Social Bonds

By Eric Crampton 02/12/2013

I hadn’t heard of this one before Rebecca Stephenson called asking for comment. New Zealand is looking to pilot a “social bonds” project. The full documentation is here; the redacted cabinet papers are here.

In short, NGOs and private providers interested in delivering projects they think will achieve objectives sought by the government, whether initiatives to reduce criminals’ recidivism rates or to help drug addicts get clean, can pursue funding for their initiatives through a bond issue. If they beat the programme’s target expectations, the investors get a nice return scaling with the project’s success. If they don’t the investors lose out.

The project certainly looks worth trialing.

KPMG provided a case study based on alcohol intervention programmes. I rather like the idea: projects then are targeted at truly harmful use rather than broader interventions. Unfortunately, they illustrated some of the potential savings from such initiatives by pulling in social cost figures from the BERL report. However, they do provide a nice caveat in Appendix 3:

The Berl analysis has been independently critiqued and it is likely the social costs have been overestimated.22 The analysis is referred to in this business case to illustrate the social cost, not provide evidence of the social cost. The scale of total costs and the comparative proportions of the cost components should not be relied on for the Social Bonds pilot, however the work does provide an illustration of the different types of social costs that should be considered for alcohol and drugs. 

They do correctly note that there are large potential benefits in reductions in costs to the health and justice sectors from targeted interventions for harmful drug and alcohol use, even if these are overestimated in the Berl report.

I told Rebecca:

Social bonds let investors bet on the interventions they think will work in reducing social problems. This provides rather a few advantages, not the least of which is forcing the use of measurable and achievable performance indicators. While I hope the business cases for particular bond issues will be a bit more robust than the case study provided by KPMG, and that Treasury will be keeping an eye on things to ensure realistic estimates of potential social benefits, the initiative seems well worthwhile.