This is a brief article, unpublished, about making Social Impact Bonds tradeable.
Make Social Impact Bonds tradeable
It’s fair to say that Social Impact Bonds have failed to live up to expectations. I think this is because they are not tradeable. This sounds like a minor technical issue, but it is a crucial flaw. It means that, if people are going to profit from investing in the bonds, the goals they target must be achievable within the time horizons of the people who buy them—a few years, perhaps. So SIBs inevitably target narrow, short-term objectives. But our social and environmental problems are complex, difficult to solve, and require long-term investment. They require a range of diverse, adaptive approaches to be tried, with the most promising ones refined and implemented, and the ones that don’t work terminated (something that governments are reluctant to do). Creative destruction, allowed to operate in the private sector, has vastly improved the quality of life of a burgeoning world population. Making the bonds tradeable would allow it to work in the service of public goals too.
Because SIBs aren't tradeable, we'd expect to see what we do see: a lack of innovative approaches, the favouring of existing service providers, high transaction costs and not much in the way of increased efficiency. Yes, there has been some transfer of risk from taxpayers to the private sector, but the overall benefits are hardly enough to justify the high hopes they raised when they were first issued. And, as in other areas of the economy, the persistence of our social and environmental problems while the rich get richer is leading to increased cynicism about markets – the best way of allocating society’s scarce resources.
A market for the bonds would mean people could buy bonds, do what they can to help achieve a targeted goal, see the market value of their bonds rise as a result, and sell their bonds at a profit to people who can take the next steps towards the achievement of the goal. Investors in the bonds would form a protean coalition, all interested in one thing: maximising the value of their bonds. With carefully specified social goals, investors’ goals would be exactly the same as those of society. As with the owners of a company’s shares, the membership of this coalition will change over time but, importantly, the way the market works will mean that bonds are always owned by those who bid most for the bonds: these would be investors who think they will be the most efficient at solving the targeted social or environmental problem.
One big benefit of making the bonds tradeable is that we can target goals that currently we have no idea how to achieve, and let bondholders and the market work out who is best placed to achieve them, and which are the most efficient ways of doing so. When I first developed the original bond concept, their tradeability was integral, and I had goals such as reducing national crime levels in mind. Without tradeability, we see SIBs targeting such short-term, narrow goals as reduced local levels of recidivism. Tradeable SIBs wouldn’t be so limited: they could target national, or even global problems, such as natural or human-made disasters, or climate change.
There is more consensus over these goals than the ways of achieving them. They are more stable, and being broad, are comprehensible to ordinary people, who could participate in their prioritisation, and thereby help close the ever-widening gap between our political caste and the rest of us.
Much human ingenuity, and their attendant resources, naturally go into activities in which people have the best chance of making a good living, but whose value to society is (to be polite) questionable, such as the financial services sector. There is no correlation between where our best talents go, and the value to society of the activities they undertake when they get there.
Making SIBs tradeable would change that. Instead of the purely coincidental relationship between activity and social utility that we see nowadays, a bond regime would channel resources into society's goals. These goals would be long-term, broad and meaningful to ordinary people, who could therefore participate in their prioritisation. Tradeability would extend the range of the goals we target to encompass those we now regard as unsolvable. It would attract resources into completely new areas, currently the responsibility of underpaid hard-working people who have few resources to play with, and are rewarded in ways that have nothing to do with their efficiency or success.
These elusive, yet urgent, goals have long been considered unrealistic or idealistic not, I contend, because they are unattainable, but because they are not rewarded in ways that attract sufficient human and material resources. With tradeable SIBs we could target such noble and, in my view, quite achievable goals, such as minimising the impact of all kinds of disaster, and the ending of war.
© Ronnie Horesh 2020
