The Role of Innovative Finance in Vaccine Provision and Development
Written by Abdul-Rahman Lediju, Akshat Jain, Yun Fu and Andrea Feigl
In a January 2021 newsletter produced by the Health Finance Institute (HFI), the organization discussed the role of innovative financing instruments to develop a medium- and long-term response to the pandemic by (1) accelerating economic reconstruction to position economies for future growth; and (2) improving pandemic preparedness and response for existing and future global health crises (where possible).
These possibilities also mirror the emerging preferences of key public and private global health decision-makers, who mostly want to re-focus funding to prepare for the next pandemic. Such preparation would require scaling up local manufacturing capacity, updating surveillance systems, and strengthening health outcomes all over the world. This is the correct future-looking view for how funding flow should be directed. But it does miss the reality of the present. Our present continues to be centered around the unequal access to and distribution of vaccines to confront the continuing COVID-19 pandemic. For example, as of January 2022, only 10% of Africa’s 1.2 billion population has been fully vaccinated, compared to 70% in the G7 countries.
These vaccine access imbalances are one of the hot discussion topics in the global health arena.
The modern global health agenda, as we understand it, was primarily shaped by the political interests of the G7, the influence of private foundations that have financial strengths, and the strategic focus of private companies that are trying to increase market access for their therapeutic or device portfolio and pipeline in newer geographies.
These strategic interests have come to life in the form of imbalanced healthcare sources (skewed toward infectious diseases); laws and policies designed to control ownership and distribution of health innovation (especially in the drug and device areas); and the lack of sustained focus on holistic health systems. It has been compounded by thin local budgetary resources dedicated to health, leading to the deep financing inequalities seen, especially in lower- and middle-income countries.
These inequalities are systemic and stubborn. In the vaccine access area, we believe that such inequalities are primarily driven by (1) procurement, (2) storage, and (3) last-mile distribution challenges across the vaccine supply chain.
A solution to the procurement issue
The Gavi COVAX Advance Market Commitment (COVAX AMC) uses official development assistance (ODA) funds from OECD donors to incentivize manufacturers through guarantees to ensure sufficient global capacity is installed before vaccines are licensed. It will then procure vaccines and assist in delivery for low- and middle-income countries (LMICs).
A solution to the storage issue
Through a USAID-backed market mapping program, a Moroccan and DC-based advisory platform isolated an opportunity to develop a cold storage facility at the Port of Tanger in Morocco. The refrigerated warehouse presented an investment opportunity and a means to enable local agribusinesses to export their goods to Europe. Such cold storage facilities could have ready-made applications to vaccine storage as well.
USAID provided a partial 50% credit guarantee to a local Moroccan family office to invest in the construction and maintenance of the cold storage facility. Other private investment partners from Spain and the United States helped the project to secure USD 11 million. The cold storage facility was operated by Friopuerto, who oversaw the project.
A solution to the distribution issue
The US International Development Finance Corporation (DFC)’s Global Health and Prosperity Initiative seeks to catalyze up to $5 billion investment in private sector projects that support the COVID-19 response, specifically for those targeting health system capacity in the distribution of medical supplies.
Viewpoint
The best health-focused innovative finance structuring practitioners have a few things in common.
First, they have the ability to speak fluently to multiple stakeholders — catalytic investors, private investors, lawyers, accountants, and potential investee companies or project developers. The best practitioner teams should be multidisciplinary — with backgrounds in fund structuring (both with respect to project management and fund modeling), management accounting (including familiarity with IFRS and IPSAS accounting standards), law (with specific expertise in fund formation and deal structuring for underlying financing instruments), and investment origination and due diligence.
Second, they recognize that complexity (in structure) is a barrier to scale. Innovative finance structures (including blended finance structures) are too bespoke, with too many tranches of risk-return expectations, or too much complexity around liquidity or impact outcome requirements. Though many structures may generate compelling press or buzz, they are not at the scale needed to move the needle on the problem it is seeking to address. For example, the financial resources needed to fully vaccinate 60% of people in lower and middle-income countries is $50 billion. Achieving such a scale would require structures that can absorb large volumes of private capital and potentially be connected to the capital markets to attract retail and institutional debt and equity investors. The COVAX AMC is the best example of a mechanism that is explicitly scalable. Still, it is essentially a pool of donor funding used to stimulate vaccine manufacturers to action (alongside procurement actors). The best-case scenario would be for such mechanisms to have an underlying business case, such that the donor pool can be used to leverage private financing to further amplify the scale.
Finally, these practitioners recognize that health-focused innovative finance structures require more catalytic financing than similar structures in other sectors (e.g. energy, agriculture, financial services, etc.). The fragmented payer system in lower-income markets, including the disproportionately high out-of-pocket expenses borne by patients who must navigate other basic needs, is a major contributor to the mix of capital needed to ensure equitable vaccine access. Lower leverage ratios (e.g., 0.5x to 1.0x catalytic to private capital ratios) should be seen as valuable given the realities of mobilizing innovative funding streams for the sector.
Conclusion
These types of innovative financing arrangements will be crucial in the long run for crowding in private capital as developing countries transition into low-middle income economies. HFI aims to bring its expertise in the global health and innovative finance space to promote stronger multi-sectoral partnerships that allow for this goal to be achieved. To learn more about HFI’s work, reach out at info@healthfinanceinstitute.org.
