“Social impact bonds—also known as ‘pay-for-success’ contracts, since they are not true bonds, but rather performance-based contracts—aim to help governments experiment with new ways of providing social services. The basic concept is this: Private investors provide the original funding, and the government only pays if the program achieves targeted outcomes. This lowers the cost of testing new policy ideas. In exchange for this ability to test new policy ideas that may or may not work, the government pays the private investors a premium if the experimental program reaches or exceeds the performance targets. In short, private investors finance experimentation and innovation.
The government naturally funds R&D on its own. But while government funding for science R&D is $176.8 billion in the FY 2018 approved budget, politicians are highly reluctant to finance R&D to improve public-sector operations. As social impact bond investor Bridges Fund Management explains in a 2016 report, traditional government fee-for-service contracts favor proven interventions, and providers have neither the flexibility to experiment nor the incentive to exceed expected results. … To date, social impact bonds have generated inconclusive results. We should expect more mishaps and crashes—like Solyndra—that hone the design of financial tools that optimize public-private partnerships on social problems. Still, the potential of public sector R&D to improve outcomes is great. This article examines how this potential could be realized.”