The Trills and thrills of GDP-indexed securities and health impact bonds

March 20, 2014

This is the second part of a two-part post discussing economic aspects of health challenges in emerging markets and financial tools to address them.

In computer science, a TRILL is transparent interconnection of a lot of links. In hip-hop culture (Keep it trill), trill combines true and real as something legit and respected. Both features define a financial innovation called a Trill (a GDP-indexed security based upon trillionth shares in GDP). The dual impact of using Trills would be to reduce the debt carried by developing countries and allow for investment in health as a driver of future growth.

Developed by Nobel Laureate economist Robert Shiller and his colleague Mark Kamstra, Trills would be based upon governments of the world (issuing) shares in their GDPs, securities that pay to investors as dividends a specified fraction of GDP, in perpetuity (or until the government buys them back on the open market).

We first thought to apply the Trills concept in the context of global health R&D at one of our recent Financial Innovations LabsA(R). Sovereign or development financial institution securities could be linked to improvements in health, avoidance of health-care costs, and improved productivity, all through the introduction of better drugs and vaccines (along with improved diagnostics, prevention and health-care delivery).

Government payments required by the Trills would be connected to a country's ability to pay, measured by its GDP, which would increase with improved health and the resulting increases in labor force productivity. Trills could be the source of refinancing and debt reduction for debt-burdened countries, while enabling proceeds to be invested in targeted global health projects. Trill-based payments to investors for health infrastructure and R&D would be based on both cost avoidance from reduced illness and the measurable value of GDP growth.

By basing loans on that expectation of future GDP expansion, governments could refinance their debt at better rates than today. Currently, developing countries suffer from inverted debt structures, where the value of liabilities is positively correlated to the value of assets. This causes debt burdens and servicing costs to decline in good times (when asset prices and earnings rise) and increase in bad times. Large external debt, short-term domestic debt, and contingent liabilities from the banking system are part of this problem as we have seen recently in the unwinding of emerging markets.

For the poorest countries constrained by health barriers to growth, this cycle could be broken by long-term, fixed-rate capital structures that enable them to pay less when times are bad and more as their health and the productivity of their economies improve. This shift could reduce capital flight and the overall cost of capital by reducing financial distress.

Trills could be combined to help fund health Development Impact Bonds that would bring together private investors, nonprofit and private-sector service organizations, governments, and donors. We also explored this topic at our Lab and subsequent working team discussions about deploying financial technology for global health R&D.

Outcomes-based contracts in which private investors pay in advance for interventions needed to achieve measurable health outcomes would work. As discussed in our Lab report, the repayment on these contracts would come from governments upon meeting performance benchmarks, based on the savings the government accrues. Any success above the targeted benchmark would earn investors additional returns. Additionally, if health performance targets were met, they could be used to buy-down sovereign debt based on performance goals for delivery of vaccines, health care, and other activities that would accelerate aggregate growth and lower interest rates for repayment.

Current feasibility studies of a funding tool called a development impact bond, which could have similarly positive effects as Trills, are underway, aimed at reducing Rhodesian sleeping sickness in Uganda, antiretroviral treatment for HIV and tuberculosis in Swaziland, and type 2 diabetes prevention in Israel. More such pilot studies should follow.