Today, the Boston Globe broke the news that Third Sector Capital Partners (TSCP), where I am interning this summer, has been selected to serve as a lead partner with the State of Massachusetts in developing the U.S.'s first two Social Innovation Financing/Pay for Success initiatives. I signed up to work at TSCP because I believed deeply in the organization's vision for advancing the role of evidence and evaluation in the social sector. This morning's announcement by the State of Massachusetts is an exciting and significant endorsement of the organization's mission. In today's blog, I will do my best to explain the mechanics and benefits of Pay for Success/Social Innovation Financing arrangements. In my next post, I'll discuss my responsibilities for the summer in more detail.
Pay for Success projects are financial arrangements that begin when a government identifies a social intervention whose successful outcomes can save the state money. For example, an eligible program might prevent youth from reincarcerating or keep the chronically homeless from living in costly shelters. The government will choose to contract with a service provider with prior success in an area of need, and enter into an agreement to pay the service provider when it achieves specific, agreed-upon outcomes. The nonprofit is then left to fund the upfront cost of providing services by borrowing money from philanthropic and private sources. It can either undertake this task directly, or work with a third-party intermediary organization that can reach out to investors and manage the financial structuring. The participating funders will receive a portion of the state-provided success payments if the service provider achieves the agreed-upon results. If the nonprofit is unsuccessful, the initial investors will not recoup their money.
These mechanisms have a number of advantages. First, they transfer the risk of unsuccessful interventions from the state to the financial backers of nonprofits. As a result, they protect taxpayers from bearing the cost of programs that don't work. Secondly, they allow evidence-based nonprofits to reach a larger scale and serve more at-risk beneficiaries. Finally, they allow funders to potentially reinvest their initial capital, which will encourage an infusion of new capital sources to social service providers.
At Third Sector, our expertise lies in developing innovative financing structures that can provide high-impact service providers with the capital they need to improve social outcomes. In Massachusetts, we were selected as sole bidders to negotiate with the state as a lead intermediary organization for a youth recidivism project, and as financial advisor to a Pay for Success initiative targeted at homelessness. Despite the excitement surrounding the state's announcement, our team knows that the work in Massachusetts is just beginning. In the coming months, we will work to negotiate the detailed terms of these arrangements with the state, service providers, and funders. This will be no small task, but I am confident that the various partners engaged in the Massachusetts project will work tirelessly to demonstrate the feasibiliy of this exciting new financing tool.