A correspondent asks: Who do you see as the most likely issuers and purchasers of bonds?
My reply goes like this:
Governments are unlikely to be the first to issue Social Policy Bonds. "Tried, tested and failed" will always be preferable to
governments than something radical that might not work. Nor are NGOs or other foundations, as
they are currently configured, likely to get involved with
buying Social Policy Bonds themselves. I envisage brokers filling the
gap between the backers of the bonds and the people carrying out
goal-achieving activities. If the bond issue is big enough, these
brokers would act as investment companies: allocating funds to those
bodies that, in their view, are carrying out the most efficient
goal-achieving activities. They could do this with their own funds
or, possibly, borrow on the strength of any anticipated appreciation
of the bonds they hold. Social entrepreneurs and NGO's could make
presentations to these brokers in an effort to convince them that
their activities are leading to, or will lead, to the fastest
appreciation of the bond price. They might have to do this on a
continuing basis (every five years, say) for long-term goals.
There are broad social and environmental goals for which
there is potentially a huge coalition that, under a bond regime, could actually
put up funds to get things done. People might be more happy to
contribute towards a specific, beneficial social outcome, rather
than to a charity or to a government that has its own ideas about
how to spend taxpayers' money. As well, most existing bodies have
relatively specific objectives, compared to those that would be best
served by the Social Policy Bond approach.
Take something like universal literacy in the Middle East and Asia.
Most people would like to see this. We might not feel strongly
enough to join a specific organization or to give funds to one of
the numerous organizations that are trying to bring about this
outcome (or claim to be doing so). But some people do already give
to such charities, and they and new contributors could well give
more if they know that their funds will be used to reward successful
achievement of universal literacy, rather than activities or
institutions that may not be very efficient. The great merit of focusing on outcomes with Social Policy Bonds is that it will enlarge the range of beneficial goals that can be targeted and, with ingenuity, achieved. Unlike under the current system, people will not be put off targeting and financing the solution of problems just because nobody currently knows how best to do so.
Or take a goal for a developed country: improving the health of the nation's population.
Currently in the UK, for instance, this is mostly financed by taxes.
In my book I discuss how we could follow a transition pathway away
from funding institutions that are supposed to improve health, and
towards funding the health outcome itself. With this objective the
bonds would (gradually) replace the current ways of allocating
funding (government fiat, basically) with more rational ways.
Whoever buys the bonds would have powerful incentives to allocate
funds to the most efficient health-improving bodies. We cannot
know in advance who these bondholders would be, especially as they
themselves would be subject to the same pressure to be continuously
efficient as the bodies to whom they allocate funds. At some point,
it will be profitable to set up these companies whose sole job is to
do this resource allocation efficiently. We cannot even know the
structure and composition of these bondholder investment companies:
these will be subordinate to the goal itself.
As I say, government itself is not going to take the lead with issuing
Social Policy Bondss targeting national health. But there are goals, like the
literacy one, or world peace, or reduced crime rates etc, about
which there is a very wide consensus and towards which people will
contribute, even from their after-tax income, if they can be sure,
as in a bond regime, that only successful efforts will be rewarded.
There is a much wider consensus over such outcomes than there is
about the bodies that, today, are allegedly achieving them. Many who
would not dream of donating to the United Nations, or to pay more
tax so that health services can be improved, would happily give to
fund the outcomes that these bodies are supposed to be achieving. '
The issuers of these bonds would not resemble current foundations.
What I envisage is that people concerned about, say, literacy in the
Middle East, would raise awareness of the problem or rather tap into
people's existing concerns about the problem, and raise donations to
be used to back literacy bonds. (They could undertake to return
funds if their specified goal is not achieved.)
In short: the goals
best targeted by a Social Policy Bond regime are broad and long term, and likely
to attract support from a very wide range of people such as
philanthropists and the public who might be more prepared to fund
outcome-achieving goals, especially because only efficient actors
will be rewarded and also perhaps because if the actors fail, then
their donations could be returned. Existing bodies might or might
not get involved in some stage of this process, whether as
consciousness-raisers or as recipients of funding from the new
bodies that I envisage would be created to allocate funds. Would
these new bodies just spontaneously come into being? Not initially,
perhaps, but with sufficient funds from whatever source backing the
bonds, and if the bonds fall in price as a result of the absence of
such bodies, then there will be motivation to create these bodies,
whose sole job will be to allocate funds to efficient goal-achieving
activities and bodies.
The important thing is to have sound objectives that will generate
lots of support and are broad and otherwise a good fit with the Social Policy Bond
concept. Then it will be in some entrepreneurs' interest to create
resource allocation bodies. We can no more identify the nature and
identity of these organizations than we can the activities they will
promote, but there is no real need to do that.
So, to sum up: the issuers of the bonds (until governments get involved) are likely to be concerned individuals, philanthropists and
existing charitable bodies, who would use their own funds and
solicit public donations to back the bonds. I envisage bondholders
(after some initial trading) mostly to be new organizations along
the lines of investment companies, who will back whatever they think
are the most efficient activities at any time. Of course, and interestingly, for large
enough issues, a government itself may buy Social Policy Bonds backed and issued by concerned groups outside its country, and then do something to bring about (say) improved literacy in their country.