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Scaling High-Impact Solutions with a Market-Shaping Mechanism for Global Health Supply Chains

04.06.23 | 12分钟阅读 | Text byAmanda Arch&Shiro Wachira&Jay Sullivan&约书亚·舒普（Joshua Schoop）

Summary

Congress created the Development Finance Corporation (DFC) to finance private sector solutions to the most critical challenges facing the developing world. In parallel, the United States Agency for International Development (USAID) has committed toengaging the private sectorand shifting more resources to local market providers to further the impact of U.S. foreign aid dollars.

USAID is on the verge of awarding its largest-ever suite of foreign aid contracts, totaling $17 billion over the next ten years and comprising nine awards as part of the “NextGen Global Health Supply Chain” (GHSC) contracts. This is a continuation of previous global health supply chain contracts that date back to the 1960s that have grown exponentially in total value but have underperformed and not meaningfully transitioned responsibility for deployment to low- and middle-income country (LMIC) governments and LMIC-based organizations.

Now is the time for USAID and the DFC to pilot new ways of working with the private sector that put countries on a path to high-impact, sustainable development that builds markets.

We propose that USAID set aside $300 million of the overall $17 billion package – or less than 2 percent of the overall value – to create a Supply Chain Commercialization Fund to demonstrate a new way of working with the private sector and administering U.S. foreign aid. USAID and the DFC can deploy the Commercialization Fund to:

• Create and finance instruments that pay for results against certain well-defined success metrics, such as on-time delivery;
• Provide blended financing to expand the footprint and capabilities of established LMIC-based healthcare and logistics service providers that may require additional working capital to grow their presence and/or expand operations; and
• If successful, invite other countries to participate in this model, with the potential for replication to other geographies and sectors where there are robust private sector markets, such as in agriculture, water, and power.

USAID and the DFC can pilot this new model in three countries where there are alreadythriving and well-established private markets, like Ghana, Kenya, and Nigeria.

Challenge and Opportunity

The world is facing an unprecedented concurrence of crises: pandemics, war, rising food insecurity, and a rapidly warming climate. Low- and middle-income countries (LMICs) are deeply affected, with many having lost decades’ worth of gains made toward the Sustainable Development Goals in only a few short years. We now face the dual tasks of regaining lost ground while ensuring those gains are more durable and lasting than before.

The Biden Administration recognizes this pivotal moment in its newU.S. Strategy Toward Sub-Saharan Africa。该战略承认大陆的成长g importance to U.S. global priorities and lays out a 21st-century partnership to contribute to a strong and sustainable global economy, foster new technology and innovation, and ultimately support the long-envisioned transition from donor-driven to country-driven programs. This builds on past U.S. foreign aid initiatives led by administrations of both political parties, including Administrator Mark Green’s Journey to Self Reliance and Administrator Raj Shah’s USAID Forward initiatives. Rather than creating a new flagship program, the U.S. Strategy Toward Sub-Saharan Africa focuses on improved implementation and better integration of existing initiatives to supercharge results. Such aims wereechoed repeatedlyduring the U.S.-Africa Leaders Summit in December 2022.

To realize a new vision for U.S.-Africa partnerships, the Biden Administration should more effectively fuse the work of USAID and the DFC. A keypolicy rationalefor the DFC’s creation in 2018 was to counter China’s Belt and Road Initiative (BRI) and growing economic influence in frontier markets. By combining this investment arm with USAID’s programmatic work, Congress hoped to accelerate major development impact. Howevernumerous mismatches between USAID and DFC prioritieshave limited and sometimes actively undermined Congress’ goals. In the worst cases, USAID dollars have been used to pay international aid contractors to perform work in places where existing market providers could. Rather than bolster markets, this candistortthem.

This memo lays out a new approach to development rooted in better USAID-DFC collaboration, where the work of both agencies contributes to the commercialization of sectors ready to transition from aid-dependent models to commercial and trade-enabled ones. In these sectors, USAID should work to phase out its international aid contractor-led model and instead scale up the work of existing market participants, including by paying them for results. This set of recommendations also advances USAID priorities outlined in the Agency’s newAcquisition and Assistance Strategyand proposedimplementation plan, as well as USAID’s政策框架, which each call for working more closely with the private sector and transitioning to more pay-for-performance models.

The global health supply chain is ideal for USAID and the DFC to test the concept of a commercialization fund because of the sector’s discrete metrics and robust existing logistics companies. Investing in cheaper, more efficient evidence-driven solutions in a competitive marketplace can improve aid effectiveness and better serve target populations with the health goods like PPE, vaccines, and medications they need. This sector receives USAID’s largest contracts, with the Agency spending more than $1B each year on procurement and logistics to get the right health products to the right place, at the right time, and in the right condition across dozens of countries. In the logistics space, only about 25%¹of USAID’s expenditure supports directly distributing commodities to health facilities in target nations; the other 75% is spent on fly-in contractors who oversee that work. Despite this premium, on-time and in-full distribution rates often miss their targets, and stockouts are still common, according to USAID’s reports and audits.²

A Commercialization Fund can directly address policy goals such as localization or private-sector engagement by building resilient health supply chains through a marketplace of providers that ensures patients and providers access the supplies they need on time. In addition to improving sustainability and results and cutting costs, a well-structured Commercialization Fund can improve global health donor coordination, crowd-in new investments from other funders and philanthropy that want to pay for outcomes, and hasten the transition from donor-led aid models to country-led ones.

Plan of Action

USAID should create the Global Health Supply Chain Commercialization Fund, a $300 million initiative to purchase commercial supply chain services directly from operators, based on performance or results. USAID should pilot using the Commercialization Fund to pay providers in three countries where there arealready thriving and well-established private logistics markets, such as Kenya, Nigeria, and Ghana. In these countries, dozens of logistics and healthcare providers operate at scale, serving millions of people.

最初关注健康物流，美国国际开发署应从其尚未获得的170亿美元的NextGen全球健康供应链合同中使用3亿美元，以为商业化基金提供初始资金。如果成功的话，商业化基金将在全球卫生供应链中为竞争和人群的高影响力技术，创新以及更多基于市场的参与者创造一个开放的竞争环境。该基金将基于整个机构的现有努力，以识别，孵化和催化私营部门的创新。

To quickly stand up this Commercialization Fund and select vendors, Administrator Power should utilize her “impairment authority。” Though typically applied to emergencies, the “impairment authority” has been used previously during global health events like the COVID-19 pandemic and the Ebola response and could be used to achieve a specific policy priority such as localization and/or transforming the way USAID administers its global health supply chains. (See FAQ for more information regarding this authority).

The creation of this Fund, which can be fully budget-neutral, requires the following steps:

Step 1. USAID and DFC take administrative action to design and capitalize the $300 million, five-year, cross-cutting, and disease-agnostic Supply Chain Commercialization Fund.A joint aid effectiveness “tiger team” within USAID and the DFC should:

1. Spearhead the design and implementation framework for the Fund and stipulate clear, standardized key performance indicators (KPIs) to indicate significant improvements in health supply chain performance in countries where the Commercialization Fund operates.
2. Select three countries to adopt the Commercialization Fund, chosen in coordination with overseas USAID Missions and the DFC. Countries should be selected and prioritized based on factors such as analyses of health systems’ needs, the existence of local supply chain service providers, and countries’ desire to manage more of their own health supply chains.作为美国 - 非洲领导人峰会的后续访问，我们建议美国国际开发署和DFC直接的初始商业化基金资金来支持非洲的活动，那里已经有蓬勃发展且已建立了良好的私人市场，例如加纳，肯尼亚和尼日利亚。
3. Set pricing for each KPI and product in each Commercialization Fund country market. For example, pay-for-performance indicators could include percent of on-time deliveries. USAID and the DFC should set high expectations for performance, such as 95+ percent on-time delivery, especially in geographies where existing market providers can already deliver against similarly rigorous targets in other sectors. USAID bureaus and missions, partner country governments, and in-country private sector healthcare and logistics leaders, as well as supply chain and innovative financing experts, should be consulted during this process.
4. 选择为结果支付的资金机制（有关详细信息，请参见步骤2）。
5. Provide blended financing to vendors that may need additional resources to scale their footprint and/or increase their capabilities.
6. Select a third-party auditor(s) to audit the results upon which providers are paid.

Step 2: USAID structures financial instruments to pay service providers against results delivered in selected Commercialization Fund countries

USAID should pay Commercialization Fund providers to deliver results, consistent with the KPIs set in Step 1 by the joint aid effectiveness “tiger team.” Pay-for-performance contracts can also provide incentives and/or price assurances for service providers to build infrastructure and expand to areas they don’t traditionally serve.

Structuring pay-for-performance tools will favor providers that can demonstrate their ability to deliver superior and/or more cost-effective results relative to status quo alternatives. Preference should be given to providers that are operational in the target country where there is existing market demand for their services, as evidenced by factors such as whether the host country government, national health insurance program, or consumers already pay for the providers’ services. USAID should work with the host country government(s) to select vendors to ensure strong country buy-in.

To maximize performance and competition, USAID should explicitly not use cost-reimbursable payment models that reimburse for effort and optimize for compliance and reporting. The red tape associated with these awards is so cumbersome that non-traditional USAID service providers cannot compete.³

USAID should consider using the following pay-for-performance modalities:

• Fixed-price, milestone-based awardsthat trigger payment when a service provider meets certain milestones, such as for each delivery made with a 95% on-time rate and with little-to-no product spoilage or wastage. Using fixed-price grants and contracts in this way can effectively make them function as forward-contracts that provide firms with advanced price assurances that, as long as they continue to deliver against predetermined objectives, the U.S. Government will pay. Fixed-amount grants and contracts are easier for non-traditional USAID partners to apply for and manage than more commonly-used “cost reimbursement” awards that reimburse vendors for time, materials, and effort and have enormous compliance costs. Because pay-for-results awards only pay upon proof of milestones achieved, they also increase accountability for the U.S. taxpayer.
  
  As USAID’s proposed acquisition and assistanceimplementation planpoints out, “‘pay-for-result’ awards (such as firm fixed price contracts or fixed amount awards) can substantially reduce burdens on [contracting officers] and financial management staff as well as open doors for technically strong local partners unable to meet U.S. Government financial standards.”
  
• Innovation Incentive Awards(IIAs) that pay providers retroactively after they meet certain predetermined results criteria. This award authority, expanded by Congress in December 2022, enables USAID to pre-publish its willingness to pay up to $100,000 for certain well-defined, predetermined results; then pay retroactively once a service provider can demonstrate it met the intended objective.
  
  Unlike a fixed-price award, which establishes a longer-term relationship between USAID and the selected vendor, USAID can use the IIA modality to provide vendors with one-time spot payments. However, USAID could still use this payment modality to move more money at scale provided a vendor(s) can successfully meet multiple objectives (e.g. USAID could make multiple $100,000 payments for multiple on-time deliveries).
  
• USAID could pursue Other Transaction Authority (OTA) opportunities without additional authorization, but the Agency may also benefit from consultation with the White House, the Office of Management and Budget (OMB), and The Office of Information & Regulatory Affairs (OIRA), as well as Congress, to secure additional authorities or waivers to disburse Commercialization Fund resources using innovative pay-for-results tools, including OTA, which other federal agencies haveused邀请更多的私营部门参与摇来摇去m nontraditional U.S. Government partners.

Step 3: USAID and DFC should provide countries with additional technical assistance resources to create intentional pathways for selected countries to contribute to the design and management of program implementation.

To ensure these initiatives support countries’ needs and facilitate country ownership and increase voice, USAID should also consider establishing a supra-agency advisory board to support the success of the Commercialization Fund modeled afterDFC的非洲投资顾问计划that seats a panel of experts that can continually advise both agencies on strategic priorities, key risks, and award structure, etc. It could also model elements of the Millennium Challenge Corporation’scompact modelto ensure participating countries have a hand in the design of relevant aspects of the Commercialization Fund.

USAID should additionally provide participating Commercialization Fund countries with Technical Assistance resources to ensure that host country governments can eventually take on larger management responsibilities regarding the administration of Commercialization Fund pay-for-performance contracts.

Step 4: As needed, USAID and the DFC should collaborate to provide sustainable pathways for blended financing that allows existing market providers to access working capital to scale their footprint.

While the DFC and USAID have worked on blended finance deals in the past, the Biden Administration should explicitly direct the two agencies to work together to identify and scale the footprints and capabilities of logistics and healthcare providers in targeted Commercialization Fund countries.

Many of the existing healthcare and logistics providers that could potentially manage a greater share of global health supply chains could need additional financing to expand their operations, increase working capital, or grow their capabilities, but they often find themselves in a chicken or the egg problem to secure financing from financial institutions like the DFC.

Traditional banks and DFC investment officers often consider these companies to be potentially risky investments because their revenue in health supply chains is not assured, especially because one of the largest healthcare payers in many LMICs is the U.S. Government, but USAID (and other global health donors) have historically funded international aid contractors to manage countries’ health supply chains, not local firms or alternative service providers. However, at the same time, USAID and other donors have not relied more on existing logistics service providers to manage health supply chains because many of these providers do not operate at the scale of larger international aid contractors.

To break this cycle, and to enable the DFC and other lenders to offer better financing terms to firms that need it to grow their capabilities or secure working capital, USAID could provide identified firms with more blended finance deals, including guaranteed eligibility to receive pay-for-performance revenue using the funding modalities described above. It could also provide unrestricted early-stage and/or phased funding to cover operational costs associated with working with the U.S. Government.

增加可用的信贷公司通过DFCnd using a USAID pay-for-performance contract as collateral would also enhance firms’ overall ability to raise credit from other sources. This assurance, in turn, reduces the cost of capital for receiving firms, resulting in more significant, impactful investments from private capital in the construction of other supply chain infrastructure, including warehouses, IT systems, and shipping fleets.

步骤5：待定成功，美国国际开发署和DFC应在其他国家 /地区复制商业化基金。国会应将商业化基金定为法律，并授权在2025年重新授权的其他地理和部门中大规模的商业化基金。

While this initial Commercialization Fund will focus on building sustainable, high-performing global health supply chains in three LMICs, the same blueprint could be leveraged in other countries and in other sectors where there are robust private sectors, such as in food or power.

1. Congress should require USAID and DFC to report overall Commercialization Fund performance every six months for a minimum of three years.
2. If the Commercialization Fund proves successful after the first year, USAID and the DFC should proactively invite other countries to participate to expand this model to other geographies, where appropriate.
3. If successful with healthcare supply chains, the Commercialization Fund should also be expanded to cover additional sectors and geographies and included in the BUILD Act 2025 reauthorization.

Conclusion

Continued reliance on traditional aid in commercial-ready sectors contributes to market failures, limits local agency, and minimizes the opportunity for sustainable impact.

As a team of researchers from the Carnegie Endowment’s Africa Programpointed out在美国 - 非洲领导人峰会之后，“对非洲的一种持续的人道主义方法……创造了无助的依赖性的病理学，对包容性增长的驱动因素的关注不足，并通过一个相互联系的小伙子来继续进行现状受益人。”这些研究人员确定了在峰会上宣布的18项新举措，并在经济部门的公共资金支持的峰会上宣布，这些倡议可以促进贸易，投资，企业家精神和创造就业机会，这表明了该政府在该政府中的前所未有的准备就绪，以优先考虑贸易。

The Commercialization Fund outlined in this memo — a market-shaping mechanism designed to correct market failures that conventional aid models can perpetuate — has the potential to become a model for accelerating the transition of other key economic sectors away from the status quo and toward innovation, investment, impact, and long-term sustainability.