Rethinking Public Health Funding
Martin Edlund, Managing Director of the Health Finance Coalition – which develops blended finance solutions to scale healthcare investment in Africa – explains how an innovative “capital stack” approach could help governments build more resilient, self-sufficient health systems.
Governance Matters: You have two decades of experience in health finance and development assistance. In your view, what challenges do African countries face in financing public health today?
Martin Edlund: First, there is not enough aid money to accomplish all the world’s health goals, including the United Nations (UN) Sustainable Development Goals (SDGs) around health. This is something those working in health financing and development aid, including the World Bank, have recognised for years.
Then there are also structural challenges that many governments face: even if they want to prioritise health, it is really difficult to do so right now.
One of the reasons for this in the African context is that many countries are debt-distressed. This severely limits options for structuring finance. In this situation, countries end up paying huge amounts to service debt – in some cases 30–35% of government revenues, which could have been used to prioritise health and other development programmes.
Africa’s massive health finance gap has worsened with international aid funding cuts.1 Most debt used to be public concessional debt held by international lending institutions such as the World Bank and the African Development Bank, or by donor governments. In these cases, you could pull a small group together to help a country refinance, do debt swaps, or forgive debt payments in return for investments in health. Instead, much of Africa’s debt today is commercial debt which is held by private creditors and has become fragmented. This makes it much harder to help countries manage their finances. It also constrains their ability to borrow further from donor governments or institutions, even for health or other high priority goals, when the money is going towards paying back private creditors.
Leaders realise there cannot be too much continued dependency on outside aid: they need to prioritise the health of their publics themselves.
A further challenge is that during a crisis situation, such as the COVID-19 pandemic or when aid resources become unavailable, frontline health services such as clinics and pharmacies risk being shut down just when they are needed the most. When these services and their revenues collapse, the country no longer meets the investment criteria of lenders, further worsening the situation.
How have African countries responded to this growing health financing gap?
African countries have responded in varied ways. First, they are prioritising the most essential services. In the case of malaria, this may be things like seasonal malaria chemoprevention campaigns. People have to be given treatment to prevent the disease before the rainy season when the mosquitoes arrive and the disease spreads. We have seen governments like Cameroon fund this themselves as a priority, for instance.
Second, we have seen calls for increased domestic spending, as African leaders realise there cannot be too much continued dependency on outside aid: they need to prioritise the health of their publics themselves. We are also seeing private sector networks and philanthropic networks stepping up. In the case of malaria, we have seen End Malaria Councils (EMCs) in Africa bring together government, business and philanthropies, mobilising about US$ 150 million in domestic funding to support government malaria goals. Such efforts will grow in response as countries face more disruptions.
You have described the Health Finance Coalition’s approach to health financing as a “capital stack” approach. How does that model work?
Global health financing is typically very fragmented, and each capital source pursues its own goals. As a result, they may not get a lot of leverage, and may sometimes work at cross purposes. How do we bring them together and align them around common goals?
We need new and different sources of financing, including commercial investment, that can complement one another. The world of private and commercial finance talks about having a capital stack: different layers of financing sources or instruments that together help reduce risk, making it attractive for other investors to participate in a venture.
This capital stack approach to blended finance involves a few tiers. At the base, you have government spending. Then you have grant financing, from philanthropies and bilateral or multilateral aid agencies. Then you have concessional debt, where governments from developing countries borrow from institutions like regional development banks or the World Bank at rates that they could not get on the commercial market to fund development programmes. After that you have various levels of commercial debt and investment.
A capital stack consists of different layers of financing sources or instruments that together help reduce risk, making it attractive for other investors to participate in a venture.2
To do this well, we need to convene and mobilise major health financing partners and get them thinking about leverage, and how their money plays with others. There need to be deals on the table, to demonstrate that this way of working can pay off. As an example, last year our Transform Health Fund, which Health Finance Coalition co-manages, raised US$ 111m.3 The fund supports growing African companies that have yet to access the right financing to reach their impact potential in the healthcare space in Sub-Saharan Africa. We bring different funders together with different resource or return requirements, and blend their money to meet entrepreneur needs not just in the urban centres but also in rural areas. In this way, we make healthcare for the most vulnerable populations investable.
How might a capital stack approach work in practice for governments?
When countries commit government spending to a public goal, they may be allowed to borrow at highly concessional rates, which then also attracts a meaningful layer of grant capital and commercial financing to the stack.
A simple example from Nigeria has to do with anti-mosquito nets for beds. You cannot use commercial investment to buy them, but you could use it to build a bed net factory. Bed nets are a recurring cost and considered a public good. Here, government spending, along with grant funding, can provide a volume of guaranteed demand that reduces the risk of building the net factory, which then allows commercial partners to take it up.
Performance-based financing payments can establish accountability: the money is only released when certain quantifiable, measurable targets are achieved. This helps the programme be implemented more efficiently and in service of the intended goal.
Taking a capital stack approach, a programme must first of all be driven by country priorities, in particular those that will generate revenue and economic growth. As a country, you need to genuinely commit government spending every year, based on what you can afford. Then you need to prioritise for and secure concessional borrowing to supplement the programme financing. You need a layer of private investment to carry out domestic manufacturing and so on.
All of this is enabled by catalytic grant capital, which is different from traditional grant capital in that it is all about leverage: not just stretching your dollar but multiplying it. In our view, you can unlock a substantial amount of money for high priority innovations if you have 10 to 15% of your programme’s capital stack in catalytic grant capital. This allows you to buy down the interest rate of loans, making them more affordable to countries and more palatable to use for health.
Performance-based financing payments can establish accountability: the money is only released when certain quantifiable, measurable targets are achieved. This helps the programme be implemented more efficiently and in service of the intended goal. Performance-based metrics should not be made so arduous that the grant-giver ends up being the implementer. There also have to be incentives for countries to do well. For instance, payouts could be contingent on meeting targets, but the money could then be made available more flexibly across the health system. Countries might use this grant money to guarantee a certain volume of the needed health products across an initial set of years, to make sure it is commercially viable.
This capital stack approach has been used with profound results in the Asia-Pacific and in Latin America, where we have also supported projects using this approach. In Indonesia, we are trying to scale up Wolbachia, a transformative technology to counter dengue-bearing mosquitoes, from five cities to 200 cities and more, using this approach. Strikingly, a big proportion of the catalytic grant capital is coming from Indonesian domestic donors, because they see that dengue is disruptive to businesses and livelihoods: it impacts tourism, workforce productivity and so on. So, local business leaders are helping to mobilise a meaningful share of the capital needed to unlock the full potential of the programme.
We need to pursue similar approaches in Africa.
What governance traits and structures are needed to successfully implement alternative forms of health financing?
Government autonomy and leadership have to be there from the start. In the case of Indonesia, we did not come in as international players telling them what they should do. The Indonesians demonstrated the technology themselves and approached us to help scale it up to a much larger population. It was a local non-profit, the Tahija Foundation, who funded the original randomised control trial and later stepped in to help us mobilise buy-in from local business and philanthropic leaders.
Some important things have to be led by the government, with partners sitting around the table. The Indonesian government co-designed the operational and financial plan with us every step of the way. Our role was to provide financial expertise and help bring together different parts of the capital stack, especially international capital providers, but in the end the government is the one requesting financing from the development banks. By actively participating in the planning and engagement, government staff build their capacity and expertise over time, so their institutions develop the muscle memory to be able to do more of this work.
Health data is challenging to manage: it is sensitive and often of low quality. To ensure local ownership and accountability, data generated from Africa should be collated through African institutions. There has to be the capability to coordinate well, to bring good datasets together and house them on local servers owned by the right authorities, so the country can make the best possible decisions. In turn, this can generate a virtuous cycle, whereby donors are far more willing to give when they see genuine domestic commitment, backed by data and accountability. This is where multilateral institutions such as the African Union can play a useful role, because they help partner countries stay accountable by rigorously keeping track of key metrics, and comparing how other neighbouring countries have fared.
There has to be the capability to coordinate well, to bring good datasets together and house them on local servers owned by the right authorities, so the country can make the best possible decisions.
For African countries seeking to transform their public health financing, what obstacles and opportunities lie ahead?
There is still an overdependence on donor aid for some programmes, as well as an overreliance on international partners for technical assistance and implementation. Much has been done to build up in-country capabilities. But governments
now need to step up more actively to drive programmes themselves.
In an environment of increasing scarcity, people in global health and development often talk about sustaining the progress that has been made. But that is not nearly ambitious enough. There are transformative technologies coming out of laboratories into the field that could revolutionise the way we deal with health concerns. We have the opportunity to end some diseases as public health threats. The question is: how do we make these innovations affordable to countries?
The challenge is therefore how to accelerate the gains we have made. To achieve these goals, we will have to be smart about how we prioritise and finance new initiatives.
