1. Pay for Success/Social Impact Bond Discussion Social Impact Bonds Overview September 24, 2014 1

2. Agenda Innovative Public Private Partnerships Overview: – Social Impact Bonds & Pay for Success Financings How SIBs & Pay for Success Work Where its Happening? Discussion/Q&A 2

3. Systematic Challenges Funding What Does Not Work 1 US $10 Billion Annual Expenditures Public Sector Service Providers Funders Silos – Limiting Effective Coordination Drive InnovationsServices That Build Sustainable Outcomes 3 1 2012 Study by the Center for Evidence Based Policy

4. The PFS/SIB Potential Drive social sector performance towards a focus on outcomes – Move from an “input” perspective to evidence based “outcomes” Repositioning government spending – Reallocating government funding to more effective programs Attract new sources of impact investment capital to the social sector. – Provide an incentive to invest in program infrastructure and evaluation methodologies. Integrate the impact evaluation into program design – Create feedback loop that allows providers, funders and government agencies to jointly and continuously monitor and manage social programs. Deepen social sector and government agency collaboration – Allow providers to manage programs with the flexibly required to achieve agreed upon social outcomes. Bring innovative programs to scale. 4

5. Combining Two New Tools 5

6. The Mechanics - Pay For Success Construct 1.Government contracts for social service or public need (e.g. energy) to address a societal need. 2.Philanthropic funders provide the financial resources to pay for the program. 3.Government, service providers and philanthropic funders agree upon targeted social outcomes. 4.Independent evaluators monitor program performance.  The government reimburse the initial funders for their “invested capital”  The government and investors have the opportunity to reinvest in the program to maintain and expand its impact.  If the program fails to meet the targeted outcomes, the government agencies are not obligated to repay the investors. Should the program achieve the agreed metrics In its basic form, Pay for Success is constructed along the following: 6

7. Pay for Success Construct 1. Enters Pay For Performance Contract 2. Provide $’s For Program 3. Lead Contractor funds & manages providers 4. Preventative services are provided 5. Social Outcomes 6. Analysis of Outcome Metrics 7. Program achieves targeted outcomes 8. Investor’s receive return on investment 7

8. Key Characteristics of PFS 8 Government Leadership Significant Unmet Needs & Targetable Populations Credible Data Interventions that Work Scalable Service Providers Safeguards Cashable Fiscal Savings for Government

9. Challenges for PFS Implementation 9 Unproven or Mandatory Programs Interventions Not Scalable No Fiscal Savings No Government Champion Lack of Proven Intermediary Outcomes Hard To Track

10. Not “Re-inventing” The Pay For Success is a public/private impact collaborative that builds upon known business model practices. PFS combines known components: ①Performance based contracting, ②Evidence-based preventative interventions, ③Collaborative partnerships, ④Data management applications, and ⑤Traditional capital markets use of risk capital. 10

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12. Global Applications 12

13. Potential Sectors for SIBs Application 13 Early Education Recidivism Education outcomes Environmental Maternal care Employment & Training …

14. Potential Evolution 14

15. Appendix 15

16. Benefits and Challenges Benefits Moving towards outcomes-based programs Access to scalable and sustainable revenue streams Room for Innovation Challenges Managing to Outcomes Government procurement Financing evidence-based practices 16

17. Existing Challenge 17 Without scaled preventative programs society funds expensive safety-net programs – Governments have fallen into the trap of funding programs without documented evidence of impact Measuring impact – We have not leveraged technology, data systems and open data to cost efficiently measure and monitor Lack of capital funding mechanisms to finance a promising organization’s capacity to scale. Disincentive to innovate – The global economy has a history of thriving on innovation and taking new ideas into deeper and broader markets. – Yet in the social sector where we lack transparent goals, appropriate measurement tools and mutually incentivized participants, we offer no motivation to develop and implement improved services. Common sense of mission – Government, services providers and philanthropy operate in separate silos, often lacking a common sense of purpose - and unjustifiably no coordinated approach to achieving impact.

18. The PFS Implementation Process Problem Identification Target areas w/high social & fiscal costs Government Solicitation Process Sole Source vs. RFP Determination of Intervention Focus on Impact Organizational Construct Lead Contractor and Provider Construct Developing Funding Arrangement Establish Return Parameters Document Agreements Performance, Financing and Operational contracts 18

19. Pay for Success Contracting 1) Start-up & Working Capital Raised 2) Services Delivered 3) Government Pays only if Outcomes are met 4) Financing Capital Replenished 19

20. PFS Organizational Chart 20

21. Population Served: 889 young people over five years Target Outcome Metric: Incarcerations avoided versus the expected rate Success Payments: The State will pay $45,000 per youth that is not incarcerated in the two years following entering the program Transitional Employment: Two-years post intensive intervention model 21 Key Operating Assumptions

22. Funding Construct and Sources & Uses 22

23. Social Innovation Funding Construct Senior Tranche: - $7 million - PRI type construct - Repaid from proceeds of Success Payments on Avoided Incarcerations. Junior Tranche: - $4 million - Recoverable Grant construct - Available to provide additional capital to support program - Only repaid if government pays Sr. Tranche and successful employment outcomes 23

24. Six –Year Cash Flows 24

25. Repayments to PRI investors will be determined as a percentage of the state’s annual success payments to Roca. Contingent on the project’s success, payments to PRI investors will begin in year three of the program and continue through year six Sr. SIB Tranche a full repayment of principal and an IRR of 3.37% Jr. SIB Tranche will repay 50% of principal Repayment Profile & ROI 25

26. Two New Tools “Social impact bonds” (SIBs) are one type of SIF financing. With SIBs, investors bear the majority of up-front risk and government reallocates expenditures towards success payments only when results are achieved. Pay For Success Performance-based contracting within the social sector where government pays only if results are achieved Social Innovation Finance Financing that bridges timing gap between government payments and upfront capital needed to run PFS programs PFS SIF 26