These Bonds Defend Against Pandemics. (Here’s Why They Didn’t Work Against COVID.)
In the first post of this two-part series, I outlined economic, psychological, and political reasons that we underfund preparation and incorrectly analyze the risks of pandemics.
In this piece, we’ll examine one program that was designed to overcome key hurdles in funding pandemic preparation (and why it didn’t work for COVID). To conclude, we’ll look at a few areas where we can improve pandemic resilience—so next time we can get it right.
One of the key points we saw in the first piece is pandemic preparation’s unique economic position as a global, intergenerational public good.
In this position, there is simply not a strong incentive for private, national, or international institutions to invest in preparation for pandemics and other large, one-off events. As such, improving pandemic preparation is not simply a matter of getting people to care about the issue—it also requires reworking incentive systems so that funding follows.
In this piece, I’ll outline one such solution: a program created by the WHO that made a bond market out of pandemic preparation.
“While every country in the world is susceptible to disease outbreaks, low-income countries with weaker health systems tend to be more vulnerable and less capable of mobilizing the financial resources to effectively respond to large-scale outbreaks.
→ Page 2, Operational Brief of the WHO Pandemic Financing Scheme
Following deadly outbreaks and widespread transmission of Ebola in 2013 and Zika in 2015, the WHO began re-evaluating its approach to pandemics. These diseases had emerged from developing countries and spread largely due to a lack of a robust initial response.
In many ways, Ebola and Zika demonstrated the failure of traditional pandemic responses—characterized by former World Bank President Jim Yong Kim as “cycles of panic and neglect.” When a novel pathogen began to spread, international organizations jolted into action; once it subsided, we resumed normality.
To have more robust protection, analysts at the WHO determined, we needed a better assessment of pandemic risk. By better understanding and mapping out these factors, we can more easily determine the right conditions and areas to provide funding.
As we saw in the previous piece, however, governmental bodies traditionally suck at predicting risks. To address these problems, some enterprising efficient-markets-believer at the WHO came up with a way to create a marketplace for this risk, thereby turning over the problem of “price discovery” to private risk analysts and investors.
As a result, in 2017, the WHO introduced the Pandemic Emergency Financing Facility (PEF), a vehicle for private investment in pandemic response. The PEF (described in detail below) was essentially an insurance policy—by making it a financial product, many hoped, pandemic prevention would draw more investment.
Before we dive into the mechanism of the PEF, we should understand that it had two core assumptions built into its operation. First, it required that emergent diseases arise from developing countries (e.g. countries with less sanitation, weaker medical systems, more human-animal contact, etc.). Next, it predicted that a sufficiently large injection of cash for pandemic response could “nip a pathogen in the bud”—clamping down on it before it spread too far.
With that in mind, this is (briefly) how the program functions:
- The WHO issues a series of high-yield, short-term bonds which are purchased by private markets (thus the task of risk quantification becomes a responsibility of the market).
- Money from those private markets goes into the PEF stockpile. The WHO pays a high interest on those bonds as coverage for the risk that private actors took in buying them.
- The money vested in the bonds is “unlockable” if there’s substantial spread of a new pathogen among developing countries, which are listed in the contract. Certain thresholds (e.g. number of cases, number of countries where disease is found, etc.) must be met.
- If a disease reaches those criteria, the PEF gets liquidated and all of the money gets sent to developing countries to mitigate the new pathogen. If nothing of the like ever happens, the WHO continues paying interest on the bond and returns the principal on maturation.
(I should note that the above process covers the “insurance” aspect of these bonds. Technically, the PEF also has a “cash option” for when the insurance criteria are not met, but that option has a much smaller funding amount.)
For a diagram explanation, see the flowchart I made below:
With the PEF in effect, people in developing countries had a financial “shield” to protect against the most deadly outbreaks! If a new disease got sufficiently bad, the PEF would simply liquidate and new funds for fighting the disease would become available.
In many ways, the PEF was a seemingly ingenious solution to a seemingly intractable problem. Faced with a problem that no organization (corporation, government, or international body) wanted to tackle, the WHO successfully re-oriented incentive systems to create a market around it. With this program, the WHO also no longer had to deal with the thorny problem of pricing risk— financial markets absorbed it in exchange for the possibility of a large reward. It was a win-win-win!
The first-ever bond sale took place in June 2017 and was oversubscribed by nearly 200% (the highest risk bonds had 11.1% interest rates). In glossy pamphlets and high-production videos, the World Bank and WHO heralded a new era of public-private partnerships that proudly declared:
“If the PEF had existed in 2014, thousands of lives could have been saved.”
The bonds were sold with an official maturation date of July 15, 2020. Until then, the PEF was supposedly a financial bulwark against pandemics—ushering in “a new era of capital markets as a force for good.”
At this point, after hearing about the PEF’s transformative effects, I’m sure every reader has the same question.
Now that the depths of COVID have passed us—what the **** happened?
The PEF’s Failure Against COVID
Considering the WHO’s heavy promotion of PEF as the pandemic response vehicle of the future, it seems like COVID would be exactly the type of event that the PEF was designed to prevent.
Unfortunately, as we all know, that didn’t happen.
While there were a host of factors that contributed to the pandemic bonds’ eventual flop, two key misconceptions within the program’s design stand out as factors that contributed to its eventual failure.
Misconception #1: Pandemics primarily affect developing countries.
The PEF was designed with outbreaks like Zika and Ebola in mind, viruses that emerged from places like rural Brazil, Guinea, and Sierra Leone. As we already saw earlier, the program’s operational handbook specifically sets insurance criteria based on case rates and exponential growth in developing countries.
This idea—that deadly pandemics had to emerge and spread from developing nations—was the first misconception. As we all know, COVID began its spread most furiously in developed countries: first China, then Asia, Western Europe, and the United States.
This mistake is even worse in light of the past pandemics we have seen. From H1N1 in the US to MERS in Saudi Arabia, plenty of recent pathogens emerged from developed countries!
Since COVID in particular spread more heavily in globalized, densely populated cities, the conditions for viral spread in developing nations were not met until April of 2020—a time when150,000 deaths had already been documented worldwide. At this point, the extra injection of $200 million scarcely helped.
Misconception #2: Pandemic toll is easily (and ethically) quantifiable.
Beyond its failure as an investment vehicle, the PEF also had broader ethical issues—particularly with its criteria for dispersal of funds.
To reach the monetary dispersal threshold for influenza, for instance, at least 5,000 infections needed to be confirmed within a rolling 42-day span. For ebola, however, at least twenty deaths had to be recorded in two countries in the span of a week.
With such cold numerical criteria as the only way of triggering the payment of hundreds of millions of dollars, morbid questions began to surface. Would assisted suicide for critically and terminally ill patients count as a death? Could bodies carried over the border trigger a payment?
For the bean-counters in vaulted financial institutions who only had to work with these criteria in the abstract, scrawling down sets of numbers and deaths was likely quite easy. It was just a problem of optimizing risk, confined to the world of mathematics and formalism.
For those battling the disease on the front lines of these countries, however, treating deaths as tally marks in a global insurance scheme wasn’t just an economic miscalculation—it was also patronizing, and ultimately dehumanizing.
Concluding Thoughts
Following their ineffective deployment during COVID, the WHO has already announced that it will not be issuing a second round of pandemic bonds. The experiment in creating a market for pandemic preparation, then, is over.
Private-public partnerships are hard. Private investors are driven exclusively by profit; public organizations must serve the common good. Balancing the two factors can be extraordinarily difficult — and is easy to mess up.
While the WHO did not succeed with this attempt, it may not be the end of all such ventures. In the future, however, the key is developing markets in the right areas: progress must start from the ground up.
Building more durable health infrastructure is a start—both in countries with government and private systems. Part of this means that pandemic preparation should not be reactionary; we ought to have viral screening and genetic testing programs in place to catch new pathogens earlier.
Research, too, is another area we can improve. This is one where we already see progress; funding has opened up greatly in infectious disease research since COVID.
Working across both areas, with the full force of public and private innovation, we can make real progress in the push for a more resilient world. And when the next fast-spreading, world-shuttering pathogen rolls around, we will it right.
