Pledge Guarantee For Health (PGH)

1. Pledge Guarantee For Health (PGH) Reproductive Health Supplies Coalition: Addis Ababa June 24, 2011

2. Health financing volatility in developing countries destroys value and has adverse impacts on the procurement system and end users High volatility in health aid Adverse impact on patients and systems Value destruction due to aid volatility Volatility of health aid is higher than government health spending1 Lost $0.07-0.28 for every $1 of aid due to the unpredictability1 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: emergencyproduction and shipping fees to compensate for the time lost waiting for disbursement $1.00 (1993 – 2005) 7-28% of value lost Health aid volatility Aid value $0.72 ODA in past 15 years Public health spending volatility Lack of access to financial tools for recipients of donor financing to effectively manage volatility (1) Source: P. 4, Brookings Institution. August 2008. “Smooth and Predictable Aid for Health – A Role for Innovative Financing?”; Dalberg analysis. 1

3. What can we learn from the private sector? Commercial bank 5 Manufacturer uses the future receivable as collateral to obtain short-term bridge financing from a bank 2 Manufacturer repays bank plus interest In 6 months, store forwards remaining 50% payment 4 Wholesale / retail store Inputs source With the financing secured from the bank, the manufacturer obtain its inputs more efficiently to lower its cost of operations In order for the store to purchase a larger order, manufacturer offers half payment upfront and half in 6 months Manufacturer 3 1 • 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

4. ILLUSTRATIVE PGH increases access to health commodities by allowing donor recipients to leverage L/Cs to accelerate procurement Supplier Procurer Recipient Bank Co. Guarantor Donor Timing 1) Donor commitment to fund a $20 M procurement of 1M implants at $20/unit UNFPA JSI PFSA PSI Gov agency MOH Civil Society USAID WB KfW DFID EU Merck Bayer Pfizer AZ Textiles J&J GSK Jan ’11 2) 50%Guarantee ($10M) Stanbic SBSA Access Eco PGH Feb’11 3) $20M L/C 4) $20M Tender PGH 5) 1M implants delivered May’11 6) $20M 30 day Invoice 7) $20M payment of invoice within 30 days of receipt 8) $20M donor funding disbursement plus financing cost Sep’11 Status quo Dec’11

5. PGH can utilized in three different ways 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 Donor 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 Recipient Procurer 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 Supplier

6. 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 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)

7. Getting better value for our money could reduce the unmet needs of the Reproductive Health Sector High volatility in health aid Adverse impact on patients and systems Value destruction due to aid volatility ~$60M* in value is lost due to inefficiencies (funding, logistics, delivery, etc..) Volatility of health aid is higher than government health spending1 Lost $0.07-0.28 for every $1 of aid due to the unpredictability1 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: emergencyproduction and shipping fees to compensate for the time lost waiting for disbursement $1.00 (1993 – 2005) 7-28% of value lost Health aid volatility Aid value $0.72 ODA in past 15 years Public health spending volatility *Assumes 25% value loss of the current 2009 level commitment of $239 M 6