News and analysis
March 18, 2015

Urban Institute Gets $8.4 Million to Help Measure Pay-for-Success Programs

The Urban Institute will attempt to make pay-for-success investments more attractive to social entrepreneurs and government program managers with the help of an $8.4 million grant from the Laura and John Arnold Foundation.

The grant, which will be paid over the next three years, will go to creating the Urban Institute’s Pay for Success Initiative. The Washington research and advocacy group plans to compile research and create web tools to help government agencies, nonprofits, foundations, and for-profit investors determine whether pay-for-success is a good way to approach a particular social issue.

The institute’s new web tools and templates will be designed to help structure deals, establish benchmarks for success, and identify methods to evaluate whether a program worked. The institute also plans to create a "help desk" to provide online and on-site training in using the new tools.

In the pay-for-success model, governments recruit investors to cover the cost of a project designed to alleviate a social ill, for instance by reducing the number of ex-offenders who return to prison. If the program delivers, the government pays the private investors back, and in some cases, provides a return on the original investment.

By paying only for positive results, supporters of the projects tout them as a way to spend government money responsibly and gain support from both sides of the political spectrum for projects that seek to solve social problems.

Urban Institute officials hope their work will simplify what is now a complex process. When investors and governments begin talks about a pay-for-success program, "they start from square one and have no idea what’s going on," said John Roman, a senior fellow at the institute.

"Everybody’s starting from scratch, and that makes the transaction cost very high," he said. "The goal is to commoditize the process."

The institute, he added, will start providing some of the research data and information on how to structure deals as early as this summer, at no cost.

"We hope to make it easier for governments to identify programs that deliver better results to those in need," said Josh McGee, vice president for public accountability at the Arnold Foundation, in a statement.

The Pay-for-Success Pipeline

The Urban Institute grant is not the Arnold Foundation’s first foray into pay-for-success. In addition to direct investment of more than $7 million in two pay-for-success projects, the foundation has made more than $16 million in grants to groups that are trying to develop a market for the ventures. At least 30 pay-for-success projects are in the works nationwide, according to the foundation’s count. Another tally, by Living Cities, a foundation and bank-financed group that works to help the poor, suggests more activity is on the way. That organization counts at least 73 pay-for-success projects in the pipeline. The discrepancy between the two counts exists because pay-for-success is relatively new and lacks a single clearinghouse for information — something the Urban Institute seeks to create.

Although there’s a lot of interest in the pay-for-success investments, fewer than 10 projects are actually under way, says Ben Hecht, president of Living Cities. A big reason the approach hasn’t caught on faster, he says, is that research on the success of social programs is "spread out all over the place."

Mr. Hecht said housing research under Urban Institute’s roof will make it easier for investors and governments to evaluate proposals before making an investment.

Anne Mosle, a vice president at the Aspen Institute said there’s a huge appetite for pay-for-success deals but that many investors and governments are skittish because the idea is so new.

"There’s a real gap between the demand and interest and the real nuts-and-bolts capacity to make it happen," she says.

Emerging Area of Philanthropy

Ms. Mosle sees the grant as a sign of how new donors are trying to make their mark. Its founders, John Arnold, a billionaire hedge-fund manager, and his wife, Laura, are in their early 40s.

"It’s emblematic of how we are seeing new philanthropic leaders step up to the plate," she said.

The federal government has also shown a greater interest in pay-for-success.

President Obama this month tapped a champion of pay-for-success, Dave Wilkinson, to lead the White House Office of Social Innovation and Civic Participation. He promised to put a premium on measurement and evaluation.

In October, the federal Corporation for National and Community Service awarded $12 million in pay-for-success grants to eight recipients. That round of funding could help spur 100 additional contracts, according to one study.

Several pay-for-success bills are pending in Congress and on Tuesday the House Ways and Means Committee held a hearing to delve into how to test the results of social programs.

Send an e-mail to Alex Daniels.