Social impact bonds require critical reflection

Members of the South African National Defence Force patrols Alexandra, Johannesburg Picture: ALAISTER RUSSELL

In addition, the bond has a penalty feature of a number of basis points, in the event that the government fails to spend the money on the projects it selected for the bond issuance. Should this happen the penalty is that the yield of the SIB would price back at market yields. This superiority premise is the ideological quicksand. The distinction between market-based finance and non-market-based finance is the best platform to see the quicksand for what it is.

In fact, the SIB itself concedes the fallacy of these beliefs. How? The lower return it offers is explicitly trying to distort market prices to impose a particular non-market allocation of capital. This SIB is an unwitting concession that in its everyday capital allocation process the market cannot distinguish socially impactful projects from wasteful ones.

Markets are powerful and have many uses; the need to distort their prices is a canary. Is it possible to find non-market-based liquidity pools that have structurally natural affinity to social-impact investing? This brings us to the other side of our quicksand platform: non-market-based finance. This is the use of balance sheets to warehouse non-market-tradable financing, on a hold-to maturity basis.

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