Pay for Success (PFS) is a new and innovative financing mechanism used to finance social benefit projects with high quality impact metrics. PFS projects are popping up in all sectors, from the homeless to healthcare and education. The new models demonstrate that PFS projects can be used to stimulate investment in commodities as well as workforce development. What impact will this have on the private sector? Will your business pay for success?
Peruvian raw materials:
The Common Fund for Raw Materials released a Development Impact Bond (DIB) to modernize cocoa and coffee production in the Amazon region of Peru, Ashaninka. This first permanent DIB of the raw materials sector breaks into a new frontier of possibilities of Payment for Success (PFS).
DIBs follow the fundamental principles of PFS projects, but have a final payment from third parties, rather than a government. In this case, the Common Fund for Commodities agreed to reimburse the investor, the Schmidt Family Foundation, once predetermined targets are successfully achieved.
Rainforest Foundation UK is the service provider for the project and the organization has already started to experiment with coffee rust resistant varieties. Last year, leaf rust affected almost 70% of the coffee growing areas in Ashaninka.
Due to global recognition as a premium commodity, Peruvian cocoa has seen a substantial increase in demand among foreign consumers. By driving supply to meet demand, the most efficient cocoa production methods are being implemented on time.
This Peruvian coffee and cocoa project raises the question of whether DIBs can be used to modernize other types of commodity production. Could a DIB be used to supplement exports of quinoa, corn and salt from the Peruvian Andes?
Sustainable technology and water:
During the Conference on Social Entrepreneurship at UVA Pay for Success, a participant raised the question of whether PFS projects could be used to fund sustainable technologies and water conservation. There’s a possibility. Under the Peruvian model, a California commodities fund could pay an investor when a nonprofit produces widespread adoption of sustainable planting methods. Would you invest in conserving California’s water?
What about climate change? A clean energy fund could pay an investor, depending on service providers spreading adoption of sustainable technology. PFS projects are all about aligning interests, so as long as you have an issue, partners, and payable results, there are PFS possibilities.
Entrepreneurship and Art:
To successfully complete a PFS project, you need a fund, trustee, and non-profit service provider. Venture capital funds could act as final payers, investing in nonprofit entrepreneurship accelerators. If the accelerator achieves some degree of success, it will pay off private investors, potentially well-connected angels. Success can be measured in the number of companies that meet a prerequisite of growth rate, target revenue, or social impact metric.
Dual incorporation companies with a nonprofit branch can experiment internally with the PFS model. Village Capital, which is an independent, non-profit fund, could essentially structure an internal DIB. If private investors wanted to invest in the non-profit organization, they could enter into a PFS agreement with VilCap Investments.
From the point of view of art accelerators, they could scale their operations with a PFS project, similar to entrepreneurship accelerators. If art investors wanted the McGuffey Art Center to expand its art cooperative model, investors could provide cash up front and a fund, including local government, could step in as final payment. This PFS model could easily be put to the test in Charlottesville, VA, if the investors backing the art catch up.