Investors profit, but pandemic bonds are not yet helping DRC

A new way of financing the fight against global diseases lured investors with annual returns of more than 11%. But the deadly Ebola outbreak in Africa is highlighting shortcomings of so-called pandemic bonds in halting contagions.

Two years ago the World Bank began selling the highyielding securities, modelling them on catastrophe bonds, which pay out in response to insurance claims for events such as hurricanes.

The pandemic bonds are triggered by patterns in deaths from infectious diseases.

While the $320m sale was hailed as a way to fight disease with finance, the funds are locked up by an arcane formula

— one that may rarely be satisfied by actual events. Bondholders are collecting rich interest payments even as the Democratic Republic of Congo (DRC) is struggling to arrest an Ebola virus outbreak that’s killed more than 1,800 people in the past year and threatens to spill into neighbouring nations.

“It was a lot of hype,” said Olga Jonas, a senior fellow at the Harvard Global Health Institute in Massachusetts and previously the World Bank’s economist coordinating avian and pandemic influenza. “They wanted to announce a new initiative that would impress the world.”

Mukesh Chawla, the World Bank’s senior adviser for pandemic financing and the facility’s co-ordinator, defended the bonds and explained they are part of an innovative financing mechanism designed to provide early, rapid funding to combat major disease outbreaks. It helps fill a gap after the initial outbreak and before large-scale humanitarian relief assistance can be mobilised, he said.

In the two years since it was established, the facility “has been operating the way it was designed to operate”, he said.

The World Bank sold the bonds, due July 2020, as part of an effort, called the pandemic emergency financing facility, to aid countries in the early stages of a global contagion of diseases such as bird flu and Ebola.

The issue was a bondholder’s dream. With US treasury yields near record lows, it offers a return found only in shaky, junk-rated bonds, sold from the best credit in the world and with a payout formula that was hard to trigger. The transaction was 200% oversubscribed, according to the World Bank.

While other funds from the facility flow to relief organisations relatively easily, triggering its $425m insurance fund is more complicated. There are conditions attached, such as that the disease must cause at least 20 deaths in another country.

A final arbiter, Boston-based AIR Worldwide, scours the World Health Organisation’s (WHO) reports to determine whether the outbreak fulfils requirements for the payout. The premiums for the bonds — one of 11.5%, the other 6.9% — cost about $36m a year, paid by donor countries including Germany and Japan, Chawla said. It’s a relatively low price in the market for catastrophe bonds.

For poor countries, the facility “is a source of grant funding for an outbreak for which the beneficiaries do not pay any premiums”, he said.

The World Bank has made other funds available to respond to Ebola, including $300m in grants and loans offered in July.

The WHO and its partners still need $287m for public health operations in DRC, according to an e-mail.

Jeremy Farrar, a director of the Wellcome Trust in London, says that while the bonds may not fill their envisioned role perfectly, the model should be adapted rather than discarded and started again.

“Let’s say it didn’t exist,” he said. “Would nation states provide the needed funding in the event of a pandemic? I wouldn’t be confident that they would. If it didn’t exist, we would probably have to invent it.”

The World Bank’s bond requires meeting a range of conditions, including deaths in two countries. Those conditions protect the pandemic insurance fund from inappropriate use, said Andre Rzym, a portfolio manager at Man AHL.

DRC’s Ebola epidemic is driven by nonmedical issues that may not lead to global spread, he said.

“Why is the current outbreak so serious in a single country?” he said. “It’s a societal issue; the real problem you have in DRC is political instability, violence and mistrust of authority.”

Critics say the bond’s complicated triggering mechanism slows its ability to stem infectious contagions. The 386-page bond prospectus lays out scenarios for global or regional spread that would trigger the insurance portion to be distributed to poor countries where cases are accumulating.

For example, a $95m tranche insuring against an Ebola virus outbreak pays investors more than $1m each month. For the funds to flow to DRC, the disease must cause at least 20 deaths in at least one other country within a specified time window. Deaths must also increase at a minimum rate during this period.

While Ebola continues to spread, just three infections have been confirmed in a neighbouring country, all traced back to DRC. The example suggests that the bond’s conditions make it unlikely that the insurance funds would become available early, when they would do the most good, said Andrew Farlow, an economist at the University of Oxford who studies pandemics.

“If you wanted to trigger it early, you would drop the requirement for spread to other countries,” he said.

THE CONDITIONS MAKE IT UNLIKELY THAT THE FUNDS WOULD BECOME AVAILABLE EARLY, WHEN THEY WOULD DO THE MOST GOOD