Two years ago the World Bank celebrated what it called "a decisive step": an attempt to use global bond markets to change the face of aid and development.
The Bank had just sold its first "pandemic bonds", raising $ 320 million from private investors, in an agreement to help developing nations face a serious outbreak of infectious diseases. It was a way to "capitalize on our capital market skills," said chairman Jim Yong Kim, "to serve the poorest people in the world."
Only a year later, a serious Ebola attack hit the Democratic Republic of the Congo. So far it has caused nearly 500 deaths and has become the second largest outbreak ever recorded, according to Médecins Sans Frontières. Yet the bonds still have to pay a penny.
An emergency fund linked to the World Bank has paid the Democratic Republic of the Congo over $ 11 million and is preparing to deliver more. But the lack of support so far from the pandemic bonds, which mature in July 2020, has raised questions about the limits of financial innovation. The bond criteria includes the requirement that a disease should spread across an international border before the affected nation can receive cash – which has not been the case in the DRC and Ebola so far.
Critics argue that such legalistic structures do not easily adapt to the world of development and charity.
"Risk finance is a new route for the privatization of profits and the socialization of losses," said Bodo Ellmers, head of the European Debt and Development Network (Eurodad) policy. "It would be better if donors financed the necessary assistance directly".
Pandemic bonds have been divided into two classes: one that covers diseases such as influenza, which pays out to investors a 6.5% coupon compared to Libor and the other that covers Ebola and other diseases, paying 11.1% compared to Libor.
Coupons are paid by Germany and Japan donor nations. If the bonds mature without paying, investors recover their money, in addition to coupons.
Pandemic bonds are just one example of a broader trend: investors have also bought bonds for vaccines, while the growing market for catastrophe bonds is another example of how private funding is financed to replace traditional funding structures. like disaster relief.
According to the World Bank, the purpose of pandemic bonds is to tackle social ills through private investments.
"If Anderson Cooper flies there [to a disaster zone], the international community will pass the hat, but this tends to be more recovery and money for reconstruction, "said Michael Bennett, head of structured finance at the World Bank Treasury, referring to the CNN presenter." We are targeting emergencies, trying to make money fall immediately. . . transferring some of these risks into the private sector helps increase the risk capital pool out there. "
But Bennett noted that the bank adopted a "very literal" definition of a pandemic as an event that extends beyond a country. "We were looking at things that were crossing the borders – Sars, Mers [a respiratory virus], Zika, [a previous outbreak of] Ebola. These were the experiences we had in our minds, "he said.
The largest holder of the Ebola bond is the manager of the British fund Baillie Gifford, according to Bloomberg data. Baillie Gifford declined to comment on her motivation to buy the bond when contacted by the Financial Times.
Stone Ridge Asset Management, a New York hedge fund listed by Bloomberg as an Ebola bondholder, was not available for comment.
Heidi Crebo-Rediker, former chief economist of the United States Department of State and an adjunct member of the Council on Foreign Relations, who runs the consulting firm International Capital Strategies, said he was "not worried" about the use of capital market to finance aid.
"If there is, in fact, a particular constraint in the case of the pandemic bond, then it does not reflect negatively on the principle of capital market use, but it is a factor that must be taken into account when plans the future funding facilities, "he said.
Bonds are a useful way to finance aid because their proceeds can be used as "pre-financing" for emergencies where "you need money immediately", added Crebo-Rediker.
The World Bank itself thinks there is a real margin to expand the concept. Pandemic bonds could help create a private market in securing emerging economies against medical risks, according to Mukesh Chawla, the coordinator of a World Bank's pandemic emergency facility.
"If we can bring private money into play and keep improving [the bond structure] and make it easy and profitable for countries to buy insurance, then it could be a process [by which] countries can self-cover themselves over time, rather than relying on donor assistance, "said Chawla.
But for now at least some are skeptical.
Tim Jones, policymaker at the Jubilee Debt Campaign, a pressure group, stressed that capital markets "insist on such high premiums, coupon payments and harsh conditions … to reduce the real risk they are taking", adding: "In such circumstances the public sector is always likely to lose".