Counterparty risk is the agenda today with an excellent article below. Most non financial folks never pay attention to the creditworthiness or reliability of their trading or investment partners while most financial professionals often worry about little else!
The UK government changing goalposts over the Peterborough bond raises issues which will be instructive to future students of SIBs but short term raise all sorts of thorny questions about just how reliable a Counterparty the (UK) government can be.
When bond issuers (or commissioners as they are referred to in the article below) chop and change they may find investors become restive and indeed wary about future deals. This is particularly vital where bonds may be commissioned by NGOs or other bodies not invariably renowned for their business practices…let alone in the corridors of government!
“Counterparty Risk” Seen As Key As Peterborough Prison Bond Peters Out
Vibeka Mair – Responsible Investor
There were two milestone events in the world of social investment recently.
First up was the announcement of the winners of contracts to deliver probation services across the UK. Catering and outsourcing firm Sodexo, in partnership with crime reduction charity Nacro, was named as preferred bidder to supervise tens of thousands of low- to medium-risk offenders across England.
It is part of a £450m-a-year privatisation of 70% of the work of the probation service – and is probably the final nail in the coffin of the pioneering Peterborough social impact bond, which is being scrapped by government earlier than planned despite a steady reduction in reconviction rates and expected returns for investors.
The following day saw the launch of the Choosing Social Impact Bonds: A Practitioner’s Guide report by Bank of America Merrill Lynch and social investment firm Bridges Ventures.
The timing was coincidental, but the report could not ignore the Peterborough experiment, talking about the “counterparty risk” inherent in such SIBs.
Discussing the Peterborough project specifically, the report stresses: “For SIBs to flourish, investors will seek reassurance that commissioners [those who commission projects] are committed over a sufficiently long-term time horizon,” the report states.
It even quotes an unnamed investor as saying the “government does have a tendency to change the rules. Their tinkering with the system is a big risk”.
Investors hate the goalposts being moved, but that is just what it seems happened with the Peterborough scheme.