Pay-for-success structure

Most charity pays for effort: the NPO spends the grant, sends a utilisation certificate, and the donor hopes something changed.

A pay-for-success structure pays for results. Money that expects a return — from banks, NBFCs, institutional or risk investors — funds the work up front. Money that wants impact — CSR spends, philanthropic foundations, impact investors — pays out only if the agreed social outcomes are independently shown to have happened.

That reverses the incentive. The NPO has to perform to keep its credibility, because otherwise risk-conscious funders will not use such structures for it again. The workbook notes that the NPO's performance is judged strictly along the social dimension, since the financial return is paid by the social-capital participants on success.

Chapter 2 says these structures are particularly well suited to the Social Impact Fund classification, and are already used worldwide and in India as social and development impact bonds.

Three types (Chapter 2, 2.3.1.1):

(a) Through a social or development impact bond. An intermediary aggregates implementation agencies working towards similar outcomes. A risk funder pays up front; an outcome funder pays on results.

(b) Through lending partners. Banks or NBFCs provide the liquidity instead of risk investors.

• The intermediary picks a well-tested intervention and arranges a multi-year unsecured lending facility for the NPO or cluster of NPOs.
• Outcome funders commit to pay for a predetermined set of outcomes.
• An initial portion of outcome funds may be held in escrow to pay interest; principal is paid only when outcomes are achieved.
• Credit risk therefore depends on the NPO's ability to deliver outcomes, so this works only for well-tested programmes ready to scale.
• The intermediary may offer a first-loss default guarantee — bearing first losses to reduce credit risk and draw in other lenders.

(c) Through grants (CSR).

1. The CSR arm picks an area and an NPO. CSR capital goes into an escrow account for a pre-defined period (the workbook's example: 3 years).
2. The CSR funder appoints, and pays for, a third-party evaluator independent of both the company and the NPO.
3. Outcomes are jointly identified and targets set up front.
4. An interim funding partner — typically a domestic philanthropic organisation, distinct from the evaluator — funds the intervention.
5. If outcomes are achieved: escrow pays the interim funding partner's costs, and the NPO receives an accelerator grant of up to 10% of the programme cost if it exceeds targets, for non-programmatic needs such as research and capacity building.
6. If not achieved: the capital is rolled over in escrow if the period is not over, or routed to Schedule VII items such as the PM's Relief Fund if it is.
7. Interest earned in escrow remains in the account.

Not every impact security is pay-for-success. Singapore's Women's Livelihood Bonds promise a financial return even if social impact is not created, so the workbook says they are not strictly pay-for-success.

Illustrative figures; the 10% accelerator cap and the escrow mechanics are the workbook's.

CSR grant route. Suryoday Chemicals Ltd wants to reduce anaemia among adolescent girls in 60 villages of Nandurbar.

Scenario A — targets exceeded (evaluator finds 68%). Escrow pays Poshan Foundation ₹1,00,00,000 for its costs. Because the NPO exceeded the target, it can receive an accelerator grant of up to 10% × ₹1 crore = ₹10,00,000. Interest earned in escrow stays in the account.

Scenario B — target missed at month 30. The period is not over, so the capital rolls over in escrow.

Scenario C — target still missed at month 36. The period has ended. The CSR capital is routed to a Schedule VII item such as the PM's Relief Fund. It does not go back to Suryoday's general reserves, and it is not paid to the NPO.

The accelerator grant is capped at 10% of programme cost, not of the escrow balance. Meeting the target exactly earns no accelerator grant — the workbook ties it to exceeding the targets.

Chapter 2 (2.3.1.1) sets out the three pay-for-success types, the escrow mechanics, the interim funding partner, the accelerator grant and what happens on failure. Section 2.1 separates Singapore's impact securities from true pay-for-success. It is a favourite source of scenario questions: where the CSR capital goes when outcomes are missed before and after the deadline, who pays the evaluator, who funds implementation, and the size of the accelerator grant.

• Missed outcomes, period not over → rollover. Period over → Schedule VII (for example the PM's Relief Fund). Never back to the company, never to the NPO.
• The accelerator grant is up to 10% of programme cost, and only if the NPO exceeds targets.
• The CSR funder appoints and pays the third-party evaluator, who is distinct from both the company and the NPO.
• The interim funding partner is distinct from the evaluator, and is typically a domestic philanthropic organisation.
• In the lending-partner model, interest can be paid from escrow; principal is paid only on outcomes.
• First-loss default guarantee is a credit enhancement offered by the intermediary — it bears first losses.
• Singapore's Women's Livelihood Bonds are not strictly pay-for-success, because they pay a financial return regardless of impact.
• Interest earned in escrow remains in the account.