Behind AfDB's $3B plan for African health manufacturing

The COVID-19 pandemic laid bare the African continent’s vulnerabilities when it comes to health manufacturing — the production of vaccines and pharmaceutical drugs falls far short of local demand. Without means of production, African countries were left without COVID-19 vaccines last year when high-income countries hoarded global supply. But this has started to change as new projects have emerged and countries have stepped forward with intentions to host manufacturing plants in the name of increasing the health security of nations across the continent. The African Development Bank Group has committed to invest $3 billion over the next decade in vaccine and pharmaceutical manufacturing. Devex spoke with Solomon Quaynor, the bank’s vice president of private sector, infrastructure, and industrialization, about these investments. Of the $3 billion, the bank expects to channel at least $1 billion toward increasing pharmaceutical and vaccine production capacity, he said. The bank expects to invest the remaining $2 billion in associated infrastructure that promotes regional logistical integration, such as building up transport systems and pharmaceutical hubs. Pharmaceutical manufacturing On average, about 30% to 40% of the drugs used on the continent are produced locally, Quaynor said, with varying levels of manufacturing maturity among countries. Shifting this and building up a sustainable industry could involve combining the economic impacts of import substitution, investments in addressing noncommunicable disease, and the manufacture of drugs that are of limited interest to manufacture in other parts of the world. The bank has identified 30 drugs that have the highest potential to be produced locally. They are used in products to treat illnesses commonly found across the African continent and they account for about 30% of Africa’s existing market. He said pharmaceutical manufacturing is a business where economies of scale are critical. The African pharmaceutical market is currently fragmented, with individual countries having limited demand. Because of this, the bank encourages regional pharmaceutical production hubs. “We will have the strategic element of really focusing initially on pharmaceutical companies that have regional aspirations or the potential to actually expand … [looking at] the importance of economies of scale,” he said. For pharmaceutical manufacturing projects, the bank is looking to provide senior debt — which is secured by assets or other collateral and is a lower risk debt for the bank because it holds priority during repayment, meaning it typically has lower interest rates — and subordinated debt — which typically has higher interest rates because it carries a lower priority during repayment. This is to ensure private sector partners have the right capital structure needed for greenfield investments — which can include a foreign direct investment where a company creates a subsidiary in a foreign country. It will also work with experienced companies that want to expand capacity, consolidate, or improve quality standards through corporate loans. “We look to make sure that the entire business plan, let's say for the three-to-five-year period, has the right sources of funding committed, including the portion we will provide,” he said. It’s a flexible approach and will depend on the project needs. Not all pharmaceutical projects need subordinated debt if there is sufficient equity capital, he said, adding that subordinated debt plays a role when there is a gap between equity and senior debt to complete the financing of the project. The bank does not make direct equity investments but is invested in several private equity funds that invest in the health and pharmaceutical sector, which might also put equity into some of the same projects. The bank’s support is also expected to address competitiveness issues affecting nascent medical devices industry, he said, including the manufacturing of personal protective equipment. Last week, the bank signed a memorandum of understanding for $3.56 million in grant funding with the Commission of the Economic Community of West African States to support the development of pharmaceutical industries. “The funds will support the implementation of regulations to allow duty-free access to pharmaceutical raw materials, packaging, and finished products under the ECOWAS Common External Tariff. It will also help establish an effective regional pharmaceutical regulatory ecosystem by providing technical assistance programs for regional regulatory authorities,” according to a press release announcing the signed memorandum. The bank's investments will also work to "advance the Bank's efforts to support the harmonization of the regulatory environment for pharmaceuticals across Africa at the regional and continental levels. This, in tandem with the operationalization of the African Continental Free Trade Area, will deepen intra-African integration and trade, boosting regional markets," according to the release. Vaccine manufacturing Currently, the African continent imports about 99% of the vaccines it uses, and consumes a quarter of the global supply. The African Union aims for African nations to ramp up the manufacture of up to 60% of the routine vaccination needed on the continent by 2040. Financing these efforts is different from financing pharmaceutical manufacturing because there is a “more complex ecosystem” with vaccines, Quaynor said. The AU has set up the Partnership for Vaccine Manufacturing to work toward improving that ecosystem in areas including coordination, access to finance, infrastructure, market demand, technology transfer, and research and development capacities. The bank has ongoing discussions to support the financing of vaccine manufacturing projects in Egypt, Ghana, Kenya, Morocco, Nigeria, Rwanda, Senegal, and South Africa. Meanwhile, the World Health Organization has selected Egypt, Kenya, Nigeria, Senegal, South Africa, and Tunisia for messenger RNA vaccine productions through its technology transfer hub in Cape Town. One of the challenges around vaccine manufacturing on the African continent is that there isn’t full clarity on how the offtake — who will purchase the vaccines — might work moving forward. UNICEF is globally the largest vaccine buyer and the main procurement partner of Gavi, the Vaccine Alliance. But countries also transition out of receiving support from Gavi when they hit a certain gross national income. Currently, Algeria, Angola, Botswana, Egypt, Libya, Morocco, Namibia, South Africa, and Tunisia are self-procuring Gavi countries, and Cameroon, Ivory Coast, Kenya, Mauritania, Sudan, and Zambia are soon to transition out of support, he said. Moving forward, there could be offtake agreements secured through an AU-established collective pooling vehicle for Africa. During the COVID-19 crisis, the AU established the African Vaccine Acquisition Trust, which is a special purpose vehicle used to acquire COVID-19 vaccines for countries. The bank will look to provide partial risk guarantees to counter-guarantee government offtake obligations, he said. This is aimed at giving manufacturers confidence the vaccines have a buyer. Vaccine manufacturers might feel comfortable with taking on the risk with the assurance that Gavi will purchase vaccines, but an AU-pooled vehicle or agreements with countries might not garner as much confidence, making partial risk guarantees more important. The structure of a partial risk guarantee for vaccine manufacturing is similar to power purchase agreements in the energy sector where governments pay for power produced. The bank provides a partial risk guarantee to the manufacturer so that if the government misses interim payments, then the bank will step in. This helps ensure that if there are delays by a government in paying for vaccines, manufacturing operations still continue and that debt service and equity returns are still achieved by the private sector. Grant funding will also be key to boosting vaccine manufacturing. AfDB is “actively working with regional and global stakeholders to consolidate and facilitate the channeling of early project funding to ensure bankability of vaccine manufacturing projects,” he said. The bank is looking into co-financing partnerships with the European Union, kfW Development Bank, U.S. International Development Finance Corporation, and India Exim Bank.