By Andrew Apampa, CFA

The rapid spread of COVID-19 presents an unprecedented challenge in an ever more connected world, requiring health organizations, governments, and the private sector to work together in the face of human tragedy.

Given the crucial need for multi-stakeholder collaboration and additional resources (financial and otherwise), we explore how blended finance can help respond to epidemics.

Unquestionably, emergency relief funding like government spending and unblended global aid will be crucial to minimizing the impact of COVID-19 in the immediate term.

However, blended finance can play an important assisting role in the medium-to-long-term recovery of health systems and economies, especially in the developing world. 

Financing for vaccines: a difficult landscape

Developing a vaccine will be crucial to tackling the COVID-19 pandemic and limiting loss of life.

Globally, scientists are working around the clock to better understand the virus, requiring billions of dollars in research and development (R&D). Up till now, a major problem in vaccine development has been the insufficient levels of investment in R&D in innovative health technologies, relative to emergent health needs.

Rapidly changing health threats (including noncommunicable diseases, new infectious diseases, and antimicrobial resistance) have produced new R&D demands.

And, with the high costs and failure rates of drug and vaccine development, with their low margins and uncertain markets, urgent health needs remain inadequately addressed.

Blended finance has been touted as one way to help mobilize additional financing toward vaccine development, by allocating the risks and returns among public, philanthropic, and private investors.

For example, advance market commitments (AMCs) are contracts in which concessional funders guarantee the future purchase of a service/product not yet available, or not available in a particular market at a specific price.

They can therefore accelerate the development of products like vaccines at affordable prices and enable manufacturers to leverage economies of scale and reduce costs by contracting large volumes over longer-term periods. 

The Global Alliance for Vaccines and Immunization’s (GAVI) AMC is a prime example.

GAVI incentivizes vaccine makers to produce affordable vaccines against pneumococcal diseases in the world’s poorest countries.

It is ‘blended’ in two ways:

(i) through its AMCs, which incentivize private investment in vaccine development, and

(ii) through the International Finance Facility for Immunization (IFFIm), which accelerates vaccine delivery by using long-term pledges from donor governments to sell ‘vaccine bonds’ in the international capital markets, making large amounts of capital immediately available for GAVI projects.

Indeed, the prospect has been raised of the IFFIm mechanism being used to ensure enough near-term funding exists to mass produce and quickly deploy any eventual COVID-19 vaccine. 

Addressing COVID-19 will also require additional funding for innovative health technologies beyond vaccines. 

The Global Health Investment Fund, which provides financing to accelerate the development of drugs, vaccines and diagnostics for diseases disproportionately affecting developing countries, is another example of a blended structure being used to tackle the shortfall in financing for innovative health technologies, mobilizing private investors through a partial guarantee provided by the Gates Foundation and SIDA.

Atomo Diagnostics, an Australian rapid blood test maker backed by the Fund, is preparing to raise AU$30 million ($11.7 million) in an IPO on the Australian Securities Exchange, and looks to develop simple-to-use rapid self-tests for COVID-19.

These self-tests could potentially alleviate pressures on health systems around the world by reducing the need for people to visit clinics. 

If successful, they would look to integrate these COVID-19 blood tests with their existing rapid test platform for HIV. Their HIV self-tests can deliver results in as little as fifteen minutes and can be used without clinical expertise or laboratory equipment. 

Other mechanisms, while not strictly blended, can also help instigate private sector investment in epidemic virus R&D. 

For example, the COVID-19 Therapeutics Accelerator, launched by the Gates Foundation, Wellcome, and Mastercard, with up to $125 million in grant funding, looks to accelerate R&D into COVID-19, identifying, developing, and scaling-up affordable treatments.

Learning lessons from the 2014 Ebola outbreak, the Accelerator will share research, pool resources, and coordinate investments with a variety of public and private sector partners around the world, including the World Health Organization (WHO), with the intention of lowering the financial and technical risk of treatment development for COVID-19 and future threats, and ensuring that new drugs are accessible in lower-income countries. 

Of course, looking beyond potential private sector innovation, standard grants that target the medical sector and shore up health systems, amongst other areas, will also be needed to help minimize the impact of COVID-19 in the immediate-term.

Looking forward

Managing the COVID-19 pandemic threatens to be a critical challenge for developing economies. The COVID-19 supply shock has seen developed economies plan large fiscal stimuluses to help households and businesses avert bankruptcy. However, developing economies’ access to finance is more precarious.

They must address a range of challenges, including higher borrowing threatening inflationary spikes; international investors fleeing to the safety of developed government assets; and their traditional sources of foreign income (such as commodity exports, remittances, and tourism) likely declining, limiting their access to hard currency while the dollar appreciates, which makes debt servicing more challenging. Overall, these obstacles constrain the fiscal space developing economies need to manage the pandemic.

Despite commitments from the developed world, in the aftermath of the Ebola outbreak, to help developing economies in preparing for epidemics, most developing economies remained unprepared for COVID-19, with persisting challenges such as relatively weak health systems, vulnerable supply chains, and difficulties with proper infection prevention and control. 

In this context, blended finance may have a key role to play in leading efforts to scale-up health security measures in developing countries. Experimentations with innovative finance mechanisms designed to boost preparedness for pandemic scenarios across developing economies, however, have had mixed success.

For example, the World Bank’s pandemic bond, which pays investors interest and returns their principal during normal times but gives that principal to developing economies in the event of a pandemic, has not yet paid out, with any future payments to affected countries potentially coming too late. 

Further thinking on how to crowd-in private sector capital to aid pandemic preparedness is needed.

For example, there have been calls for the creation of a Global Health Security Challenge Fund, which would blend resources from national governments, global financial institutions like the World Bank, bilateral development agencies, international philanthropies and the private sector, to help at-risk economies improve their preparedness for epidemic scenarios. 

We also anticipate that blended finance will be able to show one of its core strengths in the difficult passage ahead, which is its ability to draw out the best of both donors pushing for impact and investors moving at the speed of crisis. 

During the Ebola crisis, Flash Vehicle Rentals, a portfolio company of Solon Capital Partners, a blended investment holding company, transported WHO doctors and nurses around hard-hit areas of Liberia when other firms had departed. 

Their actions delivered a critically needed public good, arguably moving faster and more cost efficiently than the dwindling alternatives available, and the company is still in business today, contributing to the local economy.

Overall, the response to COVID-19 and our preparation for future epidemic scenarios will require increased collaboration between the public and the private sector, with blended finance solutions potentially becoming less tied to specific geographical borders, and more cross-country or cross-continental collaborations arising to tackle emergent health threats that know no borders.

Andrew Apampa, CFA is responsible for developing Convergence’s data and research activities, including building out Convergence’s database of historical blended finance transactions and developing blended finance trends analysis and benchmarks. Prior to joining Convergence, Andrew worked at the African Private Equity & Venture Capital Association (AVCA) as a Research Associate.