Pay for Success

In recent weeks, it seems that, for me at least, all roads lead to Utah. It happens that, more than once and by different paths, I came upon the story I want to share in this post. It deals with a pioneering public-private partnership that recently came about in the Granite School District near Salt Lake City, Utah, USA.

Granite aimed to expand its preschool coverage, betting that access to quality early childhood education can reduce the number of children requiring remedial services in elementary school. The problem was that the district lacked the capital needed to finance this investment, since remedial education funding is earmarked and could not be shifted to another use. Utah schools spend roughly $2,600 per year for each child participating in remedial educational programs. These programs are designed to provide academic support to students facing learning difficulties as they begin elementary school.

To achieve its goal of expanding preschool coverage, the Granite School District partnered with two private equity firms: Goldman Sachs and J.B. Pritzker. I’ll try to summarize this partnership agreement in a few lines because this is where the story gets interesting:

1. An external evaluator identifies the most vulnerable children who are about to start preschool.
2. When children reach preschool age, if they display characteristics associated with a greater likelihood of requiring remedial education programs in elementary school, they are guaranteed a preschool slot.
3. Investors inject fresh resources needed to carry out coverage expansion and to ensure slots for these children.
4. A few years later, for every at-risk child entering elementary school who is not attending remedial educatoin, investors will receive an amount equal to the district’s savings on remedial education.
5. Once the district pays off the full amount of the loan plus interest of 5%, the savings on remedial education are shared among the two investors (40%) and the district (60%) until the students complete sixth grade.

Private investors have committed $7 million over eight years for this project. Today, Granite’s preschool program covers 3,000 children, but it’s expected to add up to 600 additional slots, i.e., a 20% increase in just one year. It’s very important to mention that in addition to the investors and the Granite School District, there’s a third group of players at work here: a research institute at the University of Utah and the nonprofit organization United Way. The institute is charged with collecting assessment data at baseline and later on, to show that remedial education savings are attributable to preschool access. United Way will act as an intermediary between the investors and the district.

“Pay-for-success” loans are one of several methods using social impact bonds. In this particular category, the government agrees to pay back the loan in exchange for avoiding certain costs (in this case, remedial education programs) or in exchange for better results thanks to the policy intervention financed by the investment.

If the district fails to pay back the full investment by the time the children reach sixth grade, then the investors take a loss. Supporters of this type of funding think that one of the most important results of initiatives like this one is the demonstration effect. Having the private sector invest in this project is expected to mobilize public opinion as well as the government to improve the level of investment in early childhood.

Would this model work in Latin America and the Caribbean? That’s the question we’ve been asking ourselves lately, and there’s probably enough fodder there for a separate post. But I’d like to know what you think. What’s your take on this innovative approach?

(If this post piqued your interest in the project, I recommend this article from Education Week and this article from ReadyNation, which describe the financial model in more detail).