We know how to eradicate cholera. Unlike some other diseases, all deaths from cholera are preventable with the tools the world has available today, according to the World Health Organisation (WHO).
But the financial investment required in water, sanitation and hygiene (Wash) to control cholera, which is normally spread through faecally-contaminated water or food, has often been thought of as prohibitive, according to the WHO.
So how can we find that investment? One answer is through the capital markets. The worlds of finance and humanitarian aid appear poles apart, but they are starting to converge.
Pointing to crises in Syria, Yemen and South Sudan, a report from earlier this year commissioned by think-tank ODI says that while traditional donors are increasing grants to traditional emergency responders, the gap between needs and funding is growing. Last year only 58.5% of requested needs were covered.
“There is a sense that we need to move from grant-making toward employing a wider range of financial tools and scaling up investment in poor countries under the sustainable development goals (SDGs) financing frameworks — and that private finance has a part to play,” the report said.
Driving this is the abundancy of private capital versus traditional sources. In 1990, official development assistance (ODA) was the biggest flow to low and middle-income countries, compared with foreign direct investment (FDI), remittances, and private debt and portfolio equity, according to the World Bank (see graph).
Now, remittances and FDI are much larger flows than ODA, and the category of private debt and portfolio equity generally is too, although this is unstable.
What this graph shows is very significant, according to Simon Meldrum, of the International Federation of Red Cross and Red Crescent Societies’ (IFRC) global innovative finance team (Gift) in London. He says that aside from ODA, humanitarian actors have virtually no penetration into any of the capital flows. “Some proportion of ESG investing, and specifically impact investing, is relevant,” he says. “If you’re serious about addressing big humanitarian issues, why limit your response to working in the smallest pond?”
The IFRC is trying to move into larger ponds for its cholera eradication programme.
That it is known how to solve cholera means plugging in more money has a reasonable chance of bringing results. This is what gives the IFRC, working with the Islamic Development Bank (IsDB), confidence in using an output-based funding model for its Wash fund.
The amount donors put into the fund will be based on the outcomes achieved.
If the Wash fund were a normal corporation, we could say that the outcome-based funding gives it a future revenue stream, if all goes well. Meanwhile, the entity also receives fixed funding from some donors, not dependent on outcome. This is like an equity base it has from the start. These two planks allow it to adopt a novel funding structure for a charity.
The plan is for it to raise debt through a bond, with the funding costs effectively backed by the obligations of the donors. Bondholders can take comfort from the income stream as well as the equity layer underneath.
With the IFRC and IsDB working towards cutting down cholera-related deaths in member countries of the Organisation of Islamic Cooperation (OIC), it was deemed appropriate to develop the security as a sukuk, making it sharia-compliant. It will be labelled as a social bond, given the ethical use of proceeds. The issuance is targeted for early next year, according to a June update from the IFRC’s Gift.
The IFRC’s bond idea is not completely unprecedented. It is similar to the International Finance Facility for Immunisation (IFFIm). This facility has received long-term donor pledges from developed-country governments, which help it issue vaccine bonds and sukuks offering a market-based return.
Meanwhile, for investors more generally, the report commissioned by ODI recommends that at the current stage of development, investors should focus on specific areas within the spectrum of humanitarian activities.
It highlights three:
• Preventative investment: this involves insurance mechanisms, allowing money to be available when most needed and encouraging investment in reducing the impact of disasters;
• Investments in job creation and social support for refugees and host communities;
• Investments in enterprises or assets that support humanitarian work: for example, in providers of temporary housing, portable or renewable energy firms, and microfinance lenders.
Does it work?
This type of thinking is not without criticism. For one, it means private investment getting involved in what is essentially healthcare, an area often seen as the remit of the public sector. This is a step beyond involvement in a sector such as infrastructure, which has similarly been seen as ripe for private sector investment.
“We see very different roles for public funds and private finance, especially when it comes to the health sector,” says Bodo Ellmers, head of policy at the European Network on Debt and Development, in Brussels. Eurodad is a network of civil society organisations. He says that privatised health systems are less efficient at spending money. Why would this be different for humanitarian aid?
The counter-argument is that with a paucity of public sector funding, humanitarian aid needs all the help it can get. But Ellmers says that this deficiency would not be so great if developed countries met a target to devote 0.7% of GDP to development assistance, and if tax evasion and tax avoidance was less prevalent. This extra money could be used to help less developed countries invest in their health systems.
Ellmers focuses in particular on the World Bank’s pandemic bond, issued in 2017. As a form of catastrophe bond, this is an example of the “preventative investment” solution the report identified.
In return for receiving a coupon, investors face losing their principal if certain conditions relating to a pandemic outbreak are met. The trigger terms include speed of contagion, number of confirmed deaths and the disease crossing national borders. Across the bond and additional swaps, the total amount of cover is $425m to all countries eligible for support from the World Bank’s International Development Association (IDA), covering six diseases listed by the WHO as likely to cause major epidemics if the contagion spread across national borders.
Cat bonds are supposed to be efficient, compared with traditional disaster response, if we frame both as types of insurance products. Unlike with an aid appeal, there is no lag before payment (and funding can go further when it is received earlier), and the amount received is proportionate.
And rather than triggering once a disaster has occurred, like a typical cat bond, the idea of the pandemic bond was that the bond would trigger before an outbreak reached pandemic proportions.
Investors on the tranche of the bond relevant for Ebola receive a coupon of more than 11% over Libor. The Democratic Republic of Congo is struggling with what the WHO calls the second largest Ebola epidemic on record, with more than 2,000 deaths since the outbreak was declared in August 2018. But with it largely hitting DCR rather than going across borders, the pandemic bond still has not triggered, leading to criticism that the criteria is very onerous.
The World Bank has, however, paid out $61.4m to fight Ebola in DRC from a cash window that is part of the same Pandemic Emergency Financing Facility (PEF) as the pandemic bond but designed to be more flexible.
With these types of instruments, there is also a risk of moral hazard, if actors are incentivised to let a disaster reach a certain scale in order to receive the payout. Furthermore, the unique nature of the bond and triggers mean calculating loss is difficult, perhaps requiring an uncertainty premium for investors.
It is possible to criticise aspects of the pandemic bond without dismissing the entire use of private sector investment in humanitarian aid.
“The costs to donor countries of responding to a pandemic disease outbreak would far outweigh the costs of paying the insurance premiums,” says Michael Bennett, head of derivatives and structured finance for the World Bank treasury in Washington, DC.
Meldrum points out that traditional fundraising is not free either. Charity Financials, which compiles financial information on charities, reported last year that the British Red Cross Society’s fundraising cost represented 12% of its total income.
“There’s a huge cost to raising philanthropic money, whether that’s public advertising and marketing, or engaging account managers for grant managing,” Meldrum says.
And some take a pragmatic approach towards the use of capital markets: where are the funds going to come from otherwise?
“Using capital markets is one way to bring in private capital for global public goods,” says Bennett. “It provides a way of leveraging small amounts of public monies to transfer risk to capital markets and mobilise large amounts of private capital.”
Like the World Bank, the IFRC is developing a cat bond: in its case to provide payouts to communities near 12 volcanoes, with the trigger based on ash plume heights. This represents disintermediation and disruption of the traditional model of humanitarian aid provision, where an organisation facilitates the flow of funds between the original provider and the end user, while also taking a cut in order to finance its organisation.
“With enhanced information and options, we can immediately transfer cash proceeds triggered from the cat bond directly to the communities impacted by the peril,” says Adam Bornstein of the Danish Red Cross and based in Addis Ababa. “Sidestepping intermediaries and traditional funding mechanisms ensure our humanitarian assistance is more effective and efficient.”