The Pledge Guarantee for Health (PGH): A New Platform to Improve Efficiency and Impact of Donor Financing for Health Commodities

1
The Pledge Guarantee for Health (PGH) A New
Platform to Improve Efficiency and Impact of
Donor Financing for Health Commodities
2
The Need Quickly, consistently and
cost-effectively delivery health commodities The
Opportunity The Pledge Guarantee for Health
what it is, and how it works Example PGH
deals QA
3
The Pledge Guarantee for Health (PGH)

• The PGH is a financial product that enables grant
  recipients to access short-term credit for health
  commodity procurement
• PGH enables health commodities to reach
  recipients more quickly, consistently and
  cost-effectively
• Several principles guide the design and use of
  the PGH
• Increase efficiency of existing resources for
  health commodities
• Leverage existing financing mechanisms and
  institutions
• Enhance country ownership of procurement and
  local capacity building
• Promote aid transparency
• Opportunity for leaders to demonstrate
  innovation, action and impact -- PGH creates
  win-win for country grant recipients, funders,
  and an opportunity for bank partners to catalyze
  a market

4
Complex systems for commodity financing,
procurement and distribution
5
Country owned procurement approaches are
recognized as critical to long term
sustainability

• As a result of weak systems, externally funded
  programmes often institute their own purchasing
  and distributions systems
• while these provide an immediate solution
  specific to the programme, they cause major
  difficulties in standardisation and management
  for the system as a whole, as well as ignoring
  the long-term issue of reform.
• In many cases they do not address the underlying
  capacities constraints on ministries and private
  sectors ability to forecast, plan, manage and
  distribute within the context of a national
  system for drugs and supplies.
• Taskforce on Innovative International Financing
  for Health Systems,
• Working Group 1 Report

6
Funding volatility creates adverse impacts on
systems and users
1.00

• Lack of access
• Loss of patient confidence
• Extra commodity cost
• Impaired supply chain management

1.00
7-28 of value lost
0.72
Aid value
0.72
ODA, past 15 years
(1) Source P. 4, Brookings Institution. August
2008. Smooth and Predictable Aid for Health A
Role for Innovative Financing? Dalberg
analysis.
7
Donor volatility within annual funding cycle
makes it difficult to effectively plan commodity
purchases
1,440
Funding flows to one recipient of donor funding
from multiple sources,
December 2005 May 2008
(M)
12.7
9.8
8.0
4.5
4.0
2.1
1.8
1.4
1.3
0.5
0.5
Dec
Jan
Feb
Mar
April
May
June
July
Aug
Sept
Oct
Nov
Dec
Jan
Feb
Mar
April
May
June
July
Aug
Sept
Oct
Nov
Dec
Jan
Feb
Mar
April
2008
2006
2007
2005
Source Dalberg analysis with sanitized data from
recipient of donor funding (per recipients
request)
8
Illustrative donor grant process
Unpredictability of timing of first disbursement
is more a reality than a problem
Board or legislative authority approves grant
application/budget approval
Grant agreement Signed/Confirmed
First grant disbursement to recipient
6 12 months
1 5 months
Time
Source The Global Fund database available on its
website. Dalberg analysis of gt250 grant
applications.
9
Demand for financial products to manage
procurement and finances across 6.8B in health
commodities purchases and potentially beyond
Reproductive Health 277M1
Health commodities 6.8B2 Includes Global
Fund and PEPFAR
Broad range of development areas (E.g., micro,
agriculture, water, SMEs, education)
(1) RHI 2007 data and UNFPA 2007 3rd party
procurement data does not include USAID or IPPF
funded procurement as both organizations have
indicated they would not be a part of PGH
Government funding from McKinseys 2006 analysis
donor-funded procurement is defined as funding
that has been transferred from donors to entities
that procure RH commodities i.e. NGOs or MoHs
government-funded procurement is government
revenue-funded or SWAp/non-RH budget line funded
procurement (2) The health commodity market is
estimated based on Global Fund and PEPFAR
disbursements in 2007, with 47 of funding being
used for procurement Sources RHInterchange,
www.globalfund.org, www.pepfar.gov UNFPA
interviews Dalberg team analysis
10
The Need Quickly, consistently and
cost-effectively delivery health commodities The
Opportunity The Pledge Guarantee for Health
what it is, and how it works Example PGH
deals QA
11
How it works
UN Foundation plays a catalytic role in
facilitating recipients access to credit
Donor has existing commitment to recipient for
health commodities
1
Donor
UNF / guarantee
Bank extends credit line for commodity purchase
and issues L/C to supplier
2
5
1
6
Grant recipient
Bank
Supplier ships health commodities after PGH
customer procures through existing channels
3
2
Supplier
4
3
Bank pays for commodity based on invoice
4
Donor disburses funding to bank to pay back
principal
5
Legend
Commitment
Fund
Commodity
UNF provides backing through full / partial
guarantee
6
12
Access to a Letter of Credit through PGH helps
advance procurement ahead of grant disbursement
Board or legislative authority approves grant
application
First grant disbursement to recipient made
Grant agreement signed
6 12 months
1 5 months
time
Letter of Credit (9-month)
Speeds up procurement process and results in cost
savings
Begins procurement (bidding) process
Source Global Fund database available on its
website. Dalberg analysis of gt250 grant
applications.
13
Benefits of PGH
6
Cost savings by addressing premiums on commodity
purchase
Optimize supply chain and procurement
Estimated premiums
26

• Avoid stockout and effect on distribution and
  inventory downstream
• Avoid overstocking and its cost implications on
  storage
• Reduce wastage/leakage and expiry of essential
  health products
• Optimize drugs shelf life

Emergency shipment
10
Expedited production
Potential additional premium for uncertain
payment timing
Uncertain payment timing
5
Source Studies commissioned by Gates (July
2006) and Dalberg analysis. Excludes premium on
sub-scale orders
14
Illustrative example 18 savings potential in
ARVs could enable large volumes for the same price
Illustrative example for ARV procurement for 5M
transaction
390
330
Quantity of ARV packs
Commodity procurement with PGH
Commodity procurement without PGH
1. Pricing per ARV (Lamivudine - 3TC), Zidovudine
ZDV or AZT) pack based on Global Fund Price
Reporting Mechanism Full Purchase Price Report.
2. Based on 15 commodity price reduction based
on studies commissioned by Gates (July 2006) and
Dalberg analysis. Excludes premium on sub-scale
order. Note Benefits captured here do not
include time value of money and measure of
additional lives saved or stock-out avoided.
Source Global Fund PRM, Gates Foundation
analysis, Dalberg analysis.
15
PGH benefits players throughout value chain

• Customer-driven tool that supports country
  ownership of procurement and supply chains
  management in line with Paris Declaration
• Deliver essential health commodities when they
  are needed, bolstering confidence in the health
  system
• Reduce premiums (expedited production, emergency
  shipment, and payment risk) on commodity costs by
  10-30
• Avoid stock-out and its cascading effect on
  distribution, planning and inventory downstream
• Avoid overstocking that includes storage cost and
  waste/leakage

16
PGH benefits players throughout value chain

• Enables and rewards countries/NGOs with a good
  track record to further manage and optimize
  health procurement and supply chains
• Improves overall efficiency, effectiveness and
  transparency of aid utilization

17
PGH benefits players throughout value chain

• Opportunity for new business opportunities in
  emerging markets for credit within the
  philanthropic and international development
  sectors
• Lowered credit risk by partial guarantee on the
  collateral

18
PGH benefits players throughout value chain

• Customer-driven tool that supports country
  ownership of procurement and supply chains
  management in line with Paris Declaration
• Deliver essential health commodities when they
  are needed, bolstering confidence in the health
  system
• Reduce premiums (expedited production, emergency
  shipment, and payment risk) on commodity costs by
  10-30
• Avoid stock-out and its cascading effect on
  distribution, planning and inventory downstream
• Avoid overstocking that includes storage cost and
  waste/leakage

• Enables and rewards countries/NGOs with a good
  track record to further manage and optimize
  health procurement and supply chains
• Improves overall efficiency, effectiveness and
  transparency of aid utilization

• Opportunity for new business opportunities in
  emerging markets for credit within the
  philanthropic and international development
  sectors
• Lowered credit risk by partial guarantee on the
  collateral

• Improved payment certainty and/or terms
• Plan manufacturing in advance and transfer cost
  savings downstream

• Catalyze a commercial solution with minimum new
  resources

19
The Need Quickly, consistently and
cost-effectively delivery health commodities The
Opportunity The Pledge Guarantee for Health
what it is, and how it works Example PGH
deals QA
20
Senegal With low expected default risk of donor
funding and the backing of a guarantee, Senegal
is able to utilize a Letter of Credit
Expected risks
Basic terms and parties

• Global Fund rating of Senegal1 A
• Risks
• Default
• Length of delay
• Grant disbursement reduction

• Product type (maturity) Term L/C (9-month)
• PGH user Pharmacie Nationale D'approvisionnement
  (PNA), Ministry of Health, Senegal
• Donor Global Fund (GF)
• Bank Ecobank Senegal (Its parent company 600
  branches in 31 African countries, 6,550M in
  assets in 2007, 100M covertible loan invested by
  the IFC in 2009)

1. Alliance Nationale Contre le SIDA Rated A, A,
   A1 and then A1 in last four disbursement periods
   from 12/1/2007 5/31/2009 The National AIDS
   Council of Senegal Rated A, A2, A1 and then B1
   in last four disbursement periods from 3/1/2008
   5/31/2009.