18 July 2013

Issuers and purchasers?

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.

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