Using Benefit-Cost Analysis to Scale Up Early Childhood Programs through Pay-for-Success Financing

Increasing access to high-quality preschool programs is a high priority at local, state, and federal levels. Recently, two initiatives to expand preschool programming in Illinois and Utah have used funds from private investors to scale up existing programs. Private-sector social impact investors provide funding to nonprofit or public preschool providers to increase the number of children served. If the measured outcomes from preschool participation meet pre-determined goals, then the estimated government cost savings arising from these preschool interventions are used to repay the investors. Social impact investing with a "Pay for Success" contract can help budget-constrained governments expand proven or promising preventive interventions without the need to increase taxes. Cost-benefit analysis plays a crucial role in helping to identify which social, educational or health interventions are suitable for this type of innovative financing. Cost-benefit analysts are needed to design the structure of the success payments that the government will make to the private investors. This paper describes social impact borrowing as a new method for financing public services, outlines the contribution of cost-benefit analysis, and discusses the innovative use of social impact financing to promote scaling up of the evidence-based Child Parent Centers and other early childhood programs.