Even Larry Summers Denounces World Bank’s “PEF” Ebola Bonds That Enriched Investors at Expense of the Sick in the Congo

Even Larry Summers, the former World Bank chief economist who recommended sending garbage to poor countries, thought an Ebola financing scheme cooked up by his former employer went too far. As recounted by another former World Bank economist, Olga Jonas, in of all places Nature, the World Bank was enamored of the idea of having the private sector somehow participate in getting money to countries stricken by Ebola if and when they needed it in the wake of the 2014-2016 outbreak that killed over 11,000. Readers familiar with the sorry tales of privatization and social impact bonds know well that these gimmicks enrich intermediaries and investors at the expense of the intended beneficiaries. But schemes like this World Bank Pandemic Emergency Financing Facility (PEF) are particularly loathsome because they divert funds from critically important targets when there was no reason to be worried about a shortfall of financing. In other words, this looks like World-Bank-enabled looting.

It would be nice to do the customary thing and summarize the main terms of PEF but better people than me have thrown up their hands. Summers called it “financial goofiness”; Jonas tried parsing the “confusing” 386 page prospectus and appears able only to have teased out a few key elements. If I have this right, the bonds were intended to operate like credit default swaps, with investors getting 13% interest payments (ginormous) and somehow ALSO in ways that Jonas does not make clear, also got premiums from the PEF. Investors would get their principal back in 2020, but they stood ready to provide more funds if Certain Bad Things Happened.

However, as Jonas points out, the desire to have the financing look like a success (as in attract enough investors) led the World Bank to craft terms that were was too favorable to the money bags. For instance:

The PEF stipulates a payout of $45 million for Ebola if the officially confirmed death toll reaches 250 (which occurred in the DRC [Democratic Republic of the Congo] by mid-December last year), but only if at least 20 deaths occurred in a second country. Given that the WHO lists only one multi-country outbreak amid more than 30 that occurred in a single country, this requirement is inappropriate. The DRC is much bigger and more populous than all three countries involved in the West African outbreak.

The structure was so lopsided that despite the complexity of the program (a deterrent), the bond offering was 2x oversubscribed.

But why bother with this scheme, save to satsify the World Bank’s desire to be a good student of bad neoliberal ideas? Jonas points out that the World Bank, the UN and other international bodies have been able to provide funds for disease outbreaks like Ebola on a prompt basis. The shortcoming hasn’t been access to funds, as the PEF scheme presupposes, but poor information flows:

The world’s second-largest Ebola outbreak, in the Democratic Republic of the Congo (DRC), has now entered i

ts 13th month and has caused at least 1,800 deaths. In July, the World Bank announced that it would, independently of PEF mechanisms, mobilize up to $300 million towards the Ebola outbreak….

Rather than a lack of funds, vigilance and public-health capacity have been the main deficiencies. When governments and the World Bank are prepared to respond to infectious-disease threats, money flows within days. In the 2009 H1N1 influenza outbreak in Mexico, clinics could diagnose and report cases of disease to a central authority that both recognized the threat and reacted rapidly. The Mexican government requested $25.6 million from an existing World Bank-financed project for influenza response and received the funds the next day.

For the 2014–16 Ebola outbreak, substantial funds started flowing nine months after it began. Financing was slow because the affected countries, the World Bank and the WHO were not adequately monitoring the disease, and global health leaders did not pay attention until the outbreak became a full-blown crisis.

Even with the limited information Jonas ferreted out, the PEF bonds look like a boondoggle:

The PEF has already paid around $75.5 million to bondholders as premiums, but has not disclosed how much they have been paid in interest — and it is set to pay much more. However, outbreak responders have received just $31 million from the PEF, and the much-touted potential payout of $425 million is highly unlikely.

And worse, they may actually deter making far more critical investments:

The World Bank has said that the PEF is working as intended by offering the potential of ‘surge’ financing. Tragically, current triggers guarantee that payouts will be too little because they kick in only after outbreaks grow large. What’s more, fanfare around the PEF might have encouraged complacency that actually increased pandemic risk. Following false assurance that the World Bank had a solution, resources and attention could shift elsewhere….

Increasing surveillance, diagnostics and other capacities for response to outbreaks will do more than flashy financing schemes to reduce threats from infectious disease — including antimicrobial resistance. World Bank analyses show that poor countries’ investments in core veterinary and human public-health systems bring returns of 25–88% annually. The World Bank can provide robust financing and operational support for such investment; it should make this a priority.

Astonishingly, the World Bank plans to launch another round of PEF bonds. Who is benefitting from what look awfully close to payoffs? Jonas is correct in concluding:

But the best investment of funds and attention is in ensuring adequate and stable financing for core public-health capacities. The PEF has failed. It should end early — and IDA funds should go to poor countries, not investors.

But that sort of shoulder-to-the-wheel work that takes time but eventually produces substantial must not be flashy enough for the mandarins at the World Bank.

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  1. Ignacio

    Thank you for this post on WB nauseating financial practices. If “engaging the private sector” means looting the affected countries and even increasing the risks of disease spread, what is the purpose of such engagement?. The Nature article says that investors are all from 3 countries. Which countries? Do those investors publicly disclose their participation on the programme as proof of their solidarity? Do they disclose the meaty part of their contributions? Do they even pay taxes on such ‘pandemic benefits’ or do they get tax breaks for such honourable investments?

    1. 1 Kings

      Ok, so we finally found the knife-edge that ‘Ol Larry won’t cross.
      After destroying Russia’s economy, slicking the Asia tigers into submission, giving quaduple carte blanche to bank takovers, deriviatives, accounting fraud, extortion etc, helping Obama cover up said, Larry says, “Now Sir, you have gone too far!”

      Quoting Starfire from ‘Teen Titans Go’, Larry, You are not the nice.

    2. drumlin woodchuckles

      ” What is the purpose of such engagement”?

      Why . . . Jackpot Design Engineering, of course. Under a thick cloud-cover of Plausible Deniability lent by respectable names such as “Germany”, “Japan” and “WHO” . . . as mentioned in a comment just a little further down-thread.

  2. The Rev Kev

    “The PEF stipulates a payout of $45 million for Ebola if the officially confirmed death toll reaches 250 (which occurred in the DRC by mid-December last year), but only if at least 20 deaths occurred in a second country”

    This sounds like it was put together by Kamala Harris. But it was the World Bank Group, with the support of Japan, Germany and the WHO that developed this thing. Have they worked out yet that it gives financial incentives to let any outbreak fester longer and be untreated longer for a bigger payout? Here is a thought. Ebola breaks out and the Congo waits and waits for money to treat the victims from the PEF. China suddenly arrives with medical teams and a boatload of medicine. Now how would that play out in Africa? I was reading an article from earlier this year how an outbreak killed 500 people in the Congo – by which stage the bonds had paid out zip.


    If this things stands though, it is only a matter of time until this practice spreads. How about a World Bank Fire Emergency Financing Facility for Californian fires? Or a World Bank Flood Emergency Financing Facility for places like Texas and New Orleans? It could happen you know.

    1. Ignacio

      Looks like Germany and Japan desperately search por tools to entertain their billionaires savings. Much better than transferring money to those pesky consumers that spend as if there is no future

    2. Ignacio

      The pandemic bonds should also cover malaria in such a way we ensure the spread of the disease even to the coldest regions where Anopheles cannot survive.

  3. Thuto

    So we are monetizing psychosis now? This redefines the notion of sinking to new lows, financial “innovation” has cast off the pretense and taken its pride of place on the dark side with the World Bank being Lord Vader. If i’m understanding this correctly, investors could be sitting in front of a computer tracking the death rate and experiencing untold levels of dissonance as they watch, and will it to trend upwards, rubbing their hands with glee at the prospect of a payout yet overcome with shame that the “love of mammon” has so completely hollowed out their humanity.

    1. Yves Smith Post author

      I should have been clearer about what the comparison to credit default swaps meant.

      The bondholders are acting as insurers. They (very peculiarly) appear to get both interest AND insurance premiums. If certain things happen, then they make payouts. But the “insurance” was structured so that the circumstances under which they get payouts are so limited that the insurance is close to a scam.

    2. Thuto

      So the investor takes the risk of lower returns if “not enough people die” when the inverse would salvage some credibility for this crazy scheme instead of a higher death toll being an incentive…I wonder how they spin this on the prospectus. What’s next, securitize the bonds and sell them on to other “investors”? This is next level crazy…

      1. Synoia

        What’s next? Expand the range of diseases covered by the Bonds.

        It appears as just another way to exploit Africa. I believed us white people had exhausted that well after the end of colonialism.

        However I failed, and obviously still fail, to understand the power of Neo Liberalism.

        1. drumlin woodchuckles

          These bonds would appeal to the Rich of All Colors, not just the Rich of the Color White.

          It is a Rainbow Oligarchy.

      2. drumlin woodchuckles

        About the “feelings of shame” over “lost humanity” referenced a little upthread . . . the engineers and participants in schemes like this would feel pride over designing and fabricating such exquisitely conceived financial-engineering inventions and projects.

        And so of course, if they can securitize these things and sell the securities-based-on-these-bonds to downstream buyers, they certainly will. And if they can go further and meta-securitize the securitized securities for selling further rounds of third, fourth, and fifth order meta-securities, they will do that too.

        LumpenSavers who imagine themselves to be clever little LumpenInvestors should invest their meager LumpenSavings into personal Survival Doomsteads in out-of-the-way places rather than LumpenVesting any of their meager LumpenSavings in clever funds based on these clever securities.

  4. Tyronius

    I recently heard about promising vaccine trials that apparently reduce the fatality rate of Ebola from the 70% range down to as little as 10%.

    With the perversity of the incentives of the WB program, I can actually see how bondholders would deliberately interfere with distributing immunizations in the name of returns.

    Next level sick, indeed…

    1. drumlin woodchuckles

      One can only hope that an early-stage Ebola patient could get hermself on a plane and get hermself into the Boardroom or at least the Inner High Offices of the perpetrators of these bonds . . . and then cough and spit Ebola blood all over the worthy gentlefolk involved in crafting this enterprise.

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