The prospect of a massive malaria outbreak in Zambia sent shivers through the aid community late last year. But the impending disaster was averted, thanks to a new fast-track funding mechanism meant to reduce risk among an illustrious group of collaborators and encourage private-sector investment. The result: Anti-malaria bednets were delivered ahead of schedule – and a promising financing tool was born.
As the 2015 deadline for reaching ambitious anti-poverty Millennium Development Goals nears, and conflict and climate change threaten development gains made around the globe, industry experts are clamoring for new ways to deliver foreign assistance more effectively and efficiently – from results-based financing to loan buy-downs and a host of innovative public-private partnerships.
The Pledge Guarantee for Health, piloted in Zambia, tackles a major speed bump on the road to sustainable development – the glaring need for commercial financial services such as guarantees and credit products – and one of the main concerns keeping commercial banks from investing in development initiatives: risk.
Commercial banks are naturally hesitant to lend more towards development-related projects when risk is too high, according to the Maureen Harrington, director of corporate and investment banking at Standard Bank, the largest bank in Africa, whose subsidiary, Stanbic Bank Zambia, participated in the Pledge Guarantee for Health.
If donors want banks to take more risk, Harrington said at an event in Washington last month, the development community should think more creatively on how to shoulder more risk on the front end until banks find effective ways to lend.
That’s exactly what the Pledge Guarantee for Health sets out to do. It encourages risk sharing so commercial banks are more inclined to invest in development initiatives, and it enables aid recipients to procure medicines and other commodities faster and more efficiently.
The creation of a new financing mechanism
The Pledge Guarantee for Health was developed in late 2009 by the United Nations Foundation and the Reproductive Health Supplies Coalition, a global network of organizations that works to ensure poor people get access to affordable and quality reproductive health supplies. Support came from the U.S. Agency for International Development, Bill & Melinda Gates Foundation, U.K. Department for International Development, Ministry of Foreign Affairs of the Netherlands, Germany’s KfW, and Dalberg Global Development Advisors.
PGH’s first transaction was the procurement of anti-malaria bednets for 1.6 million people in Zambia, using a $4.8 million emergency grant the World Bank approved in December.
>> Zambia Secures Malaria Aid From World Bank
World Bank officials were concerned about the possibility of a malaria outbreak during Zambia’s rainy season, which begins in December and reaches its peak around the end of February. They approached UNF for help streamlining the procurement of the bednets.
UNF brokered a deal between the World Bank, the Zambian government, Stanbic Bank Zambia and UNICEF, which was chosen to procure the bednets. UNF brought in a 50 percent guarantee and Stanbic Bank Zambia put in the other 50 percent, Kevin Starace, UNF’s executive director for global health innovation, told Devex.
UNICEF received a letter of credit within two days of the World Bank’s grant approval, purchased the bednets by the end of December, and delivered them to families in northern Zambia by the end of January. The turnaround time is stunning.
“In normal circumstances,” Starace said, “the bednets would not have arrived until five to six months after the grant was approved because of the bank disbursement processes.”
How the Pledge Guarantee works
PGH can be used by both donors and aid recipients. It is an open and flexible tool, and transactions are structured in a way that accommodates the needs of all stakeholders involved, Starace said.
A typical PGH transaction involves a donor, a recipient country or organization, a commercial bank and UNF, which acts as broker, financial manager and additional guarantor.
Every PGH transaction starts with a grant or loan for the procurement of health supplies. After the grant is approved, either the donor or recipient can approach UNF to be able to use PGH. UNF then starts discussions with both parties and taps a commercial bank to participate in the transaction.
The commercial bank issues a letter of credit to the aid recipient up to the value of the grant committed by the donor. The bank can also issue the letter of credit to a supplier chosen by the aid recipient – such as in the Zambia transaction, where the government chose UNICEF to supply the bednets.
The letter of credit is essentially a “promise to pay” or loan that the aid recipient or supplier can use to buy and distribute the needed health commodities. The aid recipient then repays the loans after receiving the funds promised by the donor.
The loan is backed by a 50 percent guarantee from the commercial bank and another 50 percent from UNF. The bank also assumes first-loss position in the deal, which means it agrees to shoulder the first economic loss if the transactions fails.
UNF provides its 50-percent guarantee through its “special purpose vehicle,” a separate legal body created to protect UNF from financial risks and to ensure that obligations under the “special purpose vehicle” will be secured regardless of UNF’s own financial status. This guarantee is backed by the Gates Foundation, which at present is the sole third-party guarantor for PGH.
Plans to expand the Pledge Guarantee
Moving forward, UNF wants to downsize the percentage of the guarantee covered by the Gates Foundation, according to Starace. UNF is in talks to bring in other donors, like the U.K. Department for International Development, as additional third-party guarantors, he said.
On future transactions, Starace said UNF is looking forward to working with the World Bank again as well as with the Global Fund to Fight AIDS, Tuberculosis and Malaria. These two are ideal customers for PGH, Starace said, because they have complex grant disbursement processes. But UNF is also in talks with the World Health Organization and U.N. Population Fund to determine how they can use PGH, Starace added.
There are several transactions in the PGH pipeline for the next two years. Without identifying the donors and aid recipients involved, Starace said these projects include the delivery of commodities in areas such as malaria prevention and treatment, reproductive health, vaccines, pediatric ARV and continuation of HIV treatment in various regions around the world.
UNF aims to make between 10 to 18 PGH transactions this year and up to 40 transactions in 2012, Starace said.
He added that UNF is also eager to go beyond the procurement of health supplies and use PGH to, for instance, help the United Nations translate member states’ contributions to working capital much faster.
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About the author
Ivy Mungcal
As former senior staff writer, Ivy Mungcal contributed to several Devex publications. Her focus is on breaking news, and in particular on global aid reform and trends in the United States, Europe, the Caribbean, and the Americas. Before joining Devex in 2009, Ivy produced specialized content for U.S. and U.K.-based business websites.
