Capitalism at the Rescue of the Most Vulnerable Nations? The Irony of the World Bank’s Pandemic Bonds

By Valérie L’Heureux 

196 million dollars. That is the amount that was withheld for more than three months to low and middle-income countries that should have been channeled for urgent aid to tackle the worst outcomes of the pandemic. All this because of the dysfunctional design of the World Bank’s pandemic bonds, which represent a good illustration of the flaws of the financialization of international aid and of investors profiting from social ills.

What are the pandemic bonds?

Drawing from the growing popularity of catastrophe bonds in the reinsurance market over the past decade and following the Ebola outbreak in West Africa, the World Bank launched the pandemic bonds in 2017 as specialized funds to finance its Pandemic Emergency Financing Facility (PEF). This initiative is part of a broader strategy of the World Bank to include financial actors into developmental efforts. With the pandemic bonds, the international organization has set out to leverage private capital in order to generate funds for the International Development Association (IDA) borrowing countries - a group of 76 of the world’s poorest nations, in the event of a crisis.

Organized as a derivative, investors are essentially placing a bet on whether or not a pandemic will happen in a given period. If a pandemic occurs, the money (part of the investments made by institutional investors like asset managers, pension funds, and specialized cat bonds investors) goes to developing countries to help pay for prevention and containment efforts. If not, investors, European and American in a sweeping majority, would otherwise receive a substantial rate of return on their investment.

The bonds and derivatives total $425 million and are tranched into two categories: Class A, less risky, raised $225 million, Class B, a riskier bond, raised $95 million, with an additional $105 million in swap derivatives. The top donor countries were Germany and Japan, and together with the World Bank, they paid coupons (the annual interest payment) to the investors (Brim & Wenham, 2019). The scheduled maturity date was set to July 15th, 2020.

Taken at face value, it seems like a fair arrangement, effectively transferring the pandemic risk of low-income nations to global financial markets, at least partly. Rather than relying only on foreign governments for aid, funds are generated through the market. However, in practice, the bonds have been almost as beneficial to global investors as they have been for developing countries, with costs totalizing around 115 millions by the end of last year, mainly in interest payments, while only 196 million in total was disbursed to IDA countries in relief payments.

Red Flags from the Get-Go

There have been many high-profile critics of pandemic bonds. Lawrence Summers, World Bank chief economist from 1991 to 1993, has called them “an embarrassing mistake” as well as a consequence of the “financial goofiness” of the World Bank (Igoe, 2019). Olga Jonas, a senior fellow at the Harvard’s Global Health Institution – who worked at the World Bank for three decades – considers the whole idea a “gimmick” (Gross, 2020) and a “photo-op” (Garcia & Vanek Smith, 2020).

In reality, the bonds have proven to be cumbersome and there were many obstacles that curtailed the efficacy and payout of these bonds in the event of a pandemic.

First, there was an excruciating 12-week waiting period between the first signs of a pandemic and the two-week calculation period during which the arbitrator came to a decision on whether to trigger the bonds. This was too late to prepare for a crisis that has demanded the mobilization of aid on a timely basis, with just a few weeks making the difference for prevention and containment.

Second, the terms of the payout were convoluted, and many feared that they would never be triggered: the contract detailing all the very restrictive conditions is 386 pages long (Vossos, 2020). Thresholds have been set high and are only focused on countries eligible to receive this help, putting too much of the burden on countries lacking the testing capacities to get the statistics needed (Garcia & Vanek Smith, 2020).

Third, the terms and conditions of the bonds, and their financial modelling, are highly secretive. Some experts noted that catastrophe modeling tends to be tricky “in that it harnesses tacit knowledge shared within closed, opaque communities” (Forgues, Etzion & Kypraios, 2020). In their research, Forgues and his colleagues found that it is not functioning “any better than guesswork” (2020).  A lot of the information that would be needed for a thorough analysis is not available. Consequently, we have to rely on reported data from the financial actors themselves, which could lack reliability as well as being partial. As for the USD $105 million in over-the-counter derivatives launched alongside the two classes of bonds, the opacity is total. 

Fourth, there are questions about whether the bonds actually mitigate risks or if they amplify them by making disaster relief dependent on the functioning of already precariously functioning financial markets. The current pandemic shows at a crucial time that the valuation of those types of bonds is, in fact, highly correlated with how financial markets perform as well.

For these reasons, the pandemic bonds have faltered in the current crisis. While the health care crisis was evident to everyone else, for global investors, the verdict remained up in the air for a very long period. Air Worldwide, the arbitrator (and modeler) of the bonds, did not agree to trigger a payout of the bonds until April 16th, well after the WHO declared the outbreak a public health emergency of international concern at the end of January. This is quite ironic if we consider the fact that pandemic bonds were advertised as an innovative solution to “tackle social ills through private investments” (World Bank, 2017). Those bonds clearly represent a distinctively neoliberal and financialized way of responding to crisis, seeking to generate market-based forms of support in the context of crisis rather than drawing on state funding. Their financial structure and the conditions for the payout demonstrate how this process was faulty in the context of the current pandemic. For obvious reasons, version 2.0 of this initiative does not seem in the plans for the World Bank.

References

Brim, B., & Wenham, C. (2019). “Pandemic Emergency Financing Facility: Struggling to Deliver on its Innovative Promise.” BMJ, 367, l5719.

Forgues, B., Etzion, D., & Kypraios, E. (2020). “Pandemic Bonds: The Financial Cure We Need for COVID-19?” The Conversation. 

Garcia, C., & Vanek Smith, S. (2020, March 24th). “Pandemic Bonds.” In Planet Money. NPR.

Gross, A. (2020, March 20th). “Waiting Game Continues for Pandemic Bonds Payout.” Financial Times.

Igoe, M. (2019, April 12th). “World Bank Pandemic Facility « an Embarrassing Mistake », Says Former Chief Economist.” Devex.

Vossos, T. (2020, March 18th). “Pandemic Bond Payouts Likely to Be Held Up By Fine Print.” Bloomberg.

World Bank. (2017, June 28th). World Bank Launches First-Ever Pandemic Bonds to Support $500 Million Pandemic Emergency Financing Facility.