1 2012 Study by the Center for Evidence Based Policy
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The PFS/SIB Potential
• Drive social sector performance towards a focus on outcomes– Move from an “input” perspective to evidence based “outcomes”
• Repositioning government spending– Reallocating government funding to more effective programs
• Attract new sources of impact investment capital to the social sector.– Provide an incentive to invest in program infrastructure and evaluation methodologies.
• Integrate the impact evaluation into program design – Create feedback loop that allows providers, funders and government agencies to jointly and
continuously monitor and manage social programs.
• Deepen social sector and government agency collaboration– Allow providers to manage programs with the flexibly required to achieve agreed upon social
outcomes.
• Bring innovative programs to scale.
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The Mechanics - Pay For Success Construct
1. Government contracts for social service or public need (e.g. energy) to address a societal need.
2. Philanthropic funders provide the financial resources to pay for the program.
3. Government, service providers and philanthropic funders agree upon targeted social outcomes.
4. Independent evaluators monitor program performance.
The government reimburse the initial funders for their “invested capital”
The government and investors have the opportunity to reinvest in the program to maintain and expand its impact.
If the program fails to meet the targeted outcomes, the government agencies are not obligated to repay the investors.
Should the program achieve the agreed metrics
In its basic form, Pay for Success is constructed along the following:
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Pay for Success Construct
1. Enters Pay For Performance Contract
2. Provide $’s For Program
3. Lead Contractor funds & manages providers
4. Preventative services are provided5. Social Outcomes
6. Analysis of Outcome Metrics
7. Program achieves targeted outcomes
8. Investor’s receive return on investment
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Key Characteristics of PFS
Government Leadership
Significant Unmet Needs & Targetable Populations
Credible Data
Interventions that Work
Scalable Service
Providers
Safeguards
Cashable Fiscal Savings
for Government
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Challenges for PFS Implementation
Unproven or Mandatory Programs
Interventions
Not Sca
lable
No Fiscal SavingsNo
Government
Champion
Lack of
Proven
Intermediary
Outcomes Hard To
Track
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Not “Re-inventing”
The Pay For Success is a public/private impact collaborative that builds upon known business model practices.
PFS combines known components:① Performance based contracting, ② Evidence-based preventative interventions, ③ Collaborative partnerships,④ Data management applications, and ⑤ Traditional capital markets use of risk capital.
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Potential Sectors for SIBs Application
• Early Education• Recidivism• Education outcomes• Environmental• Maternal care• Employment & Training• …
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Benefits and Challenges
Benefits
Moving towards outcomes-based
programs
Access to scalable and sustainable revenue streams
Room for Innovation
Challenges
Managing to Outcomes
Government procurement
Financing evidence-based
practices
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Existing Challenge• Without scaled preventative programs society funds expensive safety-net
programs– Governments have fallen into the trap of funding programs without documented evidence of
impact
• Measuring impact – We have not leveraged technology, data systems and open data to cost efficiently measure
and monitor
• Lack of capital funding mechanisms to finance a promising organization’s capacity to scale.
• Disincentive to innovate – The global economy has a history of thriving on innovation and taking new ideas into deeper
and broader markets. – Yet in the social sector where we lack transparent goals, appropriate measurement tools and
mutually incentivized participants, we offer no motivation to develop and implement improved services.
• Common sense of mission – Government, services providers and philanthropy operate in separate silos, often lacking a
common sense of purpose - and unjustifiably no coordinated approach to achieving impact.
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The PFS Implementation Process
Problem Identification
Target areas w/high social & fiscal costs
Government Solicitation ProcessSole Source vs. RFP
Determination of Intervention
Focus on Impact
Organizational Construct
Lead Contractor and Provider Construct
Developing Funding Arrangement
Establish Return Parameters
Document Agreements
Performance, Financing and Operational
contracts
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Pay for Success Contracting
1) Start-up & Working Capital
Raised
2) Services Delivered
3) Government Pays only if Outcomes are
met
4) Financing Capital Replenished
• Population Served: 889 young people over five years• Target Outcome Metric: Incarcerations avoided versus the expected rate• Success Payments: The State will pay $45,000 per youth that is not incarcerated in
the two years following entering the program• Transitional Employment: Two-years post intensive intervention model
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Key Operating Assumptions
Total ParticipantsHRYIM ServicesStep-Down ServicesTotal Participants
Cost of Services Per Youth ParticipantHRYIM ServicesStep-Down Services
Total Annual Cost of ServicesCumulative Cost of Services
Annual Cohort (2yr Prior)Anticipated Incarceration RateExpected IncarcerationsRoca Participant Rate of IncarcerationActual IncarcerationsAvoided IncarcerationsPFS Fee per Successful Avoided IncarcerationAnnual PFS Success Payment
72 82
343
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
152 330 340 178 0
$11,200$3,000
$9,500$3,000 $4,000
$9,500 $9,500$3,000 $3,000
$11,200 $9,500$3,500
0 0 127 403 415 310152 330 467 746 594 310
$1,702,400 $3,137,280 $3,736,008 $4,463,267 $3,244,128 $1,084,384$1,702,400 $4,839,680 $8,575,688 $13,038,955 $16,283,084 $17,367,468
35% 35% 35% 35%
50 62 52 59$45,000 $45,000 $45,000 $45,000
120
70
149 124 140
87
207 23460% 60% 60% 60%
Year 3 Year 4 Year 5 Year 6
$2,250,000 $2,790,000 $2,328,750 $2,632,500
200 248
Avoided Incarcerations & Related PFS Success PaymentsYear 1 Year 2
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Social Innovation Funding ConstructSenior Tranche: - $7 million
- PRI type construct- Repaid from proceeds of Success Payments on Avoided Incarcerations.
Junior Tranche: - $4 million- Recoverable Grant construct- Available to provide additional capital to support program- Only repaid if government pays Sr. Tranche and successful employment outcomes
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• Repayments to PRI investors will be determined as a percentage of the state’s annual success payments to Roca.
• Contingent on the project’s success, payments to PRI investors will begin in year three of the program and continue through year six
• Sr. SIB Tranche a full repayment of principal and an IRR of 3.37%• Jr. SIB Tranche will repay 50% of principal
Repayment Profile & ROI
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Two New Tools
“Social impact bonds” (SIBs) are one type of SIF financing. With SIBs, investors bear the majority of up-front risk and government reallocates expenditures towards success payments only when results are achieved.
Pay For SuccessPerformance-based contracting within the social sector where government pays only if results are achieved
Social Innovation FinanceFinancing that bridges timing gap between government payments and upfront capital needed to run PFS programs
PFS
SIF