Innovative Financing Mechanisms to Counter Infectious Diseases: Issues and Opportunities
Address By Alexey Kudrin, Minister of Finance of the Russian federation at the International Conference Global Threats – Global Actions. Promotion of the G8 Summit Initiatives to Counter Infectious Diseases
December 8, 2006
Dear Ladies and Gentlemen, Colleagues,
The spread of HIV/AIDS, malaria and TB, and the outbreaks of new diseases such as avian flu and SARS cause huge economic losses, destabilize sociopolitical situation in many countries all over the world, and prevent the achievement of the Millennium Development Goals both in health and other sectors. It is now evident that financial and economic implications of infectious diseases have a strong negative impact on economic growth rates. According to recent studies, further spread of only two diseases – HIV/AIDS and malaria – would reduce GDP in Sub-Saharan Africa by 20% before 2010.
Globalization of the economy and the current development level of civilization can but promote the occurrence of new diseases and accelerate the spread of the old ones between countries and continents. Against this background, the increasing interdependence of national economies brings about new aspects related to the liquidation of financial and social implications of infectious diseases, and demands that the international community elaborate new approaches to prevent them.
The spread of infectious diseases noticeably increases certain expenditure items in national budgets, generates budget deficit, and diverts funds that could be otherwise used for other purposes. Thus HIV/AIDS is considered one of major barriers to the successful implementation of Education for All.
As a result, the affected countries are becoming more and more dependent on additional development assistance provided by the international donor community.
The international community agreed about the need to increase development and poverty reduction financing as long ago as in 2002 at the Monterrey Conference on Financing for Development when sovereign donors made a number of specific commitments to extend their development assistance while recognizing the necessity to consider the establishment of innovative sources to finance MDG achievement.
Since then the international community has been offered to assess several development financing alternatives. Following the discussion of the feasibility of the proposed instruments, their potential impact on the speed of resources mobilization for development purposes, etc., the international community focused on three major innovative financing mechanisms:
The above mechanisms are designed to raise funds and finance infectious diseases control programs which is one of Russia’s priorities within the framework of its G8 chairmanship this year. All three innovative mechanisms are aimed at meeting the following Millennium Development Goals: to reduce child mortality by two thirds, and to improve child and mother health by combating HIV/AIDS and malaria. All three provide a unique fund raising opportunity to finance infectious disease control programs and initiatives through long-term support and donor commitments.
The first one is the International Finance Facility for Immunization (IFFIm).
Immunization is undoubtedly the most efficient method for infectious disease prevention and control, and therefore the development, production and use of vaccines is among the most topical and difficult tasks in the health sector and requires coordinated action by the entire donor community.
Vaccination and immunization is essentially the most suitable area where issues can be addressed by ‘frontloading”. IFFim is expected to accelerate the availability of funds to be used for vaccination and immunization programs in developing countries.
The International Finance Facility for Immunization is a pilot project under the Innovative Financing Concept proposed by the UK in 2003, which is designed to mobilize additional $50 billion a year until 2015.
The Concept provides for additional fund raising through the issue of international financial commitments (bonds) secured by the donor countries’ legally binding commitments (guarantees). The accumulated resources shall be used to finance funds, programs or projects designed to meet the Millennium Development Goals. IFFIm’s advantage is reliable and predictable donor funding flows, which, in their turn, shall be an additional incentive for the recipient governments to increase national expenditure on infectious disease control and thus share responsibility for MDG achievement.
The International Finance Facility for Immunization is a new international financial institution for development whose financial base consists of legally binding commitments by its sovereign sponsors. To date, the sponsoring countries include the United Kingdom, France, Italy, Spain, Sweden, and Norway whose aggregate commitments amount to $5.3 billion over the next 20 years. All six donor countries signed framework financial agreements on September 28, 2006 which became effective on October 2, 2006. The donors shall make annual payments against the issue of IFFIm’s bonds until 2025. A desire to participate in the initiative has been also expressed by Brazil and South Africa.
IFFIm issued its inaugural bonds totalling $1 billion and maturing in 5 years on November 6, 2006. The first assessments are quite optimistic both in terms of the bond rating (AAA) and in terms of subscription (the bonds were oversubscribed). It is expected that IFFIm would raise up to $4 billion over the next 10 years.
IFFIm funds shall be used until 2015 to implement the Global Alliance for Vaccines and Immunization (GAVI) programs in the poorest countries with less than $1,000 per capita income, to support the production of new and underused vaccines to combat tetanus, measles, poliomyelitis, etc., and to provide technical assistance for immunization, including expenditure on the introduction of new vaccines.
According to preliminary estimates, programs implemented using IFFIm funds would provide for the immunization of more than 500 million people and reduce mortality from infectious diseases saving 5 million lives.
However, despite all positives aspects, the plan to implement IFFIm as a concept of development aid increase on a global scale requires further elaboration with due regard for the intermediate outcomes of the pilot immunization project. In particular, an adequate analysis of the recipient countries’ varying absorptive capacity is a key performance condition.
It should be also noted that IFFIm’s current optimistic assessments are primarily based on the participation of donor countries with high (AAA) sovereign credit ratings, which enabled three leading rating agencies (Fitch Rating, Moody’s Investors Service, and Standard&Poors) to give a similar rating to IFFIm and rate its bonds as zero risk securities (as those issued by other multilateral development banks). However, no one has ever assessed how IFFIm’s reliability and positions in the international capital market might be affected by the participation of donor countries with lower sovereign ratings. Besides, there is no clear understanding of who will be responsible for accommodating IFFIm commitments if one of the donors refuses to make grants to IFFIm.
Proceeding to the next innovative mechanism, I should say that the introduction of a fiscal instrument as an opportunity to raise funds for development purposes has been under consideration for the last 2-3 years. The discussion covered a rather wide range of instruments such as a tax on foreign exchange or financial transactions, a tax on environmental pollution, etc. However, it is the Solidarity Contribution on Air Tickets that was finally approved. The initiative was proposed by France at the 2005 Millenium+5 Summit to evaluate progress towards MDG, and received political support from 76 countries, including Germany, United Kingdom, Spain, Austria, Brazil, India, and 28 African countries. Russia also acknowledges the political significance of the initiative; however, its current domestic taxation policy aiming to reduce the total number of taxes and charges does not make it possible to introduce a new tax at the current stage.
The essence of the initiative is to include a small mandatory flat surcharge in the price of every international air ticket for flights departing from the participating countries (the surcharge shall be differentiated by the flight class and exclude transit flights).
According to available assessments, the introduction of the Solidarity Contribution on Air Tickets shall not affect airline competitiveness as it is very small: just a few euros. Responsibility for collecting such ‘voluntary’ contributions shall be borne by airline companies. Countries shall decide on their participation in the initiative on a voluntary basis and formalize such decisions pursuant to their national legislation, which protects their sovereignty in taxation issues. The initiative was discussed taking into account experience generated by the United Kingdom, Malta and Denmark which already have similar levies.
In March 2006, the participants of the Paris International Conference Solidarity and Globalization: Innovative Financing for Development and against Pandemics established a Leading Group on Solidarity Levies comprising 44 countries that declared their willingness to introduce the contribution on air tickets in near future. To date, 18 countries have expressed their intention to introduce such levy while France, Brazil, Chili and Norway have put it in place.
As proposed by France, proceeds from the Solidarity Contribution on Air Tickets shall be transferred to the International Drug Purchase Facility (UNITAID) whose launch was announced this year at the September UN General Assembly. UNITAID is designed to finance the purchase of drugs and vaccines against HIV/AIDS, TB, and malaria. First and foremost, the funds shall be used to finance drugs for HIV-infected children and teenagers. It is expected that the initiative would help UNITAID generate up to $380 million a year, on the average, in 2007-2015. Taking into account that the major task is to facilitate access to drugs against HIV/AIDS, TB and malaria for the poorest countries, UNITAID shall closely cooperate with international initiatives such the Global Fund to Fight AIDS, TB and Malaria, and the joint United Nations Program on HIV/AIDS (UNAIDS).
The implementation of the initiative will definitely require a close cooperation at the level of the participating governments and international organizations. At the national level, strict coordination of actions (collection of the contributions) with the international mechanisms of aid distribution and delivery to the recipients would be a key condition of high performance and efficient implementation of this innovative mechanism. Besides, bearing in mind that international flights are serviced not only by state-owned companies, it is not clear how one can demand that private companies support the initiative.
A number of infectious disease control initiatives are also being elaborated under the G8 Minister of Finance arrangement. In particular, in 2005 and 2006 the Ministers discussed the so called Advance Market Commitments for Vaccines (AMC). Such innovative mechanism was developed by Italy with the assistance of the World Bank and GAVI. The concept provides for the potential opportunity to facilitate access to mass vaccination for the poorest countries, which will be impossible if the current trends in vaccine production and supply prevail. At present, the pharmaceutical industry makes relatively little investment in vaccine development due to a limited demand and uncertain conditions in the vaccine market.
Under AMC, the G8 countries and other donors shall commit to subsidize vaccine purchase from the producers (starting from the supply of ‘certified’ vaccines to developing countries’ markets). The participating private companies, in their turn, commit to supply vaccines to developing countries at an agreed low price provided that the vaccines meet the pre-established standards and are demanded by these countries.
Such interaction under the proposed arrangement is interesting for the partners. For producers, advance legally binding commitments shall provide for a greater certainty in the market, stimulate the development and production of priority vaccines, and guarantee the availability of financial resources for future vaccine purchases. In essence, AMC shall encourage the growth of private investment in vaccine development before donor funds start working. For donors, AMC is a cost effective market-based mechanism which guarantees the use of donor funds only in the case of production of a vaccine that meets certain requirements and is demanded by developing countries. For recipient countries, AMC shall ensure vaccination in compliance with their national health priorities.
It is expected that the cost of vaccines will be mostly financed by the sovereign donors while developing countries will incur symbolic expenses.
Out of six proposed vaccines against HIV/AIDS, malaria, pneumococcal disease, rotavirus diarrhea, tuberculosis, and cervical cancer (human papillomavirus) it is pneumococcal disease which annually kills over 1 million children that was recommended and selected for the AMC pilot project. The use of such vaccine fits well into the existing vaccination scheme and can be introduced at the least cost. According to available assessments, if there is no investment in the development of the vaccine, it will become available to the poorest countries only in 2023.
It was widely supported by most G8 members and is open to all potentially interested parties. The pilot project shall be launched in late January 2007 and involve Italy, UK, Canada and other donors.
The development and implementation of pilot projects under the innovative financing mechanisms is in the inception stage which does not allow making reasonable conclusions on the efficiency of the initiatives. However, innovative mechanisms deserve close attention today as an alternative to traditional development assistance and an opportunity to meet most MDGs by 2015.
Therefore, we believe that decisions made at the July Summit in St. Petersburg will be further developed under the G8 agenda and within the framework of other international forums, and will eventually improve the efficiency of efforts to prevent the spread of and counter infectious diseases.