22 June 2018

Make Social Impact Bonds tradeable

It’s now thirty years since I first floated the idea Social Policy Bonds at a meeting of the Australian Agricultural Economics Society in Blenheim, New Zealand. My aim was to inject the market’s incentives and efficiencies into the achievement of social and environmental outcomes. Under a Social Policy Bond regime, bonds are issued on the free market for whatever price they will fetch. The bonds would be backed by either government or the private sector. They would not bear interest and would be redeemable for a fixed sum only when a targeted social or environmental objective has been achieved and sustained. The idea is that the holders of the bonds would form a coalition whose over-arching goal is exactly that of society: to achieve the targeted goal as quickly as possible.

If this sounds familiar, it’s because my work led to the creation of Social Impact Bonds of which about 60, involving investments of more than $200m, have been launched in 15 countries, aimed at meeting various social challenges. There are 32 in the UK alone, with such goals as reducing recidivism rates and housing rough sleepers in London.

There’s one important feature, though, about my original idea that differentiates it from Social Impact Bonds: my intention has always been that the bonds be tradeable, whereas SIBs, also known as ‘Pay for Success’ bonds, are not. This is, in fact, a critical difference, and it is one that makes me ambivalent about SIBs (with which I’ve had no involvement). I believe their lack of tradeability limits the usefulness of SIBs in several ways.

Most importantly, it means they can tackle only short-term problems. Investors will buy the bonds only if they expect to profit from them. Because SIBs are not tradeable, people will have to hold them to redemption to make a profit. That in turn means that would-be investors would want any targeted goal to have a realistic chance of being achieved within their time horizon, which might be quite short, and certainly within their lifetime. This narrows the scope of the goals we can target and, indeed, SIBs have invariably narrow goals. Because their goals are so limited, so too are the opportunities for shifting resources to and from different approaches to solving a particular problem, and varying them as circumstances change. With a short payback period, investors in SIBs have no incentive to research and experiment with innovative approaches that have anything other the shortest lead time or are otherwise almost risk free.

Another important reason why the bonds should be tradeable, is because the identity and composition of the groups best placed to achieve a targeted objective will change over time. Our most urgent and challenging social and environmental problems will require multiple steps before they are solved. The people who are best at step one will not necessarily be those who are best at step two and all subsequent steps. We cannot even specify in advance what step one, or indeed any step, will entail; still less can we identify those best placed to take these steps. Tradeability means there be a market for Social Policy Bonds, which will ensure that the bonds will find their way into the hands of the highest bidders for them – who will be the best-placed to advance progress towards society’s targeted goal most efficiently. When the bonds are not tradeable, then we have something similar to the the way social policy is currently implemented: government identifies some organisation (most likely an existing body, often one of its myriad own agencies), and pumps money into it. If this agency is paid for performance (as in Social Impact Bonds), it has an incentive to perform well. This might be an improvement on the way things are usually done. But if, as so often, one or all of the steps necessary to resolve the targeted problem optimally lie beyond the imagination or competence of such a designated agency, then we are going to be stuck with current (woeful) levels of under-achievement in social and environmental policy.

Social Policy Bonds have the advantage in that they not only do not stipulate how society's goals are to be achieved, nor who shall achieve them. They will leave those decisions to the market, which will favour the most cost-effective coalition of operators at every stage on the way to achieving social goals.

Another advantage of the bonds being tradeable is that a market for the bonds would generate extremely useful information both for would-be investors and for policymakers. The value of the bonds will rise and fall depending on whether the market thinks the targeted goal will be achieved more or less quickly. These prices, and their changes, will be immensely valuable to those having to decide where to allocate society’s scarce resources, be they in the public or private sector.

One of the problems with SIBs is that, because their goals are relatively narrow, the costs of monitoring progress toward or away from their achievement will always be a higher proportion of the total administrative costs than they would under a regime that could target broader goals. It's almost as easy (or not much more difficult) to monitor national crime indicators, say, as to look at the behaviour of group of a few hundred specific ex-prisoners in one part of the country over several years.

And it is to achieve these broader goals that my original idea was intended. Goals such as improving the health of a population, eliminating poverty or achieving universal literacy. Social Policy Bonds could target global goals too: the ending of war, civil war, terrorism; the mitigation of climate change (or its negative impacts) or any global environmental problem, such as loss of biodiversity and preservation of the marine environment. These broad problems require a long-term outlook well beyond the purview of investors in Social Impact Bonds. To solve such problems, we shall need Social Policy Bonds which, because of their tradeability, will encourage the exploration, refinement and implementation of diverse, adaptive approaches.

Most people would agree that humankind faces huge and urgent challenges, including war, nuclear proliferation, climate change and poverty. Yet, while there is almost universal consensus that these challenges need to be met, our politics is crippled by venomous, divisive tribalism, obsessed by ideology and personality. The gaps between policy and goals, and between people and politicians grow ever wider. Social Policy Bonds, by injecting the market’s incentives into achieving humanity’s long-term ideals could help close these gaps.

A shorter version of this post appeared recently on the Alliance Magazine website.

No comments: