Pledge Guarantee For Health (PGH)

Overview

July 1, 2011

Value destruction due to aid volatility

Examples of negative impacts

• Stock-outs: Recipients run out of key heath commodities or face dangerously low stocks while waiting for donor funding

• Higher per item costs: Delayed funding leads to acute shortages which reduces recipient bargaining power and often leads to supplier charging risk premiums due to payment and production uncertainties

• Additional emergency costs: emergency production and shipping fees to compensate for the time lost waiting for disbursement

High volatility in health aid

Aid value

ODA in past 15 years

$1.00

$0.72

Lost $0.07-0.28 for every $1 of aid due to the unpredictability1

7-28% of value lost

Health financing volatility in developing countries destroys value and has adverse impacts on the procurement system and end users

(1) Source: P. 4, Brookings Institution. August 2008. “Smooth and Predictable Aid for Health – A Role for Innovative Financing?”; Dalberg analysis.

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Volatility of health aid is higher than government health spending1

(1993 – 2005)

Public health spending volatility

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Lack of access to financial tools for recipients of donor financing to effectively manage volatility

Adverse impact on patients and systems

What can we learn from the private sector?

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Inputs source Manufacturer

Commercial bank

Wholesale / retail store

In order for the store to purchase a larger order, manufacturer offers half payment upfront and half in 6 months

Manufacturer uses the future receivable as collateral to obtain short-term bridge financing from a bank

With the financing secured from the bank, the manufacturer obtain its inputs more efficiently to lower its cost of operations

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In 6 months, store forwards remaining 50% payment

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Manufacturer repays bank plus interest

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• Receivables financing, where companies use commitments by customers to pay as collateral in a financing agreement, is a common method of freeing up capital to invest in improving a companies business

• Recipients of donor funding can use donor commitments as receivables to obtain short-term financing to improve the efficiency of health commodity procurement

PGH increases access to health commodities by allowing donor recipients to leverage L/Cs to accelerate procurement

Merck

Bayer

Pfizer

AZ Textiles

J&J

GSK

UNFPA

JSI

PFSA

PSI

Gov agency

Stanbic

SBSA

Access

Eco

USAID

WB

KfW

DFID

EUPGH

MOH

Civil Society

2) 50%Guarantee ($10M)

3) $20M L/C

1) Donor commitment to fund a $20 M procurement of 1M implants at $20/unit

8) $20M donor funding disbursement plus financing cost

4) $20M Tender

5) 1M implants delivered

Supplier Procurer Bank Co. DonorGuarantorRecipient

7) $20M payment of invoice within 30 days of receipt

6) $20M 30 day Invoice

Jan ’11

Feb’11

May’11

Sep’11

ILLUSTRATIVE

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Timing

Dec’11

PGH

Status quo

PGH can utilized in three different ways

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Supplier

Procurer

Recipient

Donor

Donor funded procurement supply chain

Traditional bridge financing backed by a 50% PGH guarantee: For recipients of donor funding, recipients can use donor commitments as collateral along with a 50% PGH guarantee to secure an L/C from commercial banks in order to accelerate procurement

Whole-sale bridge financing backed by a 50% PGH guarantee: Procurement agencies that are also experiencing delays in disbursements from their own donors can use donor commitments as collateral and along with a 50% PGH guarantee can secure an L/C from commercial banks to provide immediate liquidity to improve efficiency of their operations

Trade financing backed by a 50% PGH guarantee: Suppliers often price in the risk of doing business (likelihood of delay of payment and extra costs due to erratic orders), however with a PGH direct guarantee backing specific donor funded health procurement, suppliers can extend better terms (price discounts and delayed invoices) enabling recipients of donor funding to accelerate access to much needed health commodities

PGH delivers better value for money by accelerating procurement, removing risks that lead to price premiums and empowering procurers to leverage buyer power and negotiate better terms

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Accelerated

Ability to rapidly issue bridge funding while waiting for donor disbursement to avoid stock-

outs which can have dangerous impacts on both patients and the community

Efficient

With better control of the procurement timing

recipients will be able to avoid emergency

production and delivery which are costly and

come at the expense of additional beneficiaries

Empowered

Allow buyers to leverage negotiating power by removing

risks in the procurement process that cause suppliers to price in

premiums (e.g. better payment certainty,

pooled procurement, etc)

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• World Bank provided an IDA loan to the Government of Zambia (GoZ) to increase coverage and replace old, less effective bednets, with expected disbursement in February 2011

• This disbursement schedule would have pushed the estimated delivery time six months beyond the peak rainy season that begins in December 2010, resulting in lives and dollars lost

• Working closely with partners at the Government of Zambia, World Bank, UNICEF and Stanbic Bank, PGH facilitated the necessary financing to accelerate the timely procurement and delivery of bednets

• PGH provided a 50% guarantee to Stanbic Bank Zambia, which enabled Stanbic to extend $4.8 million in financing to the Government of Zambia in advance of the World Bank loan

• With this financing in place, UNICEF was able to purchase the bednets ahead of the peak rainy season

• Through PGH, procurement and distribution time to districts was achieved in 6 weeks instead of the usual 33 weeks given Retroactive Financing was not an option1

• Delivery to district warehouses were finalized by January 25, 2011• Donor disbursement occurred before interest payment was due, minimizing

the overall financing cost for the transaction • This transaction using the PGH’s partial guarantee is a step forward in the

proof of concept, demonstrating the feasibility of this structure

PGH solution

The need

PGH’s inaugural transaction provided a $4.8M credit to purchase 800K bednets for distribution in Zambia ahead of the peak rainy season

Impact

1. PGH’s long-term impact is being monitored and evaluated by a third party, with feedback and learning to be incorporated into future PGH deals.Source: Preliminary Dalberg analysis and M&E Report

• Reduces premiums on commodity purchase due to expedited production, emergency shipment, and payment risk

• Helps avoid stock-outs and resulting impacts on distribution, planning and inventory

• Prevents overstocking and associated waste/storage costs

• Delivers essential health commodities when they are needed, bolstering confidence in local health systems

• Supports country ownership of procurement and supply chain management in line with the Paris Declaration of 2005

Loan/ Grant recipients

Donors

Financial institutions

Suppliers

• Provides new business opportunities on commercial terms with the philanthropic and international development sectors

• Lowers credit risk by partial guarantee on the donor commitment

• Provides certainty of payment timing

• Enables advance planning for manufacturing, resulting in substantial cost savings

• Enables countries and NGOs with a good track record to optimize health procurement and supply chains

• Improves overall efficiency, effectiveness and transparency of aid utilization

PGH improves the global health aid market for all stakeholders

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Value destruction due to aid volatility

Aid value

ODA in past 15 years

$1.00

$0.72

Lost $0.07-0.28 for every $1 of aid due to the unpredictability1

7-28% of value lost

Getting better value for our money could reduce the unmet needs of the Reproductive Health Sector

*Assumes 25% value loss of the current 2009 level commitment of $239 M 9

Examples of negative impacts

• Stock-outs: Recipients run out of key heath commodities or face dangerously low stocks while waiting for donor funding

• Higher per item costs: Delayed funding leads to acute shortages which reduces recipient bargaining power and often leads to supplier charging risk premiums due to payment and production uncertainties

• Additional emergency costs: emergency production and shipping fees to compensate for the time lost waiting for disbursement

High volatility in health aid

Volatility of health aid is higher than government health spending1

(1993 – 2005)

Public health spending volatility

He

alt

h a

id v

ola

tili

ty

Adverse impact on patients and systems

~$60M* in value is lost due to inefficiencies (funding, logistics, delivery, etc..)