Vaccine Bonds: An Insight

Wednesday, 11 December 2013
By Eloise Bradley

Approximately 1.7 million children die each year from preventable illnesses in developing countries. Nelson Mandela founded the Global Alliance for Vaccines and Immunisation (GAVI) in 2000, in order to meet the UN objective of reducing the mortality rate of children under five. The International Finance Facility for Immunisation (IFFIm) is a UK government initiative that issues bonds into the capital market in order to mobilise the resources required to finance these vaccinations. GAVI then uses this money to provide vaccinations in 72 of the poorest developing countries. Several governments including the UK, France, Italy, Spain, Australia, the Netherlands, Sweden, Norway and South Africa, have pledged to reimburse these bonds plus interest over a twenty year period until 2026. The bonds are distributed worldwide, with mixed ratings of AAA and AA. As the bonds develop, investors start to co-fund more with the recipient country, until it is ultimately completely funded by the developing country. Thus far, IFFIm bonds have raised more than USD 4.5 billion in immediately available cash resources.

At a CSFI round-table titled “Vaccine Bonds: a shot in the arm of development? Or just new wine in old bottles?” held on 5 December, René Karsenti (IFFIm) stated that the vaccine bond market is expanding and becoming more institutional, prompting IFFIm to increase the amount mobilised in their last transaction to USD 700 million. Mr Karsenti stated that reporting on investment progress is not required by regulation, but GAVI undertakes a number of evaluations throughout the procedure. The minimum investment is GBP 1,000 and the initiative aims to provide a fixed return of 16.2%, together with the original capital. The return is usually within 3-7 years, but investors are paid interest quarterly. Alan Gillespie, the Chairman of IFFIm, has pointed out that risk-averse investors often prefer government bonds to bank savings. He says that, “Today, banks are not a good place to put your money. Globally, investors are not putting their money in the banking system where they were. They like to buy government risks.”

This scheme is unique in that it provides social as well as financial incentives. 5.5 million lives have been saved in the first ten years of the vaccination scheme. In the next four years, approximately ¼ billion vaccinations will be administered and a further 4 million lives saved. Providing vaccines not only improves health, but it enables the individual to attend school free from illness, and thus obtain a better education. This in turn increases the human capital of the country. Investing in these bonds provides investors with a “deep inward satisfaction of knowing their money is being used for something extraordinarily worthwhile,” says Alan Gillespie. “Often when you see a picture of a child in a poor country you’re being asked to give a charity gift,” he says. “Ours is very much an investment proposition.” The funds raised by the IFFIm not only enable GAVI to finance vaccines: they also go towards rehabilitating health clinics, training health workers, improving vaccine storage, and paying workers to immunize in remote areas. In this way, the scheme strengthens basic health services as well as providing vaccinations. The strongest demand for vaccine bonds stems from Japan. World Bank’s Yoshiyuki Arima claims that like GAVI and World Bank, the primary motivation for these investors is that of philanthropy. He claims that these investors “want a psychological as well as a steady financial return on regular commercial terms.”

The speakers at the Vaccine Bonds round-table discussion identified both the demand for such bonds in SRI space and liquidity risks in the market as significant risks to investor returns. However, the primary risk is that of the recipient countries going into protracted arrear, and thus being unable to reimburse the IFFIm. Élie Hériard Dubreuil, of Standard and Poor’s Ratings (S&P), noted that Zimbabwe, Sudan and Somalia are currently in protracted arrear, and emphasised that this is an unusually low number amongst the recipient countries: it is usually much higher. Mr Dubreuil advocated the retention of liquidity as a potential solution to this: IFFIm will borrow less than has been pledged to it, thus creating a 70% buffer on top of the debt. Mr Dubreuil also noted a number of delays with donor payments: the majority of these delays are less than five days, although some have lasted for several weeks. S&P recently downgraded the long-term credit raiting of the IFFIm from AA+ to AA with a stable outlook, reflecting their downgrade of France.

Despite this, the future looks positive for vaccine bonds. Anja Langenbucher of the Gates Foundation stated that the Foundation considers GAVI to be an efficient instrument in the delivery of vaccinations, and it views IFFIm as a good tool with which to enable GAVI to do this. The Foundation is extremely concerned with the delivery of vaccinations, and 50% of its funding is used to finance this cause. Ms Langenbucher advocated GAVI as a model for future aid projects, as it is a continuous process of development. However, several of the other speakers disagreed with this statement: one claimed that it could only be replicated depending on the will of the municipal government, whilst another stated that it is a unique model and thus irreplicable. GAVI has regular “replenishment cycles”, whereby donors are asked how much they are willing to contribute over a period of four years. The UK is currently the second largest donor. The IFFIm provided 50% of GAVI’s funding in the first five years since it was created, but now it provides around 30%, thus highlighting the increase in private investorship. When questioned whether this type of investment would still be popular in twenty years, the panel responded that they anticipate then to be a period of collection from the donor countries, and therefore less government investment would occur.

For more information, visit the IFFIm website.