IFFIm's Borrowing Costs Lower than Most Donor Governments?

April 19, 2011

Following my blog on vaccine financing last week, there were questions on the financing costs of the International Finance Facility on Immunization (IFFIm). In 2005, when the instrument's final design was still uncertain, Todd Moss questioned here whether the extra financing costs were justified.To answer this question, Quinton Ng of the GAVI Alliance compared IFFIm's borrowing costs to donor governments' borrowing costs:One way to measure IFFIm's value is to compare its cost of borrowing to the weighted average borrowing cost of its donors.  Instead of having IFFIm borrow the money, the donors could, theoretically, raise the money themselves.  To date, however, that would have been more costly.  IFFIm's borrowing costs to date have been approximately 14 basis points (0.14%) better than if the borrowers had raised their share of IFFIm's funding individually in their own markets.  This is a powerful statement of IFFIm's financial efficiency.  In fact, if I look at the most recent bond issue, IFFIm's borrowing costs were better than 6 of the 9 IFFIm donors could achieve on their own in their own markets.  These 6 donors represented approximately 93% of IFFIm's donor pledges by value at the time of that bond's issue.  In other instances in the past, IFFIm raised funds at a lower cost than any of its donors could have individually. IFFIm's financial success is based on the combined credit quality of its donors, as well as its flexible borrowing approach, strong franchise in retail bond markets, and partnership with the World Bank.This issue is complex. To date, IFFIm has relied overwhelmingly on the Japanese bond market.  Many of the issuances have been foreign exchange denominated, but bought by Japanese investors.  This is the reason that the borrowing cost spread is low (or even negative).  Kudos to the GAVI team for finding this niche position and exploiting it; the question is whether it can continue given Japan's current problems. This is something that should be looked at more closely in the IFFIm evaluation.Of course, borrowing costs are not the only costs and benefits to assess when comparing the IFFIm to traditional aid financing.I wrote earlier about the enormous financial leverage that the IFFIm has achieved, particularly notable during this period of fiscal adjustment in donor countries. In addition, IFFIm has generated a predictable, frontloaded flow of resources for GAVI's funding of vaccines and national immunization programs; Owen Barder wrote about the benefits of frontloading here – money now is actually better than money later if you care about achieving herd immunity and eventually eliminating vaccine-preventable disease. This predictable flow may also play a role in signaling vaccine markets and obtaining lower prices for vaccines as a result.The independent evaluation of the IFFIm will be issued this year, I’ll look forward to the results.Thanks to Ben Leo and Todd Moss for their comments on this blog.


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