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What are the risks, challenges, and limitations of pay for success?

Last Updated: Jan 14, 2016 06:13PM UTC
Although it is too early in the adoption of PFS to comprehensively identify recurring issues, governments and other stakeholders should consider the following potential risks, challenges, and limitations before pursuing a PFS project:
  • First-generation PFS transactions are complex arrangements requiring significant legal, empirical, institutional, and financial expertise. Part of this complexity stems from the fact that PFS requires an institutional behavioral shift within government to align activities with outcomes.
  • Procurement rules at all levels of government limit collaborative negotiations of a PFS project.
  • Private investors assume substantial risk in these transactions and may prefer to support low-risk, low-need populations rather than the high-risk populations that governments seek to target.
  • Private investors may prefer programs that yield the highest rates of return rather than those that address the most pressing social concerns. That preference in turn may shape what outcomes service providers focus on as they seek to attract capital.
  • The behavior of private investors, particularly banks subject to the requirements of the Community Reinvestment Act, may change. Rather than bringing new money to support social goods, PFS could end up maintaining investment levels if Community Reinvestment Act funds are reallocated from current activities .
  • PFS transfers the delivery of services from the public sector to private or nonprofit service providers. This responsibility shift could raise accountability, transparency, quality, and sustainability concerns. 

 

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