Keeping the Social Impact Going When a Pilot Project Ends

(Illustration by iStock/FANDSrabutan)

Public institution spending dwarfs private philanthropy in most countries in the world. In the United States, private philanthropy totaled $176.7 billion across social, health care, and education in 2021, while government spending in the same areas was approximately 25 times more. In Singapore, one of the countries where our firm Tri-Sector Associates works, private philanthropy for the same areas totaled SGD 1.4 billion (about $1 billion) in 2020, while government spending was SGD 36.6 billion (about $26 billion)—26 times the amount. This ratio is similar in most other countries; for every year that government funds social impact, philanthropic money would last only about two weeks.

Private philanthropy is also far more expensive to raise than tax dollars. It costs governments an average of 1 cent to raise each tax dollar. Philanthropic fundraising campaigns often spend exponentially more, and many countries have limited the amount that organizations can spend to raise each dollar to 30-35 cents.

Philanthropy cannot and should not substitute for government. Strategic philanthropists understand this and seek to act complementarily; they provide risk capital and pilot solutions to social problems with the goal of eventually handing those solutions over to larger, public institutions for funding. This frees up philanthropic dollars for new pilots, and so on.

Unfortunately, the success of this transfer process is hit-and-miss and thus slows social innovation. The traditional philanthropic exit strategy has been advocacy: Pilot a solution, collect evidence to show results, then use that data to persuade governments to adopt the solution. But this strategy’s success rate is generally low, because philanthropists often discover that the outcomes they believe are important may not align with government priorities. Furthermore, when governments do successfully uptake a program, they have to balance factors beyond the achievement of outcomes, such as whether it fits into the budget, aligns with the narrative of the government of the day, or has influential champions. This mismatch of priorities means that many well-intentioned social interventions end up fizzling out. Indeed, philanthropists may be unwilling to invest in an innovation in the first place knowing there is no clear, long-term sustainability strategy.

How a Variation on Pay for Success Can Help

One driving force behind the pay for success (PFS) model is that it aims to encourage uptake systematically, by testing out innovative solutions that public institutions may be keen on and having them pre-commit to paying for certain program outcomes before private funders start their pilot.

In theory, this ensures alignment and increases the odds of a successful handoff. In practice, public institutions have taken up a relatively small proportion of PFS projects, in part because partners do not build uptake into standard PFS project contracts. Our team designs new models of cross-sector collaboration such as PFS, and ironically, when we ask private philanthropists whether they would prioritize recycling their capital or ensuring public uptake, they almost always prioritize the latter. Yet few philanthropic products allow them to do so.

At the same time, we hear from public institutions engaging in PFS today that it can be a challenge to justify repaying private funders for the initial project. Public institutions are not required to repay traditional pilots funded by philanthropy, and some public institutions feel the same should hold for pilot funders using PFS.

Building on these insights, Tri-Sector Associates launched a new version of PFS in Singapore with the aim of resolving the problem of uptake more systematically. As with traditional PFS models, this model has an “upfront funder” (a private philanthropist or impact investor) that provides risk capital to a service provider to deliver an innovative intervention. The service provider then pursues a set of outcomes pre-defined by an “outcomes funder” (a large institutional funder or the government). However, unlike traditional PFS models, instead of repaying the upfront funder for the first round of the pilot, the outcomes funder commits to funding future rounds of the project.

We call this the “outcomes amplifier” model. It not only gives philanthropists a way to envision and achieve more-sustained social impact, but also provides outcomes funders with a payment system that is more familiar and therefore easier to implement. This is because the payment mechanism resembles tools many public institutions already have to attract philanthropic giving. In Singapore, for example, the government will match donations dollar-for-dollar through the Community Chest SHARE as One program.

The main difference between this and other matching programs is that it is contingent on the service provider meeting the pre-defined outcomes. The mechanism also has similarities to prize challenges and advanced market commitments (AMC), as well as procurement devices, such as incentive contracts or build-operate-transfer contracts that are already in the toolbox of many governments.

Using an Outcomes Amplifier Model in Singapore

In May 2022, we worked with AWWA Ltd (AWWA), a large multi-service social services agency in Singapore, to launch the first income-stability intervention in the country using a version of the outcomes amplifier model.

Founded in 1970, AWWA has provided housing and other social services to hundreds of families every day. Over time, it observed a troubling pattern: Many of the same families cycled in and out of its programs. This insight, along with research showing that families in chronic poverty have less cognitive ability to plan for the future and improve their situation, inspired AWWA to explore a new way of supporting their clients. After conducting focus groups with its caseworkers and global research on similar interventions, it came to believe that providing a longer period of stable income would empower families to break out of their cycle of poverty.

So the organization began considering a pilot program that would provide monthly cash assistance for 18 months to families using its services. The program would go beyond standard financial assistance—which is typically short-to-medium term, covers only a portion of household budgets, or is restricted to the form of grocery vouchers—to give families a greater sense of stability and more capacity to plan for the future.

While the intervention would be unconventional in the Singapore context, the potential outcomes would align with existing policy priorities. Several jurisdictions implementing income stability interventions have seen an increase in education, training, and employment outcomes. The outcomes amplifier model seemed well-poised to ensure that the outcomes funder paid only for outcomes they cared about, while supporting AWWA’s innovative new program and the prospect of sustainable social impact. And so AWWA decided to move ahead.

While in this case, the outcomes funder is not the government, the project demonstrates the principle of having an upfront funder systematically pass along a solution to a larger institution keen to pay for outcomes. Standard Chartered Bank is providing upfront capital to AWWA so that it can offer 18 months of income stability to long-term clients from 75 households. Temasek Trust, an entity affiliated with the state investment fund, has committed to sustaining the program for another 18 months should AWWA meet carefully defined, pre-specified outcomes in the areas of education, skills, and employment—indicators that capture the breadth of what success means to families facing chronic financial challenges. The contract also includes a randomized controlled trial to ensure that the impact is attributable to the intervention.

For upfront funders, the prospect of sustainability after the pilot is enticing. For the service provider, the ability to flexibly innovate in pursuit of longer-term outcomes is rare. And for the outcomes funder, Desmond Kuek, chief executive officer of Temasek Trust, describes the motivation this way: “We participated in this model because of the rigor placed on outcomes. We hope this project has the potential to catalyze other private, philanthropic, and public sector actors to collaborate on solving complex issues, especially social issues, which tend to be multi-dimensional and difficult to attribute impact to. The data and insights from the income stability project will help provide a proof point for other large institutional funders, including government, to play the role of outcomes funders and create a pathway to sustain effective social innovation at scale.”

Attracting Return-Seeking Investors

The biggest trade-off with the outcomes amplifier compared to traditional PFS may seem to be that the upfront funders do not get repaid. Funders that want to re-deploy their capital cannot do so, and return-seeking funders may not be attracted to the projects in the first place.

We believe this is a trade-off many upfront and outcomes funders would be willing to make today, but it is also possible to modify the model so that upfront funders get paid back while retaining the benefits of uptake and ease of implementation. Building in sufficient margins within the future payment stream for the funders of the initial pilot to recoup the cost of their investment, or even make a return if needed, could achieve this. These margins could be based on the value of downstream cost savings or cost efficiencies, as with other current PFS projects.

Similar mechanisms, like AMCs, have successfully attracted return-seeking funders. For example, governments and the official development assistance government aid program co-funded the COVAX AMC, which incentivized the development of COVID-19 vaccines by large pharmaceutical companies for 92 low- and middle-income countries. As another example, corporations have committed nearly $1 billion to the Frontier AMC to accelerate the development of carbon removal technologies.

Modifying the outcomes amplifier model would extend the principles of the AMC into the social sector, with two differences. First, defining what constitutes success, establishing how much success is worth, and attributing impact are arguably more complex in the social sector. Outcomes measurement therefore needs to draw on the methods that existing PFS models have already honed, such as using cost-benefit analysis and different statistical techniques to isolate the impact of programs. Second, traditional AMCs have focused on getting private sector entities to innovate. The outcomes amplifier model, by contrast, aims to drive nonprofit innovation.

Private Funders Must Demonstrate Additionality

Meanwhile, public institutions are inundated by requests from funders to scale their interventions—more than they could feasibly fund. They may ask: Why would we want to commit to supporting an innovation before it is proven when we could simply wait and see?

The entire PFS movement faces this issue. Changing the status quo, where philanthropy funds pilots without government pre-commitments, and making the outcomes amplifier and other PFS models attractive requires that upfront funders demonstrate additional value. In exchange for public institutions providing clearly defined problem statements with ramps for uptake, upfront funders need to commit additional capital, drive innovation, and build the capacity of service providers in ways that traditional granting mechanisms wouldn’t enable.

We suggest starting each project with a “best alternative to PFS” analysis, which lays out what a traditional grant or procurement model could achieve in the same context, and then showing what PFS adds to that status quo. For example, PFS may lead to additional funding, bring additional networks and expertise to the table, or incentivize collaboration between funders and providers in a way that generates bandwidth and new ideas for the broader social sector. By demonstrating additionality, private funders can build trust with public institutions and increase their willingness to partner on future PFS projects.

An End-to-End Funding System for Social Innovation

In the for-profit world, an end-to-end funding system for innovation—from seed capital to growth capital to initial public offering—gives good ideas the funding and expertise they need to scale. In the social sector, traditional philanthropy has long provided seed capital, and venture philanthropy has increasingly helped fill the growth-capital gap. The outcomes amplifier could enable a reliable transition to the final stage, and successful programs would be able to achieve scale and sustainability via the large and stable funding pools of public institutions.

In addition, just as different types of venture investors in the for-profit world specialize in Series A, B, or C stages of financing, the outcomes amplifier model could allow private funders to play to their strengths along the funding cycle (based on factors such as relative fundraising efficiency, scale, or risk appetite) and successfully hand over projects to public institutions when they exit.

To understand why this matters, imagine what would happen if venture capitalists could not exit their investments. We would expect lower rates of investment since venture capitalists have a defined time horizon for investment. Companies would also be less likely to succeed, as they would not benefit from the specialist attention and expertise venture capital brings.

The pace of social impact similarly slows when philanthropists hesitate to invest in new solutions knowing they cannot exit projects reliably. And when their capital is locked up in existing programs, they cannot build new ones that would benefit from their expertise. By enabling philanthropy to exit, the outcomes amplifier could help philanthropy play its rightful role and accelerate the social innovation we need to address today’s complex challenges.

Read more stories by Kevin Tan & Nadia Ahmad Samdin.