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Pay for Success/Social Impact Bond Discussion

Social Impact BondsOverview

September 24, 2014

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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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Combining Two New Tools

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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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Global Applications

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Potential Sectors for SIBs Application

• Early Education• Recidivism• Education outcomes• Environmental• Maternal care• Employment & Training• …

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Potential Evolution

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Appendix

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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

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PFS Organizational Chart

• 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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Funding Construct and Sources & Uses

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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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Six –Year Cash Flows

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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