SD & DFAMGMT Side-MeetingSeptember 2015

Innovative Financing (Supply & Country)

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Objectives

•Debrief the Regional and HQ Directors on the range of work underway on supply and country financing

•Get a steer from the group on whether we are taking the right approach, synergies with other areas of work, future areas of work, working in partnership

•Obtain feedback on the idea of an internal ‘think tank’ to further steer the work during this evolving period

Debrief

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Secured FinancingA look back…

4 – 5 years ago, we began a body of work in financing, initially focusing on transactional activities:- Delayed funds which prevented supply transactions moving forward - Financial backing for special contracts to generate exceptional savings

But it’s organically grown to adjacent activities and has become quite robust. Here are some highlights:

2010

• Inaugural formalized pre-financing transactions• Sierra Leone $6.7m LLINs thru 7% set-aside fund: Zambia: $4.4m LLINs (delayed WB loan) thru LoC;

2011

• Novartis OPV Firm Contract – Kept a supplier in a constrained market for 2 extra years• Rotavirus special contracting with partners $650m of savings over 5 years

2012

• First U.S. Fund’s Bridge Fund transactions ($500k RUTF Burkina Faso)• First ‘partial firm’ transaction (Sanofi OPV); high returns / efficient capital

2013

• $54m worth of pre-financings for COs and Countries, including polio transactions for Nigeria and Pakistan• Special contracting to secure IPV supply via VII; special contracting for penta via GAVI/BMGF

2014

• ~$30m of pre-financings for COs and Countries, including Ebola-related; VII transition to SD• UNICEF-led penta special contracting, novel option + commercial financing design $57m in savings

2015

• VII Expansion ExB Approval; ~$50m worth of pre-financings YTD; Nigeria RI credit line• Launch of domestic supplier base expansion / financing activities

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Improve Performance• Reduce stock-outs• Lower transportation costs• Ensure timely delivery

Improving supply chain performance within different modalities

Definition of Need Budgeting& Planning Procurement Delivery & Clearance Inspection Warehousing, Distribution & Reorder Utilisation Monitoring & Evaluation

Different modalities

of Service-Delivery

a UNICEF Government

b

UNICEF Government

c

UNICEF Government

d

UNICEF Government

e Government

Capacity Development: Focus on sharing UNICEF added-value (expertise on markets, products, inventory, monitoring & convene StS (predominantly e)Strengthening together (a, b, c, d)Optimising UNICEF (a, b, c)

Financing has primarily been within the Supply Chain Optimization Spectrum

Most recent financing work resides here

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Current Scope: 2014-2017

• ~$50m worth of transactions pre-financed in 2015YTD

• VII Expansion & USF’s Bridge Fund related to PS• Nigeria $21m credit line for Routine Immunization

Pre-Financing Delayed Grants

and MoH Budgets

• Support country-owned budgeting and sustainability initiatives

• Facilitate implementation of local public-private trust funds; access to commercial markets

Increasing Gov’t Fiscal Space

• Penta Special Contracting $57m+ savings over 2 years (MICs-GAVI price parity)

• Additional models to achieve “firm” contracts including multiple partial-firm models, option-based models

Special Contracting

• Support access of new suppliers in programme countries to financing via leveraging UNICEF’s network, convening ability and credit profile

Local Supplier Base Development

SupplyFinancing

CountryFinancing

Lower prices,secured quantities,etc.

Addressing cashflow timing gaps

Increasingavailability of funds / budgets

Lower prices + domestic economic development

Impact on Countries

To respond to these needs, we‘ve conducted activities through 4 workstreams:

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Current Trends in Supply Financing

Pre-financing need for delayed grants and government disbursements• $100m annual supply pre-financing requests (all commodities); $225m+ by 2020 Expanding pre-financing activities –2015YTD (July) ~$50M worth of pre-financings (~½

through VII) / Worth noting that since its inception the US Fund’s Bridge Fund in 2012 has supported $100M of pre-financings and government related PS activities.

Vaccine Independence Initiative– expanding scope and capital base per Executive Board approval in 2015

• Active: Kenya, Chad, Niger, Capo Verde, PICs, Nigeria: Soon active: Lao PDR, Cameroon, Ghana• By end 2015, capital fund’s effective base will increase from $10M to $30M (including most recently

$5m from GAVI). Target is $100M by 2020.

Special contracting to achieve improved pricing for countries• MICs-GAVI penta pricing parity + $57m savings• Improved pricing increased fiscal space for other interventions Cost-effective / less capital-intensive special contracting mechanisms

Sourcing of supplies from programme countries• Domestic suppliers’ poor access to affordable financing• RMNCAH-commodities to be locally sourced by Countries Support domestic supplier growth while respecting FRRs and public procurement principles

Supply Financing

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Pre/Bridge Financing of programme needs

• 2012-2015YTD (July): $141m worth of supply pre-financings vs. ~$367m of requests • ~$50m worth of successful supply pre-financings for 2015YTD (July)

Ability to meet requests is improving:• VII Expansion (most flexible tool), can now broadly support non-vaccine commodities • Triage by SD, DFAM, EMOPs and COs to determine the ‘right’ pre-financing mechanism (“the 5

Buckets” = RR, 7% Set aside, EPF, VII & USF’s Bridge Fund)• Working with EMOPs to develop ‘fast-acting’ resource mobilization, especially for those

countries which can ultimately self-fund at least part of their response• Seen by partners as a leader in pre-financing / revolving funds (many incoming consultations)Most Recent Pre-Financing ExamplesDate Country Transaction

August 2015 Zimbabwe (CO) $1.4m essential medicines while waiting on delayed EU grant

August 2015 Chad (CO) $525k RUTF advanced while waiting on delayed ECHO grant

July 2015 Ukraine (CO) $1.9m ARVs advanced while awaiting delayed GFATM grant

June 2015 WHO $6.24m mOPV2 stockpile secured in preparation for the “Switch”

May 2015 Nigeria (MoH) $21m credit line for self-funded Routine Immunization via VII ($14m of vaccines ordered)

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Special Contracting

Special Contracting refers to commercial transactions with terms or features which are not part of our standard contracting, including:- Firm Contracting- Pre-payments- Partial Firm Contract- Pre-payment equivalent of firm contract- Option-based contracting

Special contracting tools typically require dollar-for-dollar coverage of financial risk.

Recent Examples• Firm contract to secure IPV supplies, before end-users had been identified (ultimately, used in 2014

Nigeria IPV campaigns).• Special contracting with penta supplier $57m of savings and MIC-GAVI pricing parity (Philippines,

Egypt, others now buying penta at the GAVI price)• In 2016, expect another special contracting tool to accelerate availability / reduce pricing for a point-

of-care, pneumonia diagnostic device… stay tuned!

What does it mean for Countries? Lower prices, faster availability, reasonable convergence of pricing across income groups

` UNICEF organically leading development of these tools w/in partners (GFATM, GAVI, BMGF)

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Impact of Special Contracting in terms of price Financial Savings of over $789M (2011-2016)

OriginallyAnticipated

Transaction Savings ($)* Commitment ($) Duration IRR Context - Primary Driver

Novartis - OPV 2011-2012 (BMGF)

11,130,000 63,070,000 2 years 18.0% Cost savings. Plus keep large supplier in market for another 2 years. The transaction did not generate the full savings as the supplier did not have the full quantity available due to production issues.

GSK-Rotavirus ** (GAVI / BMGF)

650,000,000 221,818,182 5 years 129.6% Cost Savings and Market Influence: achieved new lowest market price. BMGF played an important role in negotiating terms. We note that there are significant pre-payments also made with this transaction which also contribute to the low price.

BioE - Penta 2012** (GAVI / BMGF)

1,731,250 41,800,000 9 months 13.2% Market influence: achieved new lowest price. Terms were informed by BMGF bilateral agreement (below). Pre-payment incorporated into transaction.

Sanofi - OPV 2013-2016 (U.S. Fund)

10,090,000 16,915,000 4 years 23.5% Cost savings

BioE- Penta 2013-2016 (GAVI/BMGF)

59,500,000 179,500,000 4 years 18.2% Cost savings. Terms were informed by BMGF bilateral agreement (below). Does not include effect of advance payment which generates additional savings.

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SII - Penta 2015-2016 (GAVI/Commercial)

56,950,000 83,500,000 2 years 119.0% Cost savings and market influence: improved convergence of prices and achievement of MIC-GAVI parity for pentavalent. Utilised commercial financing sources to provide security for transaction.

* At time of transaction.** Also, includes some pre-payment terms. Where possible, analysis seeks to identify effect of only contracting on firm basis.

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Local Supplier Base Development

Our newest category of work… financing tools to support local domestic supplier growth

SD’s 2014-17 Supply Outcomes have explicit targets on sourcing from Programme Countries- 50% of RUTF is sourced from local manufacturers by 2016- The 10 products of UN LSCWC sourced from at least 2 local sources by 2015- Contract 3 local kit-packers of health kits in Africa by 2014; Issue guidance on how to kit pack

locally in SM by 2015

Access to affordable working and growth capital remains an important barrier to growth- Businesses with $1m+ of UNICEF revenue encounter 10-12%+ interest rates- Growth capital is just as hard to find- UNICEF cannot be a financier / investor in the companies it procures from

Therefore…- We are using our convening role and industry consultations as a forum for suppliers and

financers / investors to meet- Developing financing models which leverage UNICEF’s creditworthiness for UNICEF suppliers to

reduce borrowing costs to these suppliers

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Impact of Local Supplier Base Development

Example of a local Supplier obtaining financing… without UNICEF financing the supplier

Local Supplier

International Bank Domestic Bank($)

Issue & Adv ise LC

($)

Issue & Adv ise LC

LC$Discount LC ($)

We are currently working with a Nutrition supplier to operationalize the above.

Supplier is located in a programme country and is charged 10%+ for working capital borrowings, limiting growth potential

By engaging in the above / other structures (including with other suppliers), we are helping reduce borrowing cost (by at least ½) - UNICEF, Countries and Partners will share in the generated price savings- Supporting sustainable local development.

Country Financing

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Expanding to help countries position-prepare for changing ODA context

20+ countries are predicted to enter GAVI-graduation through 2020.2014 2015 2016 2017 2018 2019 2020 2021 2022

BhutanHondurasMongolia EAPROSri Lanka LACROMoldova ROSAIndonesia WCAROKiribati ESAROBolivia CEE/CISAngola MENAArmeniaAzerbaijanCongo, Rp.GeorgiaTimor-LesteGuyanaNicaraguaPapua New GuineaUzbekistanGhanaNigeriaSolomon IslandsVietnamLesothoLao PDRZambiaCote d'IvoireDjiboutiSao Tome & Principe

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What support could UNICEF provide to countries based on the different issues?

Toolkit to Support GAVI Graduating Countries- a combination of country and supply financing

‘Sliding’ financial transition rather than cliff

• Country co-financing, including monitoring & advocacy at country level• Budgeting quantification support• Engagement with MoH + MoF

Vaccine prices • Companies agreeing to maintain prices at GAVI price for 5-10 year post graduation

• Closer engagement with RO/CO/Gov’t• Transparency• Special Contracting

Increase local fiscal space for immunization/health

• Advocacy• Tool-kit for local options (trust funds, other commercial)• Financing tools, including commercial and ring-fencing

Government self-procurement

• Support to more efficient payment & procurement systems; • Vaccine procurement practitioner's exchange

Buy or negotiate on behalf of Governments

• Expanding VII & making available PS• Establish reference prices

Work in Partnership • WB, WHO, GAVI, bilateral donors, GFF• At local, regional and HQ levels

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Fiscal Space Work – Country Spectrum

• GAVI, GFATM and other multilateral initiatives tend to rely on GNI / income-based measures to categorize countries and levels of support.

• The arbitrary delineation, particularly between the thresholds of WB-income grouping (low vs. lower-middle vs. upper middle) contributes to artificial price floors, including via tiered pricing

• The strength of systems is heterogeneous and not necessarily linked to GNI: e.g., some LMICs continue to have weaker procurement/budgeting capacity/political will. Some LICs are high-performing and have good ‘budget maturity’

• The current GNI-based model creates an acute financial and technical support cliff. Approaching support to countries instead based upon where they fall in the above continuum should create more sustainable financing solutions.

Donor FundedSelf-Funding

+ Procurement Services including

VII

Self-Funding+ standard

Procurement Services

Self Procurement

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• Ad hoc pre-financing to resolve RI stock-out / co-financing default.• Establishing more sustainable ~$2.5-5M credit line for immunization procurement (via VII)• Basic budgeting and timing release support

Ghana

• Improved synchronization of vaccine forecasting with the national budget process.• Depreciation of the CFA UNICEF to explore if can reduce foreign exchange swing effect.• Potential commercial financing options for the longer-term, leveraging the AfriVac trust fund.• TA for operational support for AfriVac trust fund staffing and RM.

Senegal

• Dedicated vaccine financing through “loi de vaccination” (taxes on alcohol and tobacco).• Analysis of increasing co-financing, fx rate fluctuations as well as falling oil prices impact.• Support application to VII, evaluating whether an ad hoc pre-financing could be completed.

Cameroon

• Current VII country: working on optimization of budget releases• Quantification of budgetary needs• Resolution of outstanding payments

Kenya

Fiscal Space Work – Snapshot of work underway at Countries

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WCARO Financing for Immunization & Health Supplies Workshop

• 4Q 2015 in Dakar, Senegal (tbc)• WCARO COs and potentially some ESARO

Objectives• Review the immunization (and health supplies) financing challenges• Understand the status and challenges of the commercial banking markets• Evaluate potential commercial financing solutions including bank guarantees (to support

pre-financings of budgetary disbursements) and financial trust fund structures (for dedicated funding and financing)

• Develop commercial models which address constraints and challenges.

Targeted Participants• Representatives of Countries: MoH, MoF, Parliamentary stakeholders• UN Affiliates and Development Partners: GAVI, WHO, World Bank, USAID, etc.• Representatives of commercial financial institutions with presence and activity

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Fiscal Space Work- moving forward?

20+ countries are predicted to enter GAVI-graduation through 2020. New domestically-funded requirements via GFF, other global initiatives put add’l

demands on finite gov’t budgets

• Pre-financing supports self-funded countries, but is not a permanent financing tool, nor does it address fundamental budget gaps.

• Expanding our financing work to help design structural solutions to increase fiscal space, including implementing dedicated funding structures, for example:

• Ring-fenced budget funded by “sin” taxes such as alcohol or tobacco (Cameroon)• Domestic trust funds financed by private – public partnerships (Senegal)• With bilaterals and WB

• Other complementary financing measures to improve sustainability include promoting:• Improved access to local capital markets• Set up of commercial bank guarantee structures Effectively creates same prioritization of development spending on par with more ‘visible investments’ (roads, buildings, etc.)

Feedback– approach, scope, synergies, future

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Scope of work, internal partners

Taking stock of where we are ½ through the UNICEF Strategic Plan:

- Supply financing activities have been transaction-related driven and reactive- A silo-thematic approach to financing often zero-sum (another programme loses)- ‘Graduating’ countries not meeting commitments (Ghana, Angola, Congo-Rep.)- Not clear we are leveraging existing strengths and capacity appropriately?- Once engaged on financing issues, CO and RO staff have unique presence and can reach beyond traditional

MoH-CO relationship and can credibly engage with MoF- We don’t have a standalone / cross-divisional financing strategy

SD & DFAM have been working closely with many parts of UNICEF, principally:- COs and ROs (typically programme and supply)- OED-Legal; EMOPs, PPD; PD; PFP (& Natcoms)

We would like to broaden our collaboration to more explicitly include:- DRP- Social Policy- Operations officers (both RO and CO)- [Others?]

There is a rich body of work whose experience supply financing would benefit from.

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Should we document the work and potential to develop an internal strategy/framework?

E.g.,

“Reactive” “Planned/Proactive” financing - Expand analytical and diagnostic framework (+ other tools)- Incorporate total country system cost in addition to current (and future) commodity needs

Support countries’ development of sustainable “exit plans” - Holistic view of health, education AND development funding and financing (remove the

“vaccine bias”).

Raise the supply and services financing profile within UNICEF and externally through - Increased financing communication- Capacity building on supply financing issues and financial literacy- Active engagement with financing partners and work streams (e.g., GAVI-graduation and

other commodity groups)

Leverage and build on existing mechanisms and platforms- Maintain balance between standardization and flexibility- Protect financing capital sources- Leverage existing (and future) partnerships – UNICEF can’t do everything (need WB and

others)

Improve efficiency of processes, responsiveness to financing needs.

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Discussion topics

- What ongoing activities have natural overlap and can leverage each other?

- Are we approaching this with the right philosophy, initial strategy components?

- Could the approach we are taking be scaled to beyond supply financing, to include total systems and programmatic financing?

- Should UNICEF take a more proactive role in country fiscal-space financing issues in some contexts?

- Should we expand knowledge / share information on work underway? And to whom?

- How about establishing a ‘think tank’ to steer a programme of work as we learn more? Then report back in 12 months?

Thank you!