WORKING MEETINGS SUMMIT2006

Opportunities

Address by Alexei Kudrin, Minister of Finance of the Russian Federation, at the international conference Global Threats - Global Actions. Promotion of the G8 Summit Initiatives to Counter Infectious Diseases, December 8, 2006

Ladies and Gentlemen, Colleagues,

The spread of HIV/AIDS, malaria and TB, and the outbreaks of new diseases such as avian flu and SARS cause huge economic losses, destabilize the sociopolitical situation in many countries all over the world, and prevent the achievement of the Millennium Development Goals in health and other sectors. It is now clear that financial and economic implications of infectious diseases have a strong negative impact on economic growth rates. According to recent studies, further spread of only two diseases - HIV/AIDS and malaria - would reduce GDP in Sub-Saharan Africa by 20% before 2010.

Globalization of the economy and the current development level of civilization can promote the occurrence of new diseases and accelerate the spread of the old ones between countries and continents. Against this background, the increasing interdependence of national economies brings about new aspects related to the liquidation of financial and social implications of infectious diseases, and demands that the international community develop new approaches to preventing them.

The spread of infectious diseases considerably increases certain expenditure items in national budgets, generates budget deficit, and diverts funds that could be used for other purposes. Thus, HIV/AIDS is considered one of major barriers to the successful implementation of Education for All.

As a result, the affected countries are becoming more and more dependent on additional development assistance provided by the international donor community.

The international community agreed about the need to increase development and poverty reduction financing as long ago as in 2002 at the Monterrey Conference on Financing for Development, when sovereign donors made a number of commitments to extend their development assistance while recognizing the need to consider the establishment of innovative sources to finance MDG initiatives.

Since then the international community has been offered to assess several development financing alternatives. Following the discussion on the feasibility of the proposed instruments, their potential impact on the speed of resources mobilization for development purposes, etc., the international community focused on three major innovative financing mechanisms:

• International Finance Facility for Immunization (IFFIm)

• Solidarity Contribution on Air Tickets/UNITAID and
• Advance Market Commitments for Vaccines (AMC)

The above mechanisms are designed to raise funds and finance infectious diseases control programs, which is one of Russia's priorities within the framework of its G8 chairmanship this year. All three innovative mechanisms are aimed at meeting the following Millennium Development Goals: to reduce child mortality by two thirds, and to improve child and mother health by combating HIV/AIDS and malaria. All three provide a unique fund-raising opportunity to finance infectious disease control programs and initiatives through long-term support and donor commitments.

 

The first of these is the International Finance Facility for Immunization (IFFIm).

 

Immunization is undoubtedly the most efficient method of infectious disease prevention and control, and therefore the development, production and use of vaccines is among the most urgent and difficult tasks in the health sector, and requires coordinated action by the entire donor community.

 

Vaccination and immunization is essentially the most suitable area where issues can be addressed by "frontloading". IFFIm is expected to accelerate the availability of funds to be used for vaccination and immunization programs in developing countries.

 

The International Finance Facility for Immunization is a pilot project under the Innovative Financing Concept proposed by the U.K. in 2003, which is designed to mobilize additional $50 billion a year by 2015.

 

The Concept provides for additional fund raising through the issue of international financial commitments (bonds) secured by the donor countries' legally binding commitments (guarantees). The accumulated resources will be used to finance funds, programs or projects designed to meet the Millennium Development Goals. IFFIm's advantage is reliable and predictable donor funding flows, which, in their turn, will be an additional incentive for the recipient governments to increase national expenditure on infectious disease control and thus share responsibility for MDG achievement.

 

The International Finance Facility for Immunization is a new international financial institution for development, whose financial base consists of legally binding commitments by its sovereign sponsors. To date, the sponsoring countries include the United Kingdom, France, Italy, Spain, Sweden and Norway, whose aggregate commitments amount to $5.3 billion over the next 20 years. All six donor countries signed framework financial agreements on September 28, 2006, which became effective on October 2, 2006. The donors will make annual payments against the issue of IFFIm's bonds until 2025. Brazil and South Africa have also expressed interest in participating in the initiative.

 

IFFIm issued its inaugural bonds totaling $1 billion and maturing in five years on November 6, 2006. The first assessments are quite optimistic both in terms of the bond rating (AAA) and in terms of subscription (the bonds were oversubscribed). It is expected that IFFIm would raise up to $4 billion over the next 10 years.

 

IFFIm funds will be used until 2015 to implement the Global Alliance for Vaccines and Immunization (GAVI) programs in the poorest countries with less than $1,000 per capita income, to support the production of new and underused vaccines to combat tetanus, measles, poliomyelitis, etc., and to provide technical assistance for immunization, including expenditure on the introduction of new vaccines.

 

According to preliminary estimates, programs implemented using IFFIm funds would provide for the immunization of more than 500 million people and reduce mortality from infectious diseases saving 5 million lives.

 

However, despite all positives aspects, the plan to implement IFFIm as a concept of development aid increase on a global scale requires further elaboration with due regard for the intermediate outcomes of the pilot immunization project. In particular, an adequate analysis of the recipient countries' varying absorptive capacity is a key performance condition.

 

It should be also noted that IFFIm's current optimistic assessments are primarily based on the participation of donor countries with high (AAA) sovereign credit ratings, which enabled three leading rating agencies (Fitch Rating, Moody's Investors Service, and Standard & Poor's) to give a similar rating to IFFIm and rate its bonds as zero risk securities (as those issued by other multilateral development banks). However, no one has ever assessed how IFFIm's reliability and positions in the international capital market might be affected by the participation of donor countries with lower sovereign ratings. Moreover, there is no clear understanding of who will be responsible for accommodating IFFIm commitments if one of the donors refuses to make grants to IFFIm.

 

Proceeding to the next innovative mechanism, I should say that the introduction of a fiscal instrument as an opportunity to raise funds for development purposes has been under consideration for the past 2-3 years. The discussion covered a wide range of instruments such as a tax on foreign exchange or financial transactions, a tax on environmental pollution, etc. However, it is the Solidarity Contribution on Air Tickets that was finally approved. The initiative was proposed by France at the 2005 Millenium+5 Summit to evaluate progress towards MDG, and received political support from 76 countries, including Germany, the United Kingdom, Spain, Austria, Brazil, India, and 28 African countries. Russia also acknowledges the political significance of the initiative; however, its current domestic taxation policy aiming to reduce the total number of taxes and charges does not make it possible to introduce a new tax at the present stage.

 

The essence of the initiative is to include a small mandatory flat surcharge in the price of every international air ticket for flights departing from the participating countries (the surcharge will be differentiated by the flight class and exclude transit flights).

 

According to available assessments, the introduction of the Solidarity Contribution on Air Tickets will not affect airline competitiveness as it is very small: only a few euros. Responsibility for collecting such "voluntary" contributions will be borne by airlines. Countries will decide on their participation in the initiative on a voluntary basis and formalize their decisions pursuant to their national legislation, which protects their sovereignty in taxation issues. The initiative takes into account the experience generated by the United Kingdom, Malta and Denmark, which already have similar levies.

 

In March 2006, the participants in the Paris international conference "Solidarity and Globalization: Innovative Financing for Development and Against Pandemics" established a Leading Group on Solidarity Levies comprising 44 countries, which declared their willingness to introduce the contribution on air tickets in the near future. To date, 18 countries have expressed their intention to introduce such levies, while France, Brazil, Chili and Norway have already put it in place.

 

As proposed by France, proceeds from the Solidarity Contribution on Air Tickets will be transferred to the International Drug Purchase Facility (UNITAID), whose launch was announced this year at the September UN General Assembly. UNITAID is designed to finance the purchase of drugs and vaccines against HIV/AIDS, TB and malaria. First and foremost, the funds will be used to finance drugs for HIV-infected children and teenagers. It is expected that the initiative would help UNITAID generate up to $380 million a year, on average, in 2007-2015. Taking into account that the major task is to facilitate access to drugs against HIV/AIDS, TB and malaria for the poorest countries, UNITAID will closely cooperate with international initiatives such the Global Fund to Fight AIDS, TB and Malaria, and the joint United Nations Program on HIV/AIDS (UNAIDS).

 

The implementation of the initiative will require a close cooperation at the level of the participating governments and international organizations. At the national level, strict coordination of actions (collection of the contributions) with the international mechanisms of aid distribution and delivery to the recipients would be a key condition of high performance and efficient implementation of this innovative mechanism. Moreover, bearing in mind that international flights are serviced not only by state-owned companies, it is not clear how private companies can be involved in the initiative.

 

A number of infectious disease control initiatives are also being elaborated under the G8 minister of finance agreement. In particular, in 2005 and 2006, the ministers discussed the Advance Market Commitments for Vaccines (AMC). This innovative mechanism was developed by Italy with the assistance of the World Bank and GAVI. The concept provides for the potential opportunity to facilitate access to mass vaccination for the poorest countries, which will be impossible if the current trends in vaccine production and supply are sustained. At present, the pharmaceutical industry makes relatively little investment in vaccine development due to a limited demand and uncertain conditions in the vaccine market.

 

Under AMC, the G8 countries and other donors will commit to subsidizing vaccine purchases from the producers (starting with the supply of "certified" vaccines to developing countries). The participating private companies, in their turn, commit to supply vaccines to developing countries at an agreed low price, provided that the vaccines meet the pre-established standards and are needed in these countries.

 

Such cooperation under the proposed arrangement is interesting for the partners. For producers, advanced legally binding commitments will provide for a greater certainty in the market, stimulate the development and production of priority vaccines, and guarantee the availability of financial resources for future vaccine purchases. In essence, AMC will encourage the growth of private investment in vaccine development before donor funds start working. For donors, AMC is a cost effective market-based mechanism which guarantees the use of donor funds only in the case of production of a vaccine that meets certain requirements and is needed in developing countries. For recipient countries, AMC will ensure vaccination in compliance with their national health priorities. It is expected that the cost of vaccines will be mostly financed by the sovereign donors, while developing countries will incur symbolic expenses.

 

Out of six proposed vaccines against HIV/AIDS, malaria, pneumococcal disease, rotavirus diarrhea, tuberculosis, and cervical cancer (human papillomavirus), the AMC pilot project focuses on pneumococcal disease, which annually kills over 1 million children. The use of this vaccine fits well into the existing vaccination scheme and can be introduced at the least cost. According to available estimates, if there is no investment in the development of the vaccine, it will become available to the poorest countries only in 2023.

 

It was widely supported by most G8 members and is open to all potentially interested parties. The pilot project will be launched in late January 2007 and involve Italy, the U.K., Canada and other donors.

 

The development and implementation of pilot projects under the innovative financing mechanisms is in the inception stage, which does not allow making reasonable conclusions on the efficiency of the initiatives. However, innovative mechanisms deserve close attention today as an alternative to traditional development assistance and an opportunity to meet most MDGs by 2015.

 

Therefore, we believe that decisions made at the July summit in St. Petersburg will be further developed under the G8 agenda and within the framework of other international forums, and will eventually improve the efficiency of efforts to prevent the spread of infectious diseases.