Reconciliation and Development Bonds in South Africa – an Innovation in Development Finance

For the last several years, I have been watching with fascination and admiration as my friend and Washington College of Law colleague, Daniel Bradlow, has been developing more or less from scratch an innovative tool in development finance for his native South Africa, what he has titled “Reconciliation and Development Bonds.”  Professor Bradlow heads the international legal studies program at WCL, which is attended by LLM and SJD students from around the world, including a significant number from sub-saharan Africa, partly through various scholarship programs.  (If I may say so, WCL has an extraordinary international legal studies program for students from abroad.)  He is also a leading expert in development finance, teaches a highly regarded course on the subject, and has long been an outside advisor to the African Development Bank, the World Bank, and other institutions on making development programs compatible with human rights, local needs, etc.

A couple of years back, Professor Bradlow began to pursue the idea of the sale of bonds that would be purchased by corporations that had business in South Africa, as well as ex-pats and emigres from South Africa, of whom there are many around the world.  The bonds would be used to fund development projects in South Africa.  They would, however, genuinely be bonds, repaid with a socially responsible investing subsidized rate of interest.  This has meant, of course, that not only must the bonds be structured carefully, most importantly there must be projects and a mechanism for choosing projects that can sustain the payments required under the bonds.  Professor Bradlow has been working out these mechanisms, spending much time back in South Africa over the last couple of years.

For a lot of folks, this is not exactly the moment when anyone wants to hear about “innovative financing.”  But despite the current financial crisis, finding ways to utilize the tools of modern finance and access to global capital markets is a crucial task for development.  Part of the reason is in order to access more capital than is available through the usual nonprofit capital markets.  But a second part of the reason is in order to draw in the discipline of the market, at least to some extent, in selecting and not selecting projects for funding.  The criterion of having to repay the loan is not by itself a guarantee of social efficiency but it can certainly help reduce, properly structured, inefficient transaction costs, rent-seeking, and wasting of valuable funds.  Here is an abstract of a paper describing Professor Bradlow’s project, including a SSRN link:

An Innovative Approach to Reconciliation in Post-Conflict Societies:

The Reconciliation and Development Project (R&D Bonds) is an attempt to explore the roles that private financial markets can play in promoting both reconciliation and development in post-conflict societies like South Africa. Its premise is that these societies require more than procedures for truth telling and accountability, which are designed primarily to re-establish good relations between the state and those who suffered under the old order. It also requires reconciliation between different social groups, which in turn requires helping those who suffered under the old order to gain or regain lives with dignity and opportunity.  The project is built around applying the author’s 3 principles of “reconciliation-financing” to South Africa. These principles are: participation by enough people to demonstrate a serious community-wide interest in reconciliation; raising sufficient funds to finance enough projects to make a meaningful difference to the situation of specific poor communities; and a sufficiently effective delivery mechanism to  satisfy both those who contribute funding and those who benefit from it that the project can make a noticeable impact on solving the problems caused by the conflict.