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The dilemma of disruption / 47th St. Gallen Symposium / 3–5 May 2017
Nathaniel Ware – Tradable Income-Based Securities (TIBS) as a Mechanism
to Improve the Provision of Services to Disadvantaged Populations
St. Gallen Symposium

Tradable Income-Based Securities (TIBS) as a Mechanism to Improve

the Provision of Services to Disadvantaged Populations

Nat Ware is one of the top six contributors to this year’s St. Gallen Wings of Excellence Award. He studies at the
University of Oxford and will attend the 47th St. Gallen Symposium as a Leader of Tomorrow.

Nathaniel Ware (UK), Ph.D. Candidate in Economics, University of Oxford

Nat Ware is a social entrepreneur, economist, and international development specialist. He is the Founder/CEO of
180 Degrees Consulting, the world’s largest volunteer consultancy with 81 branches across 33 countries and over
5000 consultants. 180 Degrees has provided 2.6 million hours of consulting to 1829 organisations to help them
improve and expand their services (www.180dc.org). Nat has won numerous academic awards, including Top Ox-
ford MBA Student, Best Performance in Development Economics at Oxford, and University Medal for Best Academic
at Sydney University. He was a Visiting Fellow at Princeton, and lectured a postgraduate course at age 21. He is a
Rhodes Scholar, Goldman Sachs Global Leader, WEF Global Shaper, was awarded Best Speech at the World Debating
Championships, won the European Venture Capital Competition, was awarded Best All-Rounder at Sydney Univer-
sity (1/40,000 students), has swum the English Channel, has completed an Ironman triathlon, and has given three
acclaimed TEDx talks.

Introduction on to risk. Also, given a portion of any certain percentage of their future income
As refugees are being resettled in the additional income is captured by the separate from taxation, face the chal-
millions, as girls across the Global South government via taxation, even if ag- lenges of adverse selection, moral
struggle to access ten years of high-qua- gregate investment benefits exceed hazard, income misreporting, and pay-
lity schooling, as indigenous popula- costs, individual costs may exceed bene- ment enforcement. Social impact bonds,
tions continue to endure dramatical- fits, making suboptimal investment in where governments pay investors if
ly different living standards, and as oneself rational. specific social outcomes are achieved,
automation leaves millions of wor- Non-Profit Financing: Many non-profits are have a capped upside, are costly to ne-
king-age people unemployed and in effective but non-scalable because they rely gotiate, and are typically based on one
need of retraining, there is one questi- predominantly on donations. For example, social outcome measurement at one point
on that should be on everyone’s mind: Darkinjung is an innovative non-profit indi- in time, which increases risk and fails to
“How can we finance high-quality genous school in Australia (Barker, 2016). It capture all the social impacts of an invest-
basic services, such as education, health, has proven effective at bridging the signifi- ment (Fox & Albertson, 2011).
sanitation, and housing, to disadvantaged cant educational gap between indigenous Government Financing: Often a
populations at scale?” It is a question that, and non-indigenous populations, however government’s primary goal is being
if answered, could improve the lives of bil- it relies on over €600,000 per year in dona- re-elected, which corresponds to
lions worldwide. tions to educate just 28 students. To repli- maximizing the wellbeing of citizens wit-
The problem is not so much a lack cate Darkinjung for all 11,342 Australian hin a short-term time-horizon. Unfortuna-
of ideas for how to provide services indigenous students would require them tely, investments in education and preven-
effectively, but that existing solutions to raise €243M annually – an improbable tative healthcare have long-term returns,
are not scalable based on current finan- task. so there is an incentive to underinvest.
cing methods, including financing from Business Financing: Private investors Governments may also find it politically
individuals, non-profits, investors, and often struggle to make the provision difficult to provide high-quality services
governments. of high-quality services to low-income to disadvantaged groups, especially if this
populations profitable. Upfront means generating a deficit, using taxpayer
Limitations of Existing Financing Methods payments are rarely possible. Long-term money on non-tax-paying refugees, or ris-
Individual Financing: Disadvantaged fixed-repayment options are proble- king programmatic failure and the percep-
individuals may struggle to finance matic due to the risk burden on indivi- tion of waste.
their own services due to limited credit duals, financial returns accruing beyond As such, each stakeholder faces challenges
history, cash flow constraints, lack of the time-horizon required, and high in financing and providing high-quality ser-
familial support, negligible or non-exis- default rates. Microequity arrange- vices at scale. In other words, the scale of
tent savings, and a rational aversi- ments, where individuals pay investors a the problems facing our world demands
St. Gallen Symposium

solutions that no one stakeholder can sup- tly, or (b) work with non-profit providers
ply. What is needed is a new type of pub- with surplus capacity and/or existing
lic-private partnership. expertise. Even if the investor contracts
with non-profit providers, the investor
Ideal Situation still has an incentive to select the most
When financing services, one would like to effective provider and to hold them ac-
know ex ante which investment is objecti- countable for their effort and performan-
vely expected to be the most effective, gi- ce. This is because the investor benefits
ven there are multiple ways to achieve each financially from good social outcomes.
development outcome. Then, underprivile-
ged populations would ideally receive the Step 4. Value Transfer (Government to Bu-
Step 1: Contractual Agreement
highest-quality services in a way that (a) siness)
The government and an investor agree to
does not cost them anything at anytime, Every year throughout the lifetimes of the
a contract with five components that takes
(b) does not require the government to pay, individuals that have received investment,
the following form: (s,q,N,P0,a). s is the spe-
(c) does not rely on donations, and (d) gene- the government passes on to TIBS holders
cific type of service that must be provided
rates profit for investors. Finally, we would (initially the investors) the agreed portion
by the investor. q is the quantity to be pro-
want to easily measure the social impact of of taxation revenue it collects from the in-
vided. N refers to the population of indivi-
investments ex post. Is this ideal situation vestment recipients.
duals who have consented to receive such
too good to be true? Remarkably, no. In this way, the government utilizes its exis-
services. P0 is an initial lump-sum payment
ting institutional role as the collector and
to be made from the investor to the gover-
Conceptual Foundation enforcer of taxation payments to act as
nment. a is a proportion of the taxation re-
The following idea arises from a deep un- an intermediary facilitator between indivi-
venue from the individuals receiving invest-
derstanding of the relationship between, duals and investors. This avoids the need
ment, which will be transferred annually by
and sequencing of, social value creation for investors to collect and enforce inco-
the government to the investor (or whoe-
and financial value creation. Importantly, me-based payments, which would be logi-
ver owns the TIBS). By way of illustration,
in the vast majority of cases where impact stically, financially, and legally problematic.
the German government could contract
investments are made – whether providing
with an investor to provide a three-year
education, healthcare, housing, sanitation, Step 5. Securities Exchange (Business to Bu-
plumbing training course to 5,000 newly
or employment – the effect is increased ex- siness)
resettled refugees, with an initial payment
pected lifetime incomes of the individuals After the completion of the investment,
of €10 million to the German government
receiving those investments. This in turn in- investors may sell the TIBS that they own
(P(0 )= €10M), and 20% of the taxation re-
creases the expected taxation revenue for to others, who then acquire the right to
venue that is collected from those refugees
the government. If this financial value that the stream of transfer payments from the
over their lifetimes to be passed on (a=0.2).
is subsequently created from social value government. The market price of the TIBS
can be attributed to and appropriated by reflects the present discounted value of
Step 2. Initial Transfer (Business to Govern-
those that finance investments, then there expected future government transfers.
may be greater incentive and capability to This ability for investors to sell the right to
Once the contract is agreed, an initial lump-
provide high-quality services to underpri- future streams of payments is of crucial im-
sum (P0) is transferred from the investor to
vileged populations. Such attribution and portance. It means the long-term impacts
the government, which can be viewed as
appropriation is indeed possible. of investments are incorporated into the
the purchase price of the TIBS.
short-term decision-making calculus of in-
This payment ensures that inaction or
A New Form of Public-Private Partnership vestors.
low-effort by investors would result in a fi-
Suppose there is a new form of public-pri-
nancial loss. Investors only profit if they pro-
vate partnership whereby the government Analysis of TIBS
vide services of high enough quality so as
contracts with private investors to provide This innovative new type of public-private
to increase the expected lifetime incomes
specific services to specific disadvantaged partnership works by combining the best
of the recipients and thereby increase the
individuals. Rather than paying the inves- elements of microequity, value capture,
stream of transfer payments to the point
tors in traditional ways, the government auctions, government institutional capa-
that it more than offsets the initial trans-
instead issues the investors with tradable bilities, business profit motivation, social
fer. In this way, high effort is incentivized
income-based securities (TIBS) that pay out impact bonds, and market exchanges, in
and high quality services are guaranteed.
every year as a function of the incomes of a new way. It is a truly mutually beneficial
those receiving services. The right to this partnership.
flow of payments is tradable, so the price of Importantly, social and financial returns
Step 3. Service Provision (Business to Soci-
TIBS is a function of the present discounted are perfectly aligned. The selfish action for
value of the expected lifetime incomes of investors to take is also the altruistic acti-
The investor provides the agreed service
the recipient population. on – to generate development outcomes
to the group of individuals that have con-
This new form of public-private partners- by providing the highest-quality services
sented to such investment. The investor
hip can be broken down into five key steps, with the highest level of effort to the target
may either (a) provide the service direc-
as shown in the diagram below. population. It is then that profit is maximi-
St. Gallen Symposium

zed, because this maximizes the expected Discounted Expected Marginal Impact social and financial returns, TIBS gives the
lifetime incomes of the population, thereby This type of public-private partnership has invisible hands a new GPS to a better north.
increasing the price of TIBS. The capacity an added benefit. It allows for a new mar-
for investors to sell TIBS allows realised re- ket-based measure of social impact. This
turns within a typical fund time-horizon measure, which we can call DEMI (Dis-
of 3-10 years, despite investments having counted Expected Marginal Impact), uses  
longer-term benefits. This makes short- the change in discounted expected lifetime
term profit possible, enabling investments income as a proxy for social impact. The ch-
to occur in the first place. Given that the ange in discounted expected lifetime inco-
potential financial upside for investors is me can be determined from changes in the
unlimited, and that investment capital far price of TIBS, since government transfers
exceeds philanthropic capital (O’Donohoe are a monotonically increasing function of
et al, 2010), investments in achieving de- income. Formally, the DEMI of an invest-
velopment outcomes could increase subs- ment can be calculated as follows:
To the extent that investors work with civil
society on service provision, this would re-
duce the time non-profits need to spend
raising funds, allowing more time for pro-
grammatic improvements. Non-profits
could scale up effective services and have a
larger impact.
Governments would benefit substantially As such, if an investor’s profit π is known,
from this partnership. Rather than spen- then a simple adjustment gives the social
ding taxpayer money on services upfront, impact of the investment. If profit is unk-
they receive money upfront. Even after nown, it can be calculated by summating
service provision, they do not pay anything. the disbursements to date and the current
Rather, they simply transfer a portion of the security price P_S, less the initial transfer
taxation benefit. The taxation transferred P_0 and investment cost C.
only exceeds the initial lump sum when
the investment turns out to be more ef- There are numerous advantages to DEMI
fective than the expected effectiveness of over the prevailing approach of Social Re-
the counterfactual investment (Appendix turn On Investment (SROI). These include
1). In other words, governments only have its objectivity as a market-based measure,
a positive net transfer to investors when its ability to compare programs covering
they receive a marginal taxation gain that different social outcomes, its continuous
is attributable to those investors. They only rather than intermittent nature, its expli-
pass on what they otherwise would not cit focus on marginal rather than absolute
have had. Importantly, there is no need for social impact, its ability to easily ascertain
the government to guess which providers the counterfactual impact, and the lack of
would be most effective. The providers need for separate funding to calculate. Gi-
with the greatest effectiveness expect to be ven this, DEMI could improve social impact
able to increase incomes, taxation revenue, measurement, helping capital allocation
and therefore the price of TIBS the most. decision-making be more evidence-driven
Since these providers expect to profit the and less emotion-driven.
most, they will bid the highest and win the
contract (Appendix 1). In this way, there is Conclusion
truthful revelation of effectiveness. As such, To address the refugee crisis, the indi-
there is no risk to the government - either genous crisis, and the inevitable automa-
financially or politically. tion-induced unemployment crisis, it is
Disadvantaged individuals are able to recei- essential to positively disrupt the way ser-
ve the most inherently effective services, vices are financed and provided. To do this,
with providers exerting the greatest effort, we must look beyond one-stakeholder so-
at zero cost. Since individuals simply pay lutions to innovative forms of partnerships
the taxation they would have otherwise between business, government, and soci-
paid, there are no additional challenges ety. TIBS offers a way to bring together all
regarding adverse selection, moral hazard, stakeholders in a mutually beneficial way.
misreporting, or enforcement. It could become the default way to finan-
ce essential services worldwide. By aligning