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Broken bonds

World Bank
Jim Yong Kim speaking at the IFC's 16th Annual Global Private Equity Conference in association with EMPEA/WikiCommons
Former World Bank president Jim Yong Kim sold $320 million in pandemic bonds during the Ebola crisis.  
The bonds, however, did not pay out, even though over 2,000 people have died. Credit: WikiCommons

The World Bank celebrated the 2017 launch of its ‘pandemic bonds’ with a glitzy video. Shots of gleeful African schoolchildren were cut with a speech from Jim Yong Kim, the Bank’s president, pledging to be ‘aggressive and creative’. The initiative would channel money quickly to disease outbreaks, he explained. But it has not delivered as promised.

The scheme was, in essence, insurance. The Bank sold $320 million of bonds and $105 million of financial derivatives to investors, asset managers and pension funds, mostly in Europe. If all went well, bondholders would receive regular interest payments and get their original sum back after three years. But if a serious epidemic struck in the Global South, they would lose their investment and funds would go instead towards fighting the disease.

The first test came in the Democratic Republic of Congo, which since 2018 has been battling the second-worst Ebola outbreak in history. The bonds did not pay out, even though over 2,000 people have died. Buried in the 386-page bond prospectus is a clause that the epidemic must spread to a second country, and at least 20 people die there. Only a handful of infections have reached neighbouring Uganda, so no payment has been triggered.

Then Covid-19 hit. This time the bonds have paid out $195 million – it was, after all, a once-in-a-century pandemic. But the small print mandated a 12-week waiting period after the first case. More time was lost as data was verified and cases rose. Funds were only released in May when the pandemic was in full swing.

‘There were plenty of people in the Bank who knew it wouldn’t work,’ says Olga Jonas, an economist at the Harvard Global Health Institute who previously worked on pandemic risk at the Bank. ‘This was meant to be impressive and innovative and flashy, to send a signal that the World Bank is solving something.’

These kinds of ‘exotic financial instruments’ were unnecessary, adds Jonas, because the World Bank can cheaply raise its own money from donor countries and capital markets, such as the $160 billion it expects to deploy in response to the Covid-19 crisis. ‘Public health is a public responsibility so it’s a big mistake to delegate it to private capital,’ she says.

The scheme was designed to make payouts unlikely. If it released funds easily, it would have to offer even more interest to entice investors (on top of almost $100 million they have already received). And the triggers are necessarily based on data and mathematical modelling – even though, as the Covid-19 pandemic has shown, it is fiendishly difficult to track the course of an ongoing outbreak.

‘This instrument is not fit for purpose and seems better designed for the needs of private investors rather than development,’ says Mark Perera of Eurodad, a civil-society network. The World Bank says it will not renew the insurance after the current bonds mature in July. The announcement was made quietly on their website in April, this time without a video.

New Internationalist issue 526 magazine cover This article is from the June 2020 issue of New Internationalist.
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