08 May 2007

Social Policy Bonds and government sub-contracts compared

Discussion with friends makes me want to highlight one of the less obvious features of Social Policy Bonds: they function as a tradeable contract not to deliver a service, but to achieve an outcome. The distinction is an important one: the risk of bondholders' failure to perform is borne by the bondholders, not the government - or taxpayer. This is contrast to the usual sort of government sub-contracting.

The other difference between a tradeable contract to deliver an outcome, and a Social Policy Bond issue, would be that Social Policy Bonds could be bought and held by anybody, not just people already involved in carrying out the target-achieving projects, or well set up to do so. So the range of possible bidders would not be limited to a few likely operators, but would be open to all who are prepared to do, or to finance the doing of, projects that would help achieve the targeted objective. The fact that anybody could be involved in the bidding for bonds at any stage would discourage people from making excessive bids, so ensuring that social objectives would be achieved as cost-effectively as possible. Compared with tradeable contracts, this would make ownership of Social Policy Bonds more fluid, which would mean more market liquidity, more transparency and an enhanced ability for the government to fine tune its priorities after the outcome has been specified and the bonds issued.

If the Social Policy Bond concept were to generate more market activity, it would make more practical the targeting of remote objectives; ones that may take years or decades to achieve. Many businesses would be reluctant to take on these goals without the possibility that they could benefit in the shorter run. Social Policy Bonds would allow them to do what they could to achieve the target, then benefit from selling their bonds at a higher price, letting the new bondholders continue the advance toward the goal.

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