Payments by results and social impact bonds: do they focus minds or shift risk?

The debate in brief

Payment by results (PbR) ties some or all of a provider's income to the achievement of specified outcomes. Social impact bonds (SIBs) add a layer of private investment: external investors fund the service upfront and are repaid by government only if agreed outcomes are met. Advocates argue these mechanisms drive accountability and focus delivery on what actually works. Critics argue they transfer financial risk from the state — which can absorb it — to charities and social enterprises that cannot, while privileging easily measurable outcomes over complex, long-term change.

Quick takeaways

The arguments

The case for outcomes-based commissioning

The central argument for payment by results is that it aligns incentives. Under traditional commissioning, a provider is paid to deliver activities: running sessions, filling places, employing staff. Whether those activities produce results is a secondary question. PbR reverses this. Payment is triggered by outcomes — reduced reoffending, sustained employment, measurable health improvements — which, advocates argue, creates a powerful incentive to focus on what works and stop doing what does not.

Social impact bonds extend this logic by bringing private capital into public services. The Peterborough Prison SIB, launched in 2010 as the world's first, illustrates the model. Social Finance Ltd designed a programme to reduce reoffending among short-sentence prisoners released from HMP Peterborough. Investors — including charitable trusts and social investors — provided the upfront working capital. One Service, a consortium of charities, delivered the intervention. The Ministry of Justice agreed to pay investors a return if reoffending fell by at least 7.5% compared to a control group. The final results, published in 2017, showed a 9% reduction in reconviction events, triggering outcome payments to investors.

For proponents, Peterborough demonstrated three things: that private capital could fund social programmes, that tying payment to outcomes drove rigour, and that charities could deliver measurable results under a performance framework. Big Society Capital, established in 2012 with funds from dormant bank accounts, was created in part to scale this model, channelling social investment into outcomes-based programmes across homelessness, youth unemployment, mental health, and early years.

The case against

Critics make several arguments, all of which have strengthened as evidence has accumulated.

First, risk transfer. PbR moves financial risk from the state to providers. For large private contractors, this may be manageable. For small and medium-sized charities, a payment model where income depends on hitting outcome targets can be existential. A charity that delivers a programme but narrowly misses its outcome threshold receives reduced payment or none at all — despite having incurred the full cost of delivery. This is not theoretical. The Work Programme, launched in 2011 as the government's flagship welfare-to-work scheme and the largest PbR contract in the UK, demonstrated the problem at scale. The National Audit Office (NAO) found in 2014 that the programme had underperformed against its targets, with only 12.1% of the hardest-to-help group (those on Employment and Support Allowance) achieving sustained job outcomes against a 16.5% target. Smaller subcontractors, many of them charities, were squeezed by prime contractors who retained the easier-to-help clients and passed the most complex cases down the supply chain — a practice known as "parking and creaming."

Second, measurement distortion. PbR requires outcomes that can be defined in advance, measured reliably, and attributed to the intervention. This works tolerably for binary outcomes like reconviction or job placement. It works poorly for the complex, relational, long-term work that many charities do: supporting people with multiple disadvantages, building community resilience, addressing trauma. The risk is that PbR steers provision toward what can be counted rather than what matters, and that the most vulnerable people — whose outcomes are hardest to achieve and measure — become a financial liability rather than a priority.

Third, transaction costs. SIBs are expensive to design and manage. The Government Outcomes Lab at the University of Oxford, which tracks outcomes-based contracts across the UK, has documented the extensive legal, financial, and performance management infrastructure required to operate a social impact bond. Multiple evaluations have noted that the transaction costs of establishing and managing SIBs can be disproportionate to the scale of the intervention, particularly for smaller programmes.

The structural critique

Beneath the technical arguments lies a deeper question about the role of the state. Payment by results and social impact bonds rest on the premise that market discipline improves public services — that the introduction of financial incentives and investment logic will drive better outcomes than democratic accountability and professional judgement. Critics, including academics at the Government Outcomes Lab itself, have questioned whether this premise holds. The state has the capacity to borrow at lower rates than any social investor, to absorb risk across its entire portfolio of services, and to take a longer view than any contract cycle permits. If the state believes a programme will reduce reoffending or homelessness, it can fund it directly and accept the uncertainty. The question is why it would choose instead to pay a premium to private investors for bearing a risk it is better placed to carry itself.

The evidence

The evidence base on PbR and SIBs in the UK is now substantial, if not conclusive. The Government Outcomes Lab at Oxford maintains the most comprehensive dataset, tracking over 100 SIBs and outcomes-based contracts. Their research has found that SIBs can be effective vehicles for testing new approaches and that the performance management structures they require can improve service quality. However, they have also found no strong evidence that SIBs systematically outperform conventionally commissioned services in terms of outcomes.

The NAO's 2015 report on outcome-based payment schemes found that the Cabinet Office and other departments had limited evidence on whether PbR improved value for money compared to other funding approaches. The report noted that outcome-based contracts were more complex and costly to manage than conventional contracts and that government departments often lacked the data infrastructure to set meaningful baselines or verify outcomes.

The Peterborough SIB achieved its reoffending reduction target, but the programme was discontinued in 2015 when the government introduced statutory post-release supervision for short-sentence prisoners through the Offender Rehabilitation Act 2014, making the comparison group redundant. The SIB met its outcomes but was overtaken by policy change — illustrating how outcomes-based contracts operate within a political context that can shift beneath them.

Better Society Capital (formerly Big Society Capital) reported that the UK social investment market reached approximately £9.4 billion in assets under management at end of 2022, growing to £10 billion by end of 2023, with outcomes-based finance representing a subset of this. However, the enthusiasm for SIBs as a commissioning model has cooled significantly since the early 2010s. Fewer new SIBs have been launched in recent years, and the Cabinet Office's Life Chances Fund, which provided top-up outcome payments for SIBs, closed to new applications in 2021.

Current context

The landscape for outcomes-based commissioning has shifted considerably since its peak in the early to mid-2010s. The number of new SIBs launched annually in the UK has declined, and government rhetoric has moved away from the Big Society framing that originally accompanied the model. The Cabinet Office's Centre for Social Impact Bonds has been absorbed into broader policy functions, and the Life Chances Fund has concluded.

The Government Outcomes Lab continues to research and support outcomes-based approaches, but with a more nuanced framing that acknowledges the limitations of the model alongside its potential. There is greater recognition that outcomes-based commissioning is a tool suited to specific circumstances — programmes with clearly defined, measurable outcomes, sufficient scale to justify transaction costs, and providers with the financial resilience to manage payment uncertainty — rather than a universal improvement on conventional funding.

The broader trend in commissioning is toward grant-based and relational models of funding, driven in part by the evidence on transaction costs and risk transfer, and in part by the financial fragility of the charity sector following the pandemic, inflation, and employer NIC increases.

Last updated: April 2026

What this means for charities

Charities considering outcomes-based contracts or SIBs should be clear-eyed about risk. The financial modelling matters: what happens if outcomes are partially met? What proportion of costs are guaranteed regardless of outcomes? Who holds the risk if external factors — policy changes, economic conditions, pandemic — disrupt delivery? Trustees have a fiduciary duty to ensure the charity can absorb the financial risk of non-payment, and that risk should be assessed before entering any PbR arrangement.

Charities should also be realistic about measurement. If the outcomes a funder wants to measure do not capture the value the charity creates, the contract may drive the wrong behaviour. The pressure to demonstrate short-term, quantifiable results can distort service delivery away from the complex, relationship-based work that produces lasting change.

For charities that do operate under outcomes-based models, the Government Outcomes Lab's resources and the experiences of organisations that have participated in SIBs are valuable reference points. The model is not inherently harmful, but it requires a level of financial resilience and performance management capacity that many charities — particularly smaller ones — do not have.

Common questions

What was the Peterborough Prison SIB?

The Peterborough SIB, launched in September 2010, was the world's first social impact bond. Seventeen investors provided £5 million to fund intensive support for short-sentence prisoners leaving HMP Peterborough, with the aim of reducing reoffending. One Service, a consortium of charities coordinated by St Giles Trust, delivered the intervention. The Ministry of Justice committed to repaying investors with a return if reoffending fell by at least 7.5%. Final results published in 2017 showed a 9% reduction in reconviction events, and investors received outcome payments. The programme ended in 2015 when statutory post-release supervision was introduced for the target group.

How does payment by results differ from a social impact bond?

Under payment by results, the provider delivers a service and receives payment contingent on achieving specified outcomes. The provider bears the financial risk directly. Under a social impact bond, external investors provide the upfront capital to fund delivery. The provider is paid for its work by the investors, and the government repays the investors (with a return) only if outcomes are achieved. In theory, the SIB shifts financial risk from the provider to the investor. In practice, the delivery organisation still bears operational, reputational, and sometimes financial risk.

What happened with the Work Programme?

The Work Programme (2011-2017) was the UK government's largest payment-by-results welfare-to-work scheme, with contracts worth approximately £3-5 billion over its lifetime. The NAO found in 2014 that it had underperformed against its targets, particularly for the hardest-to-help groups. The programme was dominated by large prime contractors — including Serco, Ingeus, and A4e — who subcontracted to smaller organisations, often charities. The "creaming and parking" problem was well documented: prime contractors focused resources on participants most likely to find work, while those with complex needs received minimal support. The programme demonstrated the risks of large-scale PbR for smaller providers and for the people the system was supposed to prioritise.

Are social impact bonds still being used?

Yes, but at a reduced rate. The UK remains the country with the most SIBs globally, with over 100 launched since 2010. However, the pace of new launches has slowed significantly since the mid-2010s. The Cabinet Office's Life Chances Fund, which provided government co-funding for SIBs, closed to new applications in 2021. Some existing SIBs continue to operate, and the model has not been abandoned, but the earlier ambition to mainstream outcomes-based finance across public services has given way to a more selective approach.

Who benefits from social impact bonds?

This is contested. Proponents argue that beneficiaries gain from better-managed, outcomes-focused services. Investors receive a financial return if outcomes are met, providing a new asset class for social investment. Government pays only for results, transferring risk. Critics argue that the primary beneficiaries are the intermediaries — social finance organisations, law firms, and consultancies — who design, structure, and manage SIBs, earning fees regardless of outcomes. The transaction costs of SIBs have been a persistent concern in evaluations.

Can small charities participate in PbR contracts?

With difficulty. PbR contracts require financial reserves to absorb the risk of delayed or non-payment, performance management systems to track and report outcomes, and the capacity to negotiate complex contracts. Small charities typically lack all three. In the Work Programme and other large PbR schemes, small charities participated as subcontractors to prime providers and were frequently exposed to the worst terms: payment only on outcomes, with the most complex cases and the least control over programme design. The evidence strongly suggests that PbR as currently structured is not suited to small or financially fragile organisations.

Key sources and further reading

• Government Outcomes Lab — University of Oxford, Blavatnik School of Government. The leading UK research centre on outcomes-based commissioning and social impact bonds, maintaining a comprehensive database of SIBs and publishing regular analyses of the model's effectiveness and design.

• "Outcome-Based Payment Schemes: Government's Use of Payment by Results" — National Audit Office (NAO), June 2015. The NAO's assessment of PbR across government, finding limited evidence on value for money and highlighting complexity and data challenges.

• "The Work Programme" — National Audit Office (NAO), 2014. The NAO's evaluation of the UK's largest PbR welfare-to-work programme, documenting underperformance against targets and problems with the subcontracting model.

• Peterborough Social Impact Bond Final Evaluation — RAND Europe and the University of Leicester, 2017. The independent evaluation showing a 9% reduction in reconviction events against the 7.5% target, triggering outcome payments.

• Big Society Capital Annual Review — Big Society Capital, published annually. Reports on the growth and composition of the UK social investment market, including outcomes-based finance.

• "Social Impact Bonds: The Early Years" — Ecorys and the Cabinet Office, 2016. Evaluation of the first wave of SIBs commissioned through the Cabinet Office's programme, noting both promising results and concerns about transaction costs and scalability.

• "The Shift from Grants to Contracts" — NCVO, various publications. NCVO's ongoing analysis of how the shift from grant funding to contract-based commissioning has affected charities, directly relevant to the PbR context.

• Life Chances Fund Evaluation — Cabinet Office, various reports 2017-2022. Evaluations of the government's £80 million fund designed to support SIBs across six policy areas including homelessness, early years, and drug and alcohol recovery.

• "From Sticking Plasters to Systemic Change" — Lankelly Chase Foundation, 2020. Analysis of how outcomes-based funding models interact with systems-level change for people facing severe and multiple disadvantage.