Sir,

Your blog, and the many excellent CGD papers that precede and link to it, have moved me to put finger to keyboard. The basic question on my mind is: Are there also lessons from ‘making markets for merit goods’ not only for those organizing campaigns, but for those Public Finance Managers (and allied professionals) on the receiving end of these campaigns?

Going Short on the Global Fund

“Charity is injurious unless it helps the recipient become independent of it” J.D. Rockefeller

“Pure philanthropy is very well in its way but philanthropy plus five percent is a good deal better” Cecil Rhodes

As the off-balance sheet vehicles that contain asset backed securities unwind, the world’s attention has been focused on the systemic risk such operations can create. Reading the G20 to do list to avoid such risk exposure in financial institutions in the future, one cannot help but be reminded of classic PFM advise when dealing with extra-budgetary funds: higher capital, a focus on systemic risk, countercyclical rules, liquidity rules, and better incentives. Should we not therefore be on the alert for public finance products whose incompletely accounted risk potentially poses systemic risk to public financial institutions? The more public and timely the advice, the better the case study might be to illustrate not only the technical but – and as importantly – also the moral importance of sound PFM (Zalm 2009). A significant, but potentially tragic case study, may be about to present itself.

Even by the standards of the UN pantheon, the Global Fund is extraordinary. It is perhaps the first extra-budgetary (special purpose financial) ‘vehicle’ at the level of global government. At the same time there is clearly no global government accountable for residual risk if it should fail. If the buck can go no further, it stops. Timely and invasive surgery will be needed if the UN family, or major contributors, are not to be exposed to unnecessary reputational risk (Over 2008). But timing is everything. The liquidity position of the Global Fund liquidity is likely to be key indicator to watch.

I was not alone amongst those with questions regarding the operational basis of the Global Fund (Radelet 2004). In 2002 I wrote an editorial piece for a well know health journal suggesting that the then nascent Global Fund would be ill advised to use public health planning, needs and ‘evidence’ based assessment as a basis for capital allocation decisions, just as public health care systems are ill advised using these out-dated methodologies for managing public finance operations in national health systems (Rhodes 2004). More difficult to foresee was the frankly stunning success the Global Fund would have in raising philanthropic and public capital to fund these operations. As an ‘investment’ vehicle, the Global Fund is then managed on quite a different basis to other global financial institutions or risk vehicles, will it rate any better at dealing with hard times?

The omens are not good. The Global Fund Secretariat estimates total demand (requests and commitments to fund health care interventions) to be at a level of at least US$ 13.5 billion for the three years 2008-2010. Donor funding, based on pledges received and indicated, is of the order of US$ 9.5 billion for the same period. Hence, there is currently a funding gap of approximately US$ 4 billion.

While emphasizing the Fund’s many achievement at the Mid-Term Review of the Second Voluntary Replenishment (2008 – 2010) in Cáceres, Spain, 30 March – 1 April 2009 the chair also conceded that: “the Global Fund, as a matter of responsible governance, must maintain a balance between ambition and realism and therefore must have an explicit framework for managing the tension between resource demand and supply.” (Global Fund 2009a)

This is an understatement. Risk management on the scale facing the Global Fund is not simply a question of ‘frameworks’ but also perhaps of fundamentally reexamining the business model.

The Global Fund business model and the two uses for ‘economists’ in health care

I started my career as an economist in health care working for a pharmaceutical industry lobbyist in the UK. My boss at the time, a seasoned and gnarly marketing man, pricked any scientific illusions I might have had as green graduate about clinical trials, cost-effectiveness and evidence based medicine by explaining to me in no uncertain terms that there were only two uses for economists in the health care industry: “create monsters and slay them”. He seemed to be referring to burden of illness studies and cost-effectiveness/impact analysis.

15 years later these instructions ran through my mind again as a colleague at the World Bank gave me a fly on the wall account of the boiler room debates in Geneva preceding the Macro-economic Commission on health and subsequently the Global Fund. The same simple idea, another colorful idiom; “show them the money”. Economists (in fact teams of economists) were duly contracted, and the world was shown the enormous potential benefits of ‘investing’ in cost-effective health care interventions in what must count as the greatest health care marketing exercise in human history (WHO 2001).

Having spent $15.3 billion to date great benefits have been achieved: 2.3 million PLWA are on ARVs (Persons with HIV/AIDS on anti-retrovirals); 5.4 million people are on DOTS (Directly Observed Treatment) for TB and 88 million bed nets have been distributed (Global Fund 2009b). Translating these benefits into direct health status achievements is complicated and somewhat uncertain but the impact has potentially been great. Research as to the difference between the proposed efficacy (theoretical performance pre-intervention) and the later effectiveness (real world performance post-intervention) would certainly be interesting.

Performance aside, the primary operational issue is to continue to achieve benefits. For this as the CGDs own publications illustrate billions more will have to be spent and provide plenty of interesting suggestions. Before allocating these kinds of volumes of capital, however, it must first be raised. The Global Fund relies predominantly on a more or less zero endowment (cash in cash out) philanthropic and public finance lobby model on the revenue side and a ‘needs’ and ‘evidence’ based model on the allocation/expenditure side. The temptation must surely be to stick with a business model that has been so successful to date.

Riding the bull market

The annual reports of the Global Fund rightly bemoan shortfalls on pledges, but one cannot help but wonder at the remarkable success of the Global Fund to date in raising capital (GF 2008). The secret must surely lie, not simply with a good marketing strategy, but skillful and even ruthless execution.

The Global Fund is managed operationally though networks of Public Health Schools in developed countries and Country Coordinating Mechanisms (CCM) in developing countries and has built up a formidable (‘underline’ or ‘public affairs’) marketing machine. By creating broad participative alliances of both public and commercial (and most interestingly perhaps popular culture) interests, irresistible momentum has been built up.

Success however can breed its own downfall. Internally, the more success a business model has, the more difficult it is to question any flaws it might contain. Financial institutions as much as any human organization or activity are vulnerable to this herding instinct (Ball 2004, Sunstein 2009). While risk assessments on securitized derivatives markets were warning of the risks accumulating in the wider financial markets and systems, for example, neither bankers nor regulators seemed able to jump from the charging bull (Rees-Mogg 2009). Those trying to harness the bull from inside the ring either got crushed or ran for their lives.

Public and quasi-public finance institutions are of course not exempt from the same frailties. World Bank project appraisal documents for spending/’investing’ in Global Fund Country Coordinating Mechanisms reported; for example, (social) return rates (e-IRRs) of more than 100% (WB 2003). Imagine 114% returns on an investment; surely a no-brainer? But anything that is too good to be true usual is. For those willing to look at the details, the warning signs of accumulating risk have been there for some time. The real question of course is much more practical and pragmatic; when and in what direction to jump when things start to head south.

Surviving the bear squeeze

Goldman Sachs has reportedly been a notable exception amongst commercial financial institutions in the recent financial crisis. One of the early innovators in asset-backed securities, at some point in 2008, before the market collapsed, it started phasing out of a market it itself had been a prime mover in creating. In retrospect perhaps, a moment of genius, at the time of the move there must have been white knuckles at the boardroom table.

The boards of HIV and public health orientated NGOs and the Global Fund have been facing a similar choice. Continue with a product and market that has brought so much success, or recognize that that very success is part of, and probably a major contributing factor towards, creating systemic weaknesses in global health care markets and systems. The winners are likely to be those with little sentimentality, and a strong focus on the fundamentals.

The tone and emphasis of the chair’s summary of the Mid-Term Review of the Second Voluntary Replenishment meeting for the Global Fund in April of this year would seem to indicate that the current management of the Global Fund is not in the mood for cashing in yet. The emphasis is still very much on finding more ‘innovative financing’ methods. In lay man’s terms, ways of raising more capital. In the current (public and private) capital markets, $4 billion and counting fast is a lot of capital to raise. Does the board of the Global Fund believe that the time is not yet right, does it not perceive any fundamental risk, or is the problem identifying any suitable exit confronted with systemic risks?

Conclusion: defuse the bomb or beat a rush for the exit?

Predicting the future is of course a dangerous business, but failing to react on time to a wave of systemic risk can be fatal. The question is, how much risk is the Global Fund holding and if, as the omens suggest, it is significant, how and who is going to go about diffusing that risk? Looking forward, a first and elementary steps would be the introduction of accounting on a commitment basis. Secondly, presuming that dropping the ball is not an option, the broader questions of aid effectiveness and the crowding out of both other (general) health care programs and wider development and global public good programs emerge (yet more excellent CGD reports).

Managing risk on this scale, not to mention the non-financial risks of committing to cover open-ended life and death treatment benefits such as ARVs to 2.3 million people, is not simply a question of changes to “frameworks”. Fundamental questions must be asked of working practices, principles and even organizational culture. Risk management is one of the most challenging aspects of governance in any organization; but it is the bedrock of financial institutions be they public or private.

In this sense, The Global Fund can be seen as a live PFM experiment. As with clinical trials however sometimes things do not go according to plan and an early halt must be called for ethical reasons (on both the up- or down-side variance). Quick work and a number of hypotheses could be tested and both a practical and theoretical contribution made to PFM as not only a discipline, but also a calling with a ‘duty of care’ (for the ‘body politic’?) that, although perhaps not as sexy – and I am sorry but I don’t think CGD blogs can expect a call from a sitcom producer any time soon – can very easily be compared to medicine.

Keep up the good work; you have fans out there who do enjoy watching your show.
References:
Ball A. Critical Mass; how one thing leads to another. Farrar, Straus and Giroux. London. 2004 (Aventis Science Prize 2004)
Fund J. Warning the Deficits are coming. Wall Street Journal. 4 Sept 2009. (Ref: Walker D. Comeback America. Random House pre-publication).
Global Fund (2009). Updated Demand Estimate 2008-2010. Mid-Term Review of the Second Voluntary Replenishment 2008-2010 Cáceres, Spain, 30 March-1 April 2009
Global Fund (2009a). Website headline data.
Global Fund (2009b). Mid-Term Review of the Second Voluntary Replenishment (2008 – 2010) Cáceres, Spain, 30 March – 1 April 2009. Chairman’s summary.
Global Fund (2009c). Updated Demand Estimate 2008-2010 Mid-Term Review of the Second Voluntary Replenishment 2008-2010.
Over M. (2008). Prevention Failure: The Ballooning Entitlement Burden of US Global AIDS Treatment Spending and What To Do About It. Centre for Global Development, Washington.
Radelet (2004). The GFATM Progress, Potential, and Challenges for the Future.
Rees-Mogg W. We will sink, not swim, in a sea of new rules. The Times, London, September 7, 2009
Rhodes G. 1978; A good year but a vintage past its best. Health Policy 67: 3; 241-244 (2004)
Sunstein C. (2009). Going to extremes: How like minds unite and divide. Oxford Uni Press.
The Lancet Infectious Disease (November 2007) “The Global Fund: growing pains” Vol. 7 Issue 11.
WHO (2001). Report of the Commission on Macro-econmics and Health. WHO, Geneva.
World Bank (2003) Project Appraisal Document Moldova CCM and AIDs project (ref needed)
World Bank (2003). Project Appraisal Document. Moldova Aids Control Project.
Zalm G (2009). De Romantische Boekhouder (The Romantic Bookkeeper). Balans. (autobiography of former and longest serving Dutch Minister of Finance).