19 March 2006

Subordinate organisations to objectives, not vice versa

Take any social or environmental problem that a government, local or national, decides must be solved. In many cases some government agency will have the job of solving the problem. However competent and well-meaning are the individuals who work for this agency, as an organisation the agency will generally have little or no financial incentive to minimise its costs. However, the government could decide to contract out solution of the problem. It could do this by carefully specifying the outcome it wants to achieve, and putting a contract out to tender. This would be much better than, as is more common, specifying tasks that must be undertaken and paying on completion of these tasks. Rewarding outcomes transfers the risk of failure from the government (tax- or rate- payers) to the private sector, but only if the successful bidder cannot simply go out of business and plead bankruptcy if it fails to complete the contract.

Better would be a tradable contract to achieve an outcome, which could be bought from a failing company by people to whom it would be more valuable because they believe they are better placed to achieve the outcome efficiently.

But perhaps best of all would be to issue Social Policy Bonds, which would disaggregate the contract, making it much more fluid. Rather than being limited to a single successful bidder, the contract to achieve the outcome would then be dispersed amongst a coalition of interests, bondholders, whose composition could constantly adapt to changing circumstances. The existence, structure and goals of this organisation would be subordinated entirely to the targeted outcome. In this way government could specify longer-term, more ambitious social and environmental goals than is possible currently, when the scope of its goals is severely limited by the scope and objectives of existing problem-solving agencies, whether they be government or private.

See this holding message from the New Zealand Minister Responsible for Climate Change issues, in response to my suggestion that Climate Stability Bonds be considered.

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