Pay-for-Performance Allows Governments to Embrace Creativity and Experimentation

This piece was written by Dr Susan de Witt, Senior Project Manager of Innovative Finance at the UCT GSB’s Bertha Centre for Social Innovation & Entrepreneurship. This article was published by Apolitical and can be found here

In South Africa, reducing the incidence of new HIV infections in young women is a complex behavioural issue that requires multiple interventions and stakeholders. As Fareed Abdullah, the former CEO of the South African National AIDS Council points out, it is about sex—which is about relationships, which is about power dynamics.

How do you address the health of a young woman, while ensuring that she completes her schooling, finds economic opportunity, and gains agency in her relationships? If you are in government and contracting an organisation to address this issue, how do you wrap all of that into a service?

The old ways don’t work

Our experience at the Bertha Centre for Social Innovation and Entrepreneurship at the UCT Graduate School of Business is that traditional mechanisms are often inadequate in cases such as this. They concentrate too much on committing to certain inputs, and not enough on delivering outcomes. In many cases, they also lead to piece-meal efforts that fail to deliver a coordinated response.

A possible solution to this problem is emerging in the form of social impact bonds, an innovative financing model sometimes called pay-for-performance or outcomes-based contracts.

These are public sector contracts that are structured to leverage private investors to pay for social services so that providers (i.e., government departments) do not have to front the cost of delivery. Investors are rewarded only if providers meet agreed-upon outcomes: a fall in new HIV infections, for instance.

"Social impact bonds create an environment for experimentation."

The exciting thing about social impact bonds is that they represent an entirely new approach to social interventions. Vitally, they reduce the restrictions placed on the organisations delivering programs to vulnerable people where they have to follow specific input and activity checklists.

Pay-for-performance tools, in contrast, allow for far more flexibility in execution. Instead of being limited by having to meet pre-determined deliverables, organisations are able to adapt and improve their programs during the delivery period and tailor them to achieve the desired results.

These models have already been successful in many developed countries, but their potential in emerging countries is gaining recognition. They are not only able to reduce the financial risk to the state, but are also a powerful tool in preventative interventions.

How social impacts are breathing new life into social interventions

One of the first pay-for-performance contracts in South Africa, which was also the first Early Childhood Development (ECD) bond to be issued in the Global South, is focused on meeting nutritional and educational needs at the ECD stage. It has been demonstrated that if you get this right, you increase an individual’s earning capacity by 10 per cent over the age of 20 throughout their life.

The Bertha Centre is now working with government to set up an outcomes-based contract on literacy, which is one of the biggest constraints in the country’s schooling system. Only 28 per cent of children in South African schools at the end of grade four can read for meaning.

Our vision is to create a national fund to invest in multiple programs, with government and civil society working in partnership, on a scale that has the potential to support foundation phase teachers and establish the right environments in which proper learning can take place.

"The result is a much richer environment for collaboration and problem solving"

We are also supporting the design of a pay-for-performance contract that will similarly convene multiple stakeholders to address the high levels of HIV infections in young women. We anticipate this will be scalable and able to attract significant capital.

While the efficacy of these innovative mechanisms still needs to be rigorously tested and the issues of data-poor environments, government capacity and high transaction costs have not been fully resolved, hopes are high that social impact bonds will make a positive impact on some of South Africa’s intractable social challenges.

One of their clear advantages is that, as the initial funding is not coming out of the government purse, they create an environment for experimentation. Governments traditionally prefer to commission goods and services with which they are familiar and have already tested. However, if you are contracting on the basis of results, you are relatively agnostic to how that service is delivered.

This allows governments and the organisations they are contracting to be more creative with what they are doing. The result is a much richer environment for collaboration and problem solving that delivers a genuine opportunity to solve even the most complex of social issues.