A successful Social Impact Bond

A flurry of reporting on the success of the world's first Social Impact Bond. The goal was to reduce reoffending rates of short-sentence ex-prisoners in the English city of Peterborough by at least 7.5 percent. The result was a 9.0 percent reduction:

The conclusion of the world's first social impact bond (SIB) will return all of the investment as well as a one off payment described by Social Finance as "just over 3% interest per annum" over five years go to 17 social investors after outcomes were achieved. All of the investors were charities or charitable foundations. Peterborough social impact bond investors see 3% interest, Lee Mannion, 'Pioneers Post, 27 July

Social Impact Bonds are the non-tradeable variant of Social Policy Bonds. I've had no direct involvement in any of the 89 SIBs in 19 countries which have now been issued. I'm ambivalent about SIBs and their non-tradeability - see here and here. But I think they can be helpful where the alternatives are neglect or poor policy. They might also serve as a handy stepping-stone to the full Social Policy Bond model. For current news about SIBs there is a database and relevant links, here.

Targeting long-term goals

James Hansen talks about climate change:

You’re talking about a system that responds on the timescale of decades to centuries — that’s a different time constant than the political constant.” James Hansen talking to David Wallace-Wells in The Uninhabitable Earth: Annotated Edition (reference 12)

It's not only climate change for which our current politics is inadequate. Any crisis building now, but whose effects will be felt only by future generations or, even more scarily, future administrations, is going to to be neglected within our current system. Our politicians face few incentives to consider future generations, and plenty of incentives to ignore them completely. We see this in the amassing of grotesquely inflated debt levels, badly thought-out immigration policies, under-investment in critical infrastructure, and environmental behaviours including, but by no means limited to, those that affect the climate. The narrow, short-term interests of powerful interests, public- and private-sector, win out every time. As for future generations: our politicians are expert at kicking the can down the road.

Social Policy Bonds could remedy this neglect of long-term consequences. They would create a coalition of interests in favour of achieving social and environmental goals that are currently too remote to receive much attention - though plenty by dystopian fiction writers. The way the bonds work would be to reward the achievement of our long-term goals at every stage of the process.

Social Policy Bonds (unlike Social Impact Bonds) are radeable, which means that bondholders don't have to hold them until redemption to see their value rise and realise a profit.. This allows the bonds to target effectively such remote goals as climate stability, universal literacy and world peace. The bonds would begin their work as soon as they were issued: those who buy the bonds would be motivated to begin the explore measures that would immediately raise the chances that the targeted goal will be achieved quickly. For most long-term goals, a large array of diverse measures will need to be proposed, implemented on a small scale, then either terminated or implemented more widely. No government can effectively oversee such a range of projects, nor can any single, conventional organisation. In particular, terminating failed approaches in favour of more efficient ideas does not come easily to government. But under a Social Policy Bond regime there would be every incentive to focus only on those approaches that will achieve our targeted goal most efficiently. And, crucially, the optimum mix of approaches will change over time - especially over the long time period that remote goals will require for their achievement. The bonds would give rise to a new type of organisation; ones whose composition and structure would change, perhaps radically, over the lifetime of the bonds, in response to changing circumstances and improving knowledge. Again, such adaptiveness is not a characteristic of government action, but it is an essential element of any attempts to solve our long-term problems.

Social Policy Bonds would represent a radical change from today's politics. But, as long-term problems threaten to overwhelm humanity (click on the source excerpted at the top of this post, for one example) it's clear that business as usual is not working. Targeting long-term goals and injecting market incentives into their achievement would seem to be our best hope. Social Policy Bonds, uniquely amongst policy instruments, would do both.

I've written about why I believe tradeability is important here, and why I am ambivalent about Social Impact Bonds here.

Limitations of the Payment by Results model

An interesting comment from Mr Toby Lowe on an article extolling the benefits of Payment by Results (PbR):

[I]n order for PbR to work, 'results' must be directly attributable to particular interventions .... In complex systems, results are never attributable to particular interventions, and so PbR cannot work. This is not a technical issue about measures, it is an inescapable consequence of the way that complex systems operate. Toby Lowe, commenting on The next step in payment by results by Rodney Schwartz, 28 September

You might think that this - valid - point undermines the Social Policy Bond concept. But I would disagree. PbR as practised today differs from Social Policy Bonds in that the bodies that are paid to perform better are (1) conventionally structured, and (2) generally known in advance.

Both these features multiply the opportunities for gaming and manipulation. Bodies that are paid by results under current regimes are service providers that have a persistent composition and identity, and mainly for that reason are committed to a fairly limited range of activities. The 'results' for which these bodies are paid, though termed 'outcomes' are therefore quite narrow. So a body can, for instance, game the PbR scheme by simply exporting a targeted problem to areas not covered by that scheme. More importantly, the very scope of the 'outcomes' targeted is greatly restricted in time and space by the constraints imposed by the structures and activities of existing organizations. I belive that to tackle broad social problems we need a new type of organization; one of protean structure and composition, so that at each point along the outcome-achieving path it forms a coalition of the bodies that will be most efficient at solving the targeted problem. Social Policy Bonds would bring about such organizations.

What about the difficulty of attributing results to interventions in complex societies? Again, I agree with Mr Lowe. But under a Social Policy Bond regime, there would rarely be a need for direct, deliberate (and manipulable) attribution. Take for example the goal of targeting a nation's health for sustained improvement over, say, thirty years, as measured by a combination of such indicators as longevity, infant mortality and quality adjusted life years. Under a Social Policy Bond regime, such Health Bonds would be valued not by some cash-doling bureaucracy, but by the market for the bonds. Any activities undertaken by holders of the bonds would raise the value of their bonds only if they, in the market's view, make the early achievement of society's health goal more likely. Bondholders can undertake, or finance, a vast range of health-improving activities, some of which might benefit from a PbR approach, others of which will not (and might even conflict with one). It will be for motivated bondholders to decide. Such broad outcomes, undertaken by bodies that come and go during the lifetime of the bonds and overseen by a motivated market, cannot be manipulated. The complexity of the interventions and their effects is matched by the complexity of the bondholders', their coalition and the vast range of approaches that they will try in their efforts to achieve the targeted goal. Direct attribution of payment to successful interventions is no more necessary in such a long-term, broad project than it is to employees of a hospital.

Most of the PbR schemes that are being talked about involve Social Impact Bonds (also known as Payment for Success bonds), which are non-tradeable versions of Social Policy Bonds. I have discussed the limitations of such bonds, and my ambivalence toward them, here and here and in many posts in this blog: here and here, for examples, or search this blog for Social Impact Bonds. Long ago I did a post on New Public Management, which is also relevant.

Impediments to a radical transformation

My 27 August post pointed out the advantages of making Social Impact Bonds tradeable. In other words, of issuing Social Policy Bonds rather than SIBs. Why then have Social Policy Bonds, to my knowledge, not yet been issued?

One reason is that Social Policy Bonds work best on a large scale and over long time periods during which resources can most readily find their optimal deployment. I've pointed out the necessarily narrow scope of Social Impact Bonds here and here. Because SIBs cannot be traded, their ownership is restricted to a specified (small) number of service providers with an inescapably short time horizon as compared with the long time usually needed to solve important social and environmental problems. But SIBs' restricted scope acts as reassurance to policymakers in general, and the bonds' issuers in particular: it gives them control over who shall undertake the activities that help achieve the targeted goal. Yes, the bonds do reward more efficient performance, but only for specified service providers.

Social Policy Bonds, in contrast, work best when service providers are subject to creative destruction: the impetus that rewards successful firms and winnows out failures. It's a discipline rarely seen in the provision of social services which, being very often government agencies, are immune from penalty for poor performance (and often, if too successful, will face a reduction in funding, or even dissolution). The time period required for the solution of most major social problems will necessarily be long; longer in most cases than the planning horizon of existing service providers and probably, in the case of very remote goals (world peace, for instance) longer than most people's life expectancy. The creative destruction that will be a necessary byproduct of efforts to solve these large-scale problems discourages existing service providers, be they government or non-governmental organisations of any type, from advocating for, or themselves issuing Social Policy Bonds. Existing bodies, in this view, are impeding the achievement of some of humanity's most urgent goals, not so much through any active lobbying on their part, but because of an understandable wish not to jeopardise their survival.

It is the interests of existing organisations, public- and private-sector, and their wish either to control who shall achieve social goals or to survive that, I think, are impediments to the radical transformation of humanity's prospects to which Social Policy Bonds could give rise.

Make them tradeable

Quite a bit going on with Social Impact Bonds, as is apparent from their Wikipedia page and the almost daily Social Impact Bond newsletter; one recent issue highlighting Japan's interest in the concept. I do have reservations about SIBs, which I have written about here and here, though they do seem to have been inspired by my early work on Social Policy Bonds. One weakness, in my view, is that because they are not tradeable, SIBs are more subject to gaming and manipulation than Social Policy Bonds. This could become a bigger problem if the SIB concept becomes so widely adopted that they avoid public scrutiny. There is a long and sorry history of (presumably) well-intentioned measures, ostensibly taken to boost efficiency in the public sector, ending up as subsidies to the already wealthy and powerful. See, for instance, this piece about the UK's Private Finance Initiative. This is corporate welfare wearing a thin disguise.

So, given my doubts about SIBs, do I have anything positive to say about them? Yes:

First, is that they aim to reward better performance in the provision of social services. True, their lack of tradeability drastically narrows the range of such services and severely restricts their applicability over space and, especially, time. Still, they do give incentives to service providers to do a better job, given such limitations: something that is more revolutionary than it should be, but nevertheless a definite step forward.

Second, whatever their weaknesses, SIBs might be an improvement in policy areas that are particularly poorly served by existing interventions. Such unglamorous policy areas as, for instance, provision of services to the mentally unwell or to newly-released prisoners to help prevent them from recidivism.

And third, of course, SIBs might serve as a helpful or necessary transitional step toward Social Policy Bonds. SIBs allow the bonds' issuers, whether public- or private-sector a greater degree of control than Social Policy Bonds over who shall go about achieving the bonds' objectives and (less directly) how they shall do so. Government and other backers of bonds are, understandably, reluctant to relinquish their control over these levers of power. But Social Policy Bonds could be introduced gradually, and government agencies - if they are truly efficient - need not fear their introduction. Exposure to competition from others motivated to achieve society's goals, as targeted by a Social Policy Bond regime, would stimulate the exploration and implementation of diverse, adaptive solutions to national and even global problems. If it takes a decade or two's experimentation with SIBs to get there, it's a worthwhile journey. My hope is that SIBs' weaknesses and the greater scope they give for manipulation do not falsely discredit the Social Policy Bond idea in the eyes of the public.  

For more about a transition to a Social Policy Bond regime, see chapter 3 of my book.

Social Policy Bonds: state of play

I don't think any Social Policy Bonds have yet been issued, despite their having been in the public arena for 28 years. That said, more national and local entities are issuing or considering Social Impact Bonds, the non-tradable variant of Social Policy Bonds. This wikipedia page summarises the history and current deployment of SIBs. I'm pleased to say that they are becoming more widespread. Countries in which they have been issued include the UK, Australia, the US, and they are also being considered in Brazil, Israel and New Zealand. Dan Corry of New Philanthropy Capital in London summarises the current (9 August) state of play with SIBs in the UK here, while Patrick Young, in Australia puts out the Daily SIB Newsletter.

I do have reservations about SIBs, which I have expressed here, here, and in several blog posts (search this page for Social Impact Bonds). Perhaps necessarily, they are narrow in scope and, in my view, will be prone to manipulation and gaming, especially if they become so commonplace that they escape public scrutiny. Because of their limitations they are also, as I expected, relatively costly to administer, as Alliance 54 reported in July: 'SIBs are gaining traction with 57 models operating, but they have proven complicated and costly to design and implement.' I haven't been consulted about, and have no involvement in, any of these SIB issues. My hope is that SIBs, will advance, rather than discredit, the Social Policy Bond concept.

PBR and SIBS: bring in tradability!

The Economist writes about Payment By Results (PBR) for public services in the UK, and cites these problems:

• PBR can create strange behavioural incentives, including a phenomenon known as “creaming”. Given the emphasis on meeting targets, providers are often tempted to focus on the easiest-to-help people. 


• In addition, the economics of PBR can work against innovation. Providers of public services must pay their employees and suppliers. It is difficult, especially for small firms, to wait around for a payment based on how they have done.  Pay up, the 'Economist', 4 June

It goes on:

The question, then, is not whether to get rid of PBR, but how to make it work better."

My suggestion? Make the contracts tradable. Then government can specify broad, much longer-term objectives which would encourage participation of a much wider range of potential service suppliers at every stage of the pathway towards goal achievement. Unlike under PBR there would be creative destruction of useless interventions and inefficient agencies.

The article also mentions Social Impact Bonds, of which there are now 32 in the UK and the most famous of which 'seems promising'. I have posted before about Social Impact Bonds, which, while I think they may be a much-needed improvement in neglected policy areas, would benefit greatly by being made tradable (and so becoming Social Policy Bonds, as I conceived them). You can now search this blog for keywords such as Social Impact Bonds, or see here and here for my short papers on them.

Social Policy Bonds: the past and the future

In the past year there has been a rise in the number of issues of Social Impact Bonds - the non-tradable variant of Social Policy Bonds, about which I have had mixed feelings. They essentially function as performance-related bonuses to service providers. Because they aren't tradable, they favour existing bodies and so, in my view, can be gamed or manipulated more readily than could Social Policy Bonds. However, there are social services that are currently so poorly provisioned that SIBs could well represent an improvement over existing policy. And they might be a first step - perhaps even a necessary first step - to the issuing of Social Policy Bonds. Tradability would greatly expand the range of goals that could be targeted, and I discuss this and other advantages of Social Policy Bonds over SIBs here and here. (You could also search for "SIBs" on this blog.) This wikipedia page summarises where SIBs are being issued and other details.

As far as I know, Social Policy Bonds are not being issued anywhere. I believe, though, that the need for outcome-based policy is becoming increasingly urgent. Society grows ever more complex, and its problems ever less amenable to solution with our existing government machinery. As ever, there is a much broader consensus about the outcomes we wish to see than the possible means of achieving them. The gap between governments and the people they are supposed to represent keeps widening. The recent Paris meeting, which was supposed to address climate change, is the example par excellence of policymaking entirely disconnected from citizens. It will fail for several reasons, foremost of which is the total absence of buy-in from ordinary people - that is, people who aren't involved in policymaking or lobbying. With efforts to address global problems, there would be huge benefits arising from a market-based solution, which in economic theory and on all the evidence would optimise resource allocation.

For reasons of both buy-in and efficiency, then, and because of our increasingly interlinked world, I remain optimistic that Social Policy Bonds will play a role in achieving social and environmental outcomes in the future. Perhaps not in 2016 but, I think, within the next ten years.

Climate change: the fundamental question

Social Policy Bonds impose a useful discipline on policymakers. They oblige us to be very clear about what we want to achieve. Nowhere is this more necessary than with climate change. The fundamental question, which I don't see posed in policymaking circles or indeed anywhere else is:

Are we more concerned about climate change, or about the impacts of climate change on human, animal and plant life?

There seems to be a pervasive assumption that the most efficient way of mitigating the negative impacts of climate change is to reduce that which current science suggests (but does not know for certain) are one of its major causes: greenhouse gas emissions.

A Social Policy Bond regime would not make that assumption. Instead we would specify very clearly what we want to achieve. We would express our policy goal as a combination of physical, social, biological and financial measures that must fall within specified ranges for a sustained period. Only then would holders of Climate Stability Bonds be paid out.

In fact, there's a strong case for ensuring that policy be independent of our views about what's happening to the climate. For instance: a family made homeless by an earthquake or a missile is just as homeless as one made homeless by rising sea levels. Perhaps we should target for reduction the human cost of all disasters, whether caused by adverse climatic events, other acts of God, or by man. Impacts on animal and plant life could be targeted by other bond issues.

Unfortunately an entire bureaucracy has grown around climate change as a discrete problem. It seems to me that the existence and activities of this bureaucracy embody the assumption that our trying to influence the climate is the most efficient way of dealing with problems caused by unfavourable changes in the climate. I think that assumption needs to be challenged.

Where we're at

How are Social Policy Bonds doing?

It's about 27 years since they first entered the public arena (see here). In that time the Social Policy Bond idea has won praise from distinguished economists (point 8 here), but no Social Policy Bonds have actually been issued.

It's not all doom and gloom though. There is widespread, though belated, recognition now that rewarding better performance in the public sector is a good thing, and non-tradeable variants of Social Policy Bonds are being issued on a trial basis in the UK, US, Australia and Israel. They are also being considered in New Zealand (see here for a short video discussion).These bonds have various names including Social Impact Bonds, Social Benefit Bonds and Pay for Success Bonds.

I have my reservations about them, which I've expressed here and here. Essentially, their being non-tradeable drastically reduces the scope - in breadth and time horizon - of the goals that can be considered. They favour existing service providers, and their administrative costs are likely to be relatively higher than Social Policy Bonds. As well, because they aren't openly traded, they generate no price information that could be extremely useful to policymakers. Nevertheless, these bonds do reward greater efficiency in achieving their limited objectives, and they might well improve on current policy where that is particularly inefficient. They could therefore be a handy (and though I am hesitant to say so, necessary) first step toward a fully-functioning Social Policy Bond.

That said, I'd disappointed that, as far as I am aware, the backers of all the Social Impact Bonds being issued have been, or will be, governments. I'd have much preferred the private sector, in the form of non-governmental organizations or philanthropists, take the lead. The bonds being issued are intended to help vulnerable or disadvantaged people and it seems regrettable in today's climate that the other beneficiaries of taxpayer funds will be financial intermediaries who will take their cut of the transaction costs. Indeed, it seems these bond issuers will benefit whether or not the bonds work as intended. If the bonds do work as intended, that's fine, but we should remember that they are an experiment and, it would be a shame if they come to be seen as a means by which the financial services sector syphons off yet more cash from taxpayers while contributing nothing (at best) to wider society. The other danger is that if Social Impact Bonds fail - and especially if they do so while the brokers benefit - they could discredit the Social Policy Bond concept. For many reasons, therefore, I hope they succeed....

SIBs can be better than existing policy

Though still skeptical about Social Impact Bonds - the non-tradeable version of Social Policy Bonds - I do now think that under some circumstances they will be an improvement over existing policy. My main concern with SIBs is the danger that, being necessarily more narrow and short term than Social Policy Bonds, they will stimulate achievement of their targeted goals at the expense of people whose well-being isn't targeted for improvement. This possibility is lessened when the beneficiaries of a SIB regime are markedly disadvantaged. I am thinking now of the use of SIBs to target goals such as improving the well-being of the mentally unwell. (Here are arguments for and against the issuing of SIBs to brighten the employment prospects of mentally unwell people in New Zealand.) There will need to be provisos and careful monitoring, of course, as not all attempts to game a SIB regime can be foreseen and written into the redemption conditions of the bonds. But at this point SIBs are controversial, which is a positive in that it means that bondholders will want to ensure compliance with the bond issuers' intent and not only the bonds' legal stipulations.  

The advantages of a SIB regime over existing policy arise from their rewarding of outcomes rather than activities. Not as effectively as a pure Social Policy Bond regime, to be sure, but they should nevertheless stimulate greater efficiency in current activities and some innovation of new activities - a big plus where existing policy is thought to be failing.

You'll notice that I still have my reservations about Social Impact Bonds. Being better than existing policy is not always a great recommendation, though it could mean a lot to those individuals who (as in the New Zealand example) are in urgent need of new approaches. A pure Social Policy Bond regime would represent a drastic change from current policy with, I believe, commensurate benefits for all. SIBs can be a useful intermediate step towards such a regime.

Why I don't like Social Impact Bonds

When I first came up with the idea of Social Policy Bonds, their tradeability was an intrinsic part of their identity. Without tradeability, the bonds would be little more than prizes awarded to existing service providers for doing their jobs a bit more efficiently than previously. There's obvious scope for gaming here: perform badly, wait till the government issues SIBs, perform better, then cash in. But perhaps more important is the necessity for allowing new service providers - or, as I term them, outcome achievers - to buy the bonds at any stage and receive extra rewards, in the form of a rise in the market value of their bonds, for performing well. Without tradeability, that won't happen.

The way of the world is that big business and government go hand-in-hand. The way of Social Impact Bonds is is equally familiar and equally dubious: government thinks it knows best who will deliver certain services and rewards them if they improve their performance. These will be existing service providers or, just possibly, new bodies upon which the government is equally keen to bestow favour for some reason or other. The whole point of my Social Policy Bond idea is to bring about creative destruction into the achievement of social and environmental outcomes. Under a Social Policy Bond regime new approaches and new organizations will be rewarded if, and only if, they are more efficient than anyone else. Social Impact Bonds won't do that: existing organizations will be favoured; they will have some incentive to perform their existing functions more efficiently, but little incentive to look at new approaches. For one thing, innovation risks rocking the boat. For another, SIBs, because they are not tradeable, are going to be restricted in their time horizon to that of existing organizations: they will take a short-term view, relative to the complexity of our social and environmental problems. This is a major deficiency: it restricts the scope of the bonds to narrow, short-term goals. As well, the costs of monitoring progress toward such goals is going to be large relative to sums at stake.

Contrast this with Social Policy Bonds, which are not limited by the prejudices of government (or anyone else) as to how our goals shall be achieved nor who shall achieve them. So we can target long-term social goals that will inevitably require diverse, adaptive approaches: reduced crime rates, for example, or improved health. We can even target global goals, like human development or the sustained avoidance of violent political conflict. Governments that issue Social Policy Bonds don't have to take a view as to which organizations are best placed to achieve such goals, nor as to how they shall go about achieving them. That work is done by bidders for the bonds who will be motivated by the rewards they get for helping achieve the targeted outcome. Note the word 'helping': a single organization need not achieve the entire goal to be rewarded under a Social Policy Bond regime: helping raise the likelihood of early achievement of the goal will generate reward in the form of the increased value of the bonds they (or a contracting agent) owns. Social Policy Bonds encourage a coalition of interests, whose composition and structure will change in response to changing circumstances, to co-operate in exploring and implementing a diverse, adaptive array of initiatives with the aim of achieving our broad social goals, even ones as seemingly remote and unattainable as universal female literacy or world peace.

For more on this see my short article: why the bonds must be tradeable. Also previous blog posts. For another critical view of SIBs (in New Zealand) see here. Contact me if you would like to know more.

Dog food or doomsday

A longer version of a previous posting:

It's a puzzle to me how we have created regimes that allow financial incentives to operate creatively in interesting but ultimately not very important aspects of our lives - advertising dog food, for example - while ways of dealing with the most serious determinants of mankind's well-being rarely reward efficiency. So employees of companies selling dog food have sales and revenue targets to meet, stringent deadlines, and they are offered meaningful incentives backed up by robust reporting and analysis systems to monitor progress and so achieve maximal dog food market penetration. In contrast, responsibility for what you might think should be major priorities for homo sapiens is given over to the dead hand of government or brave, well-meaning, hard working but under-resourced non-governmental organizations.

What are these priorities are? Most of us would probably give a high rating to things like avoiding the deaths of many millions of people in a nuclear exchange. Or the ending of any violent political conflict of the sort that, amazingly, in the 21st century, still kills, maims or makes homeless countless thousands of us around the globe. Or minimising the deaths caused by natural disasters, or pandemics.

Climate change too: it's no different from other potential catastrophes in that we don't know when or how it will strike. The most fortunate amongst us can insure against some of the financial costs of some adverse climatic events. But even there, markets cannot fully redress the balance. The uninsured, whether uninsurable or not, cannot be compensated at all. Markets are even less capable of addressing the more global calamities of nuclear war, or large-scale violence.

Some years ago I came up with the Social Policy Bond idea, which aims to channel market incentives into the achievement of social goals. Much of this idea has been taken up by governments worldwide, in the form of Social Impact Bonds. But SIBs leave out one crucial aspect of the Social Policy Bond principle: tradeability. When the bonds are tradeable on a secondary market, we can greatly enlarge their scope, because we do not have to specify which organizations shall achieve our goals, and because we can target goals that might be too remote to interest existing organizations.

Take something that has recently made the news: nuclear catastrophe. As the members of the Bulletin of Atomic Scientists shift the hands of their doomsday clock to three minutes to midnight, where are the incentives that will mobilise large numbers of us actually to do something to avoid the doom represented by midnight? There aren't any - we're all doing better by devoting our ingenuity to selling dog food.

The answer could be Social Policy Bonds. Targeting nuclear catastrophe they would be backed by governments, NGOs, philanthropists and anybody with a strong interest in human well-being. Floated on the open market they would become redeemable for, say, $1m each only after a thirty-year period during which no nuclear explosion takes place. Floated on the open market, they might fetch just $10000 each, if the market thinks the probability of thirty years’ nuclear peace is low. But these bonds would be tradeable: their value would rise and fall according to how likely people think the peace target will be reached.

Initial investors would buy the bonds and do whatever they can to increase that probability. Even helping existing ways of monitoring nuclear material might see the value of their bonds double. Others, with expertise in different areas, would buy their bonds and do what they can to raise the value of the bonds still further. At every stage, the bonds would be in the hands of those most able to bring about nuclear peace. The bondholders’ goal is exactly congruent with society’s: they make money only by achieving society’s goal. At every stage of every process required to achieve that goal, incentives will motivate people to be as efficient as possible.

Rather than encourage endless speculation about what projects will make the world more peaceful the bonds would, in effect, contract out the achievement of world peace to the market. They would encourage a wide range of adaptive projects, whose sole criterion for funding would be that they would raise the probability of world peace being achieved. In this way, the governments and others who back the bonds would do what they are best at: articulating society’s goals and raising the revenue for their achievement. At the same time, the market would be doing what it is best at: allocating resources as efficiently as possible.

If nuclear peace sounds too lofty a goal, then we could start by aiming for something like peace in the Middle East. The same principle would work for natural disasters or climate change. In every case, we'd be rewarding the successful achievement of a sustained, desirable outcome, without - as now - distracting ourselves by self-indulgent irrelevancies such as who shall achieve it and how they shall do so. It is a shame to me that few people seem to think along these lines.

Greenhouse gases, recidivist rates, cholesterol, and the one percent

What do greenhouse gas emissions, recidivist rates and cholesterol readings have in common? They are all surrogate indicators; that is, they are things that governments target, thinking (or pretending to think) that by doing so they are benefiting society. They aren't. Whether the associated loose thinking - or just plain dishonesty - originates in government or in the people who pay governments to shape the regulatory environment in their favour, surrogate indicators have little to do with human well-being.

Perhaps we need to ask in whose interest it is that we target things like greenhouse gas emissions, or recividist rates or cholesterol readings? Surely, if we want to reduce the adverse impacts of climate change on humans and the environment, we'd be better off, with all the scientific uncertainties, to target reductions in those negative impacts? Similarly, if we actually want to reduce crime rates, why don't we target crime rates rather than recidivist rates, which have very little, if anything, to do with crime? And if we want to target physical health, why don't we reward improvements in physical health, rather than encourage the mass ingestion of statins, whose long-term effects are nebulous at best and dangerous at worst?

One reason that I am a less-than-enthusiastic supporter of Social Impact Bonds is that they are targeting recidivism rates. Their targeting of an indicator that has nothing to do with things that matter to ordinary people risks discrediting the whole idea of channeling the market's incentives and efficiencies into the public good. We have had plenty of recent and disastrous experience of financial instruments being gamed to death, with calamitous effects on ordinary hard-working citizens. So we need to be very careful about introducing new financial instruments. There is, unfortunately, every reason to be cynical. Bankers, consultants, the financial services sector, big corporations, government agencies and even non-governmental organizations all have made lots of money doing things that are purportedly in the public interest, but in fact have done nothing for ordinary people.

That is why I suggest that Social Policy Bonds target only metrics that are, or are inextricably linked to, indicators of societal well being. The bond mechanism allows for that sort of targeting, because it does not specify how our goals shall  be achieved, nor who shall achieve them. Unfortunately, without that sort of guarantee, there is every reason to expect that the well-meaning targeting of rhetorically persuasive but flawed indicators will continue to enrich only the one percent.

SPBs, SIBs and SOBs

It's probably too early to say whether the doubts being expressed about Social Investment Bonds (SIBs) are fatal or not, but one thing is clear: at best the bonds will function like performance related contracts. An improvement on most current government approaches, perhaps, but in terms of ambition and potential for real change SIBs fall far short of Social Policy Bonds. They aren't tradeable, which sounds like a mere technical detail but in fact severely limits how useful they can be. I've outlined why here, so in this post I'll just concede that Social Impact Bonds is a better name than Social Policy Bonds.

I'm reminded about why I chose the name Social Policy Bonds by the website linked to in the first link, above. It's a long pdf, which documented the meeting at which I first pubicly presented the bond concept, in 1988. I'd originally used the name Social Objective Bonds, until a colleague read my draft paper and told me exactly what the acronym meant and how widespread it was.

Target crime, not recidivism

I've done a short piece on my main website about why I think Social Policy Bonds must be tradeable. In this they differ crucially from Social Impact Bonds. Because they can't be traded, SIBs must target fairly narrow objectives, and ones with relatively short lead times. This makes them easier to try out and, unlike Social Policy Bonds, SIBs have actually been issued. In the US and the UK SIBs have been issued that target recidivism. There are numerous problems with this, most of which are discussed by Theodore Dalrymple, who also succinctly points out their most important flaw: 

The public wants to be protected against crime, not against recidivism... What Does It Mean To ‘Punish’ Syria?, Theodore Dalrymple, 'Library of Law and Liberty', 8 September

Tradeability sounds esoteric, but it's not. It's a fundamental distinction, and one with large consequences: under a Social Policy Bond regime we can target exactly what we want to achieve; under a SIB regime we can aim at solving only narrow problems that are short term in nature. This means that they fail to capture the public imagination and perhaps even more importantly, lend themselves far more readily to being gamed or manipulated. My hope is that they don't discredit the whole notion of channelling self-interest into the achievement of broad social and environmental goals.

Social Impact Bonds: not very exciting

Toby Eccles earlier this year asked why uptake of Social Impact Bonds hasn't been spectacular. SIBs, you may recall, are similar to Social Policy Bonds, but they aren't tradeable.

And because SIBs are not tradeable, objectives have to be narrow, and so will fail to capture the public imagination. Also Mr Eccles says, '[g]overnment likes to know who it’s dealing with' and this, to me, is another problem with SIBs: they take current institutions, with their agendas, hidden or otherwise, as a given.

Tradeability makes Social Policy Bonds wholly different. With tradeability people can make a profit without holding the bonds until the targeted goal has been reached. So with Social Policy Bonds we can target broad, long-term goals that:

• appeal more to the public. With Social Policy Bonds goals such as universal literacy or world peace can be targeted. But with SIBs they are as unimaginably unrealistic policy goals as they are they are under the current system; and 


• therefore are far more likely to be be issued and backed by bodies other than government, including the public. 

Almost there

More on Social Impact Bonds in the Economist of 23 February. I've posted about SIBs and compared them to Social Policy Bonds in previous posts (here, for example). I'm glad to see the concept of payment for performance enter social policy. The flaw, though, remains that SIBs don't appear to be tradable and so, under a SIB regime, as the Economist says:

Projects which take many years to have an effect (the impact of pre-school education on university admissions, say) will not interest investors.

I have outlined my reasons for advocating tradability of the bonds here. It does appear, I'm pleased to say, that there are bodies interested in making a secondary market for SIBs.

When I first came up with the idea of Social Policy Bonds one of my colleagues told me that I was 20 years ahead of my time. He was almost right: it's been 25 years. This long pdf contains my first published paper on the subject and is dated 1988.