INNOVATIVE FINANCING INSTRUMENTS : HEALTH
Realizing the importance of health in our human existence, this basic standard of living has attracted a number of donors and private sector partners to form several innovative financing for development mechanisms.
Innovative Health Financing
In terms of new public revenue, innovative health financing facilities are designed to bring forward the availability of finance or generate additional funds for international development through taxes, dues or charges raised by revenue-generating authorities, there are three major health-related such mechanisms in existence today:
UNITAID and the solidarity contribution on airline tickets is able to leverage economies of scale to drive prices down and stimulate the development of new drugs better adapted to patients’ needs. In three years, UNITAID has raised over a billion dollars and is funding projects in 94 very poor countries, half of them in Africa.
The International Finance Facility for Immunization issues bonds in the capital markets backed by legally binding donor commitments to pay grants over the next 20 years. Donor commitments to IFFIm amount to $5.9 billion (from the United Kingdom, France, Italy, Norway, Spain, Netherlands, Sweden and South Africa), with bond issuances at $2.6 billion.
Product (RED) raises funds for HIV/AIDS programs in Africa through a share of the profits from the sale of branded products; it has generated more than $150 million for the Global Fund to Fight AIDS, Tuberculosis and Malaria.
There is a growing list of debt-based instruments or frontloading mechanisms that make public funds – existing or innovative – available for development earlier by taking on liability or reducing debt burden. The pioneering IDA buy-down, also referred to as credit buy-down, refers to a third party donor paying off all or part of a specific IDA credit on behalf of the government subject to achievement of predefined results. Since 2003, IDA buy-downs in Pakistan and Nigeria received almost $150 million from the Bill & Melinda Gates Foundation, U.N. Foundation, Rotary International and the U.S. Centers for Disease Control and Prevention, to buy-down more than $300 million in IDA credits.
Advance market commitments have been successful in minimizing the risk for suppliers so they can engage in research and development, marketing and sales activities. $1.5 billion have been put up under the advance market commitment for pneumococcal vaccines.
Debt2Health makes funds available to Global Fund projects through reducing a country’s debt burden. A Debt2Health swap is a conversion of official debt at a discount. By 2010, some €160 million in Debt2Health swaps have been agreed upon.
Then there is future receivables financing. More recently countries have leveraged more innovative approaches to financing their development via asset- backed securitization of future-flow receivables, diaspora bonds, and GDP- indexed bonds. Specifically, with regards to future-flow receivables, countries have principally used heavy crude oil receivables, diversified payment rights, airline ticket receivables, telephone receivables, credit card receivables, electronic remittances, oil and gas royalties and export receivables, paper remittance and tax revenue receivables. All have been used as potential collateral to obtain better lending terms on the bond market.
Future Mechanisms of Innovative Health Financing
Perhaps the most untapped breed of innovative financing are hybrid initiatives that present a clear and shared stake both by the official and private sector actors – not only blending, but co-joining public and private investments to forward development objectives. This qualifies in some cases as results-based financing and in other cases as impact philanthropy, by offering subsidies, guarantees and new insurance-type facilities. Volume guarantees are useful in minimizing the uncertainty that suppliers have to invest in scaling operations to ensure greater volumes for developing economies.
Examples include net guarantees , a niche insurance product for long-lasting bed net manufacturers, enabling suppliers to guarantee stock thereby ensuring rapid deployment. The Revolving Guarantee Bridge Fund allows private sector actors like Standard Bank to support UNICEF projects while aid recipients gain bridge access to funding until regular, slower disbursements become available.
The Affordable Medicines Facility – malaria , or AMFm, is a global subsidy, managed by the Global Fund, designed to expand access to artemisinin-based combination malaria therapies. The Global Fund negotiates the price of ACTs and subsidizes it to lower the cost to first-line buyers. AMFm has received $212.5 million in contributions from the Gates Foundation, UNITAID, and the United Kingdom.
Backed by a Gates Foundation, the U.N. Foundation’s Pledge Guarantee for Health uses guarantees to underwrite donor commitments, securing low-cost commercial credit for recipients of aid on the basis of pending aid commitments. By providing bridge financing and organizing guarantees through letters of credit, essential health supplies can be shipped while the normal processes of transferring donor funding gets worked out, the net benefit being accelerated commodity delivery and less supply chain inefficiency and supplier risk.
One such example is bridge financing such as Pledge Guarantee . In addition to working with donors and recipients, PGH engages suppliers, providing direct guarantees to ensure future payment, removing risks for suppliers throughout the value chain. By amortizing payments over the life of a commodity, buyers can offer suppliers certainty along with much-improved invoicing terms, effectively increasing the amount of funding available via trade/supplier financing.
While shifting money from one pocket to another may provide a more productive use of resources, the challenge of maximizing that productive capacity remains. For the most part, investigating the strategic use of funds at different stages of the development supply chain will unveil efficiencies and new ways to process or minimize risk, and create savings and thereby more available program funds. At the same time, providing suppliers or markets that serve the developing world with more assurances, more risk sharing and some creativity usually results in further price savings and supply chain efficiency, which really should be the ultimate goal right now.