Singapore Social Impact Guarantee – Enhancing Youth Support Programme

Project insights

1. A new model to deliver social outcomes: the world’s first Social Impact Guarantee

   A common complaint about Social Impact Bonds (SIBs) and Development Impact Bonds (DIBs) is that they can be difficult to create. There are two main barriers. Mechanically, it can be difficult to apply impact bond models within traditional grant making and government procurement processes. Impact bond payments vary depending on the success of a program, whereas most grant making and procurement processes pay with certainty. In addition, considering today’s low interest rates, governments have less incentive to use impact bonds over traditional public-finance tools like government bonds.

   In Singapore, there was an opportunity to try a different model. SIGs aim to remove these barriers by making the flow of funds closely resemble existing processes and paring away the borrowing component of the SIBs, while retaining the key benefits of impact bonds. The SIG can be broken down into three steps:

   1. A social impact funder provides funding to a service provider to achieve a set of agreed-upon impact outcomes
   2. The service provider develops and implements the service, optimising it with ongoing support from one or more third-party guarantors, the social services funder, and other capacity builders
   3. The service provider or an external evaluator rigorously measures and reports the program outcomes. If the program did not achieve the agreed-upon outcomes, the third-party guarantor(s) will reimburse the social impact funder for any unachieved impact. The funder can then use this funding to try again. In exchange, some guarantors may ask for a small premium.

   A SIG functions similarly to a money back guarantee – it allows a Donor to ensure that their donation achieves the social impact it was meant to achieve, or a portion of the donation is returned. This donation can then be recycled to a new iteration of the program or other programs to try to achieve the intended outcomes. Through a SIG, Tri-Sector Associates hopes to enable YMCA to innovate on existing services, while crowding-in more donations focusing on outcomes. In addition, by addressing mechanical challenges in grant making and government procurement processes, the SIG might broaden the applicable areas for outcomes-based funding.

   The SIG model is quicker to structure than SIBs as it builds on existing processes and is simpler. In this project, the period from conception to launch was only about 6 months, and it required minimal tweaking to the current funding contracts of both the impact funder and the guarantor.

2. Addressing mechanical and moral hazard challenges

   The key challenges to implementing the SIG took the form of a mechanical funding mandate barrier and a philosophical 'moral hazard' question.

   At the outset, Tri Sector Associates ran into a funding mandate challenge. Foundations (like the social impact funder in this SIG) and governments often cannot take back their funding for tax or legislative reasons. To address this issue, instead of having the guarantor make the guarantee payment to the social impact funder, who in turn re-disburses the money, the guarantor will instead directly make any guarantee payments to a cause of the social impact funder’s choice. This could be another iteration of the YMCA program or a different program entirely, but it achieves the same end and bypasses the need for the social impact funder to receive the money back. In a governmental case, many contracts already have a clawback provision that requires a return of funding if a service provider does not perform. A SIG could be executed simply by tying the clawback to impact outcomes and then having the service provider obtain a SIG from the guarantor. If the program does not achieve impact, it will trigger the guarantee, leading to a flow of funds from the guarantor to the service provider, who in turn repays the government via the clawback.

   Tri Sector Associates also faced the issue of 'moral hazard': How does it ensure that the delivery organisation still tries its best to perform when it no longer bears risk? Tri Sector Associates adapted a few solutions from mainstream insurance. The guarantee has a deductible, as it covers only the impact achieved above the baseline of the previous years. In the YMCA case, for example, the guarantee does not cover any impact below 62 percent. It also rewards good behaviour. The guarantor has committed to re-guarantee the program at no cost if the project cycle does not trigger the guarantee, thereby providing an incentive for success. Finally, there is a prevention program to reduce the odds of needing to call the guarantee in the first place. Through quarterly governance meetings with the service provider, the guarantor plays a proactive role in ensuring success by helping monitor performance and provide advice, resources, and networks as required.

3. Encouraging innovation in the social sector

   A key success from the project is the encouragement of YMCA to innovate upon an existing program and aim for higher performance goals. The SIG project encourages innovation through three main ways.

   First, because the guarantor bears a portion of the risk, the YMCA is allowed more flexibility to test new approaches using donor money. This enabled YMCA to introduce three enhancements to try to improve VaSSP’s youth placements in education and employment beyond their baseline success rate.

   Second, the SIG maintains an emphasis on rigorous impact measurement to allow the YMCA to test new innovative approaches and manage them to success. YMCA provides quarterly Evaluation Reports at the SIG Governance meetings to proactively track the progress of the programme and make adjustments as necessary to improve the final outcomes. Moreover, the reports will include metrics beyond the final outcome metrics, encouraging YMCA to collect, track, and verify a robust body of data that can be used to understand and optimise for impact even after the project’s conclusion.

   Finally, the SIG might bring in new skillsets and mindsets via the Guarantor. The Guarantor is incentivised to lend their private sector skills to provide ongoing capacity building for the provider.

4. Crowding in new types of funders who can act as guarantors

   The guarantor role has two distinct advantages that might enable a SIG project to attract new types of funders. First, funding dollars do not have to be committed until or unless the reimbursements are called upon, which unlocks the time-value of money and enables guarantors to grow their funding pools in the meantime. Second, the SIG allows for risk pooling of guarantors’ money. Guarantors can use the same funding to back multiple SIGs at the same time, allowing new projects to take off quickly. Such advantages can appeal to family offices, foundations, and impact investors.

   It should be noted that impact investors often are bound to mandates that prohibit them from engaging in insurance structures like SIGs, but creative modifications can be made. The SIG can eventually work like a catastrophe (CAT) bond; investors would buy a bond with the understanding that if a certain trigger occurs, their funds will cover the resulting insurance payout, and they may not receive their full principal back. In exchange, CAT bonds offer an uncorrelated and attractive return. As of November 2021, they are a $51 billion USD market.

   Banks and insurance/re-insurance companies are potentially two other types of players who can be crowded-in via the SIG and its ability to leverage the time-value of money and risk pooling. Banks can expand their existing credit issuing business to the impact space. Meanwhile, insurance and re-insurance companies can help scale the SIG so that there is greater ability to diversify risks and introduce more data to improve the prediction of impact, through applying their existing strengths of their vast balance sheets and technical expertise. This will help lower the costs of SIG and further drive their adoption.