Global health and international development is changing. I recognize this has been the opening of keynote addresses to countless conference, symposia and workshops in the field. Yet, I repeat it now, because it now stands to be eminently true. To be more specific, financing for global health is changing.
The reason for this change is two-fold. Demand and Supply.
First, there is a great need for change in financing of international development. The current model of financing of international development involves governments of rich countries handing out money to their poorer cousins. This model worked well, until rich countries realized that they are no longer rich. The best case in point is the United States. One-fourth of global development aid comes from the US government. The tiny fly in the ointment is that the US government no longer has any money. The narrowly averted debt crisis brought to everybody’s attention the fact that the US government was living on borrowed means. It has been borrowing money (mostly from China) and giving it out for free to the rest of the world. While admirably generous, it makes for fiscal suicide to be doing this. Some have called this a national Ponzi scheme. I submit that it is actually even worse. While a Ponzi scheme involves payment of borrowed money to creditors, the US government is currently running an operation that pays borrowed money to parties that have no claim to that money. China, in the meanwhile, has quietly learned that you do not put all your eggs in one basket, and is beginning to diversify their foreign exchange holdings. This means that the next time the US government threatens to default, China will have sufficiently reduced their exposure to be able to call the US government’s bluff. When that happens, the US government will have to make a dire choice. Either it fulfills its obligations to its own citizens, or it fulfills its obligations to citizens of other nations. Hardly a tough choice, but a cruel one, nonetheless. The bottomline is that rich country funding to international development will wane, perilously so.
The other reason is Supply. There are a number of innovative financing solutions that have come up to replace the hegemony of government-funded development. One such modality is the concept of Social Impact Bonds (SIBs). SIBs have three players -an implementing partner, the donor and private investors. The implementing partner actually carries out the work of development that the donor wants done. However, the donor does not pay the implementing partner up-front for the work, as the current model dictates. Instead, the donor institutes conditions or goals that must be met before the implementing partner gets paid. What happens if the pre-decided goals are not achieved? The donor simply does not pay the implementing partner. This places a huge risk on an implementing partner, and actually stifles innovation. This is where the third player, the private investors, comes to the rescue. Instead of forcing the hapless implementing partner to bear the risk, the private investors take the risk upon themselves by purchasing Social Impact Bonds. If the implementing partner does achieve the pre-defined goals, the donor pays it its due, and it then honors its bonds. If it fails, the private investors lose their money. This institutes a much-needed market dynamic in international development, an arena that loses much efficiency as a result of its current model. Under the SIB model, if a particular implementing partner routinely fails to meet the goals set by the donor, it will lose investor confidence and will die a natural death. By establishing objective and well-defined goals, it increases transparency and fairness in the award process.
SIBs are, of course, only one among many innovative financing models that have been taking flight recently. They are a good example of how, to twist the phrase around, one man’s poison is another man’s meat. They rely upon the same tools of financial engineering and shifting risks that brought down the global financial establishment; only this time, for doing good. The difference is that here, the parties bearing the risk are well-aware of their situation. Private investors in SIBs are usually of the kind that would like their investment make the world a better place, while earning them a dividend at the same time.
The beneficiaries of international development, either as individuals or as a community, are almost never able to pay for the services that they are provided through implementing partners. Donor funding, though potentially dwindling and uncertain, is required to provide these services. Although it behooves implementing partners to be as efficient as they can, the current model does not enforce ruthless efficiency. SIBs are one mechanism that can.
