2020-04-01 Bloomberg Markets Magazine

(Jacob Rumans) #1
So how exactly are these bonds supposed to work? How does the
money get to the World Bank?

There are parametric triggers, but it
proves to be very challenging to define
the triggers because it’s very difficult
to anticipate how an epidemic starts.
That’s why in designing it they chose
triggers that are much later. It has to
be at least 12 weeks after the begin-
ning of the outbreak before anything
can be triggered, as well as a high
number of deaths and the growing rate
of the outbreak. So that means
it’s triggered much too late. But if it’s
triggered earlier, the price of the
insurance would be much higher
because there is just so much
uncertainty in the modeling. Much of
the uncertainty is due to the lack of
data on these kinds of events. The lack
of data is due to the lack of
public-health systems in developing
countries, which is what is needed to
invest in. And that’s not very expen-
sive. It is, in fact, highly affordable
compared to the benefit. And that’s
what’s been sidelined.

Who’s the arbiter of when these bonds pay out? How do they verify
that the triggers have been met?

Verification of the triggers is spelled
out in the prospectus for the bonds,
which is 386 pages long, and there is
a verification agent [AIR Worldwide
Corp.]. It’s a commercial contract
between the World Bank and the ver-
ification agent, and they are going to
ascertain whether all the triggers
have been met. This is not a trivial
exercise to verify these triggers,
because it’s really quite complex. So
when the verification agent notifies
the World Bank that the triggers have
been met, then the World Bank
would get the money from the bonds,
because it’s holding that money.

What’s the maximum payout the World Bank could get?

That’s the other issue that’s very
disappointing in this whole experi-
ence. For coronavirus, when you look
at it, the first payout—if it happens,
there’s no way of telling at least from
where I sit whether it will happen—it
will be $131 million, and the maximum
payout is $196 million. And that will
have to be divided among the
76 poorest countries. So you can see
if the poorest countries in the world—
with a bigger population than China
all together—they will get only a frac-
tion of what China is already spending.
One of the sort of tragic aspects
of this is, in fact, that the payment
for the cost of the bonds, the premi-
ums and the interest and the fees that
were associated with this pretty com-
plicated transaction, that those add
up to $115 million. And those funds
actually came from funds that were
intended for the poorest countries.
They came from IDA [International
Development Association], which is
money that donors give to the World
Bank to finance productive projects
in the poorest countries. So that was
$50 million from IDA. Then
$50 million was donated by Japan,
but I’m sure the Japanese govern-
ment intended that their donation of
$50 million benefit the developing
countries, benefit the poorest coun-
tries, and protect them from pan-
demics. And then $15 million was
donated by Germany. Taxpayers in
Germany, taxpayers in Japan. So all
together $115 million has been paid
for premiums and for interest and for
the fees to recipients who are not
poor, who are in high-income
countries—these are investors who,
of course, they invest their funds and
they are at risk of losing some of this


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