Enlist Wall Street to Fight Pandemics Before It’s Too Late
Financial engineering usually connects suppliers of capital to users. For example, mortgage-backed securities were developed so investors who wanted steady safe income could provide funds to home buyers more efficiently and cheaply than banks had done -- as long as the engineering was sound.
Vaccine financing tackles a different issue. Interest in funding vaccines is high in the early stages of a pandemic, but funds are needed at different stages. The world would have been better prepared for Covid-19 if we had maintained robust basic research efforts into coronavirus vaccines and other technologies such as vaccine storage and delivery before 2020. Infectious diseases account for more than a quarter of all deaths, and pandemics are recurring events, but we treat them as unexpected Black Swans.
Once a pandemic hits, governments and philanthropists are eager to throw money at the problem. But there are limits to how fast research can be scaled up. Moreover, the really expensive stuff, such as human safety trials, human effectiveness trials and delivery of the vaccine, happens later, when pandemic panic has faded and other priorities loom larger.
The simplest vaccine security has been around since 2006. The International Finance Facility for Immunisation has issued $6.8 billion of bonds backed by pledges from national governments going out 32 years in the future. These governments are reluctant to disburse cash today for such a long-term use, but their pledges are enough secure top credit ratings for the bonds. Political promises not securitized into bonds have a way of evaporating in an election cycle or two.
Vaccine bonds fit the socially responsible allocations many investors have, and therefore can be sold at interest rates on par with what the governments would pay for general-purpose borrowing. So governments can promise funds when that’s popular, and researchers and vaccine providers can get cash when it’s actually needed.
Consider the incentives of a policy maker or philanthropist to support vaccines. The strongest is personal protection, followed by the protection of friends and family, and people the individual is likely to encounter. Another incentive is the general protection of national populations and economies, mixing altruism and self-interest. The final incentive is saving lives of poor people in far away places out of altruism.
From February to November, all three incentives were in force. But policy makers and philanthropists are in the process of being vaccinated, so the first incentive has diminished. The second is still strong and will probably support vaccine research and deployment for the first half of 2021, albeit with less urgency than in 2020. But after that the gigantic challenge of wiping out Covid-19 throughout the world will get less attention among the rich and powerful than other issues, and the tremendously important work of preparing for the next pandemic will be even lower on the priority lists.
This is the dilemma of vaccine economics. The social value of a vaccine is to get the effective reproduction number below one, so the disease can be eliminated, or at least reduced to sporadic local outbreaks. But this erodes the personal value of a vaccine to an individual. A vaccine that fails in its social goal will command high prices from individuals, whereas a vaccine that succeeds in its social goal will have trouble collecting payments. People will resent price gouging during the crisis, and will be disinclined to pay for success after the fact, heedless of the enormous costs of efforts that were not part of the eventual triumph.
The idea of vaccine securities is to extract binding promises from governments and philanthropists when they are anxious for vaccines, and use socially conscious investors to transform those promises into properly timed cash to support basic research between pandemics as well as pay for moving vaccines from the lab through regulatory approval to actual injection into enough people—including the poorest and most remote people – to defeat the pandemic. Vaccine research can be organized by rational science and vaccine deployment can be run with efficient logistics, rather than both being derailed by perverse funding decisions and conflicting economic incentives.
In a more rational world, governments and philanthropists would dedicate a trillion dollars or so to a fund administered by scientists with two goals: being ready for the next pandemic and finishing the job of controlling infectious diseases that have fallen out of the public eye. But that’s not going to happen. Vaccine securities are a more likely solution and have the added advantage of enlisting the market to raise and allocate the capital. You cannot save a life with financial engineering, but you might be able to save the world.
Vaccine bonds have been around since 2006 and researchers such asAndrew Lo at MIT, Roger Stein at NYU, John Hull at the University of Toronto and José-María Fernández of Altamar Credit have been publishing papers on the subject for years.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. He is the author of "The Poker Face of Wall Street." He may have a stake in the areas he writes about.
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