Health Reform and Drug Financing. Selected Topics - Health Economics and Drugs Series, No. 006
(1998; 49 pages) [French] [Spanish]
Table of Contents
View the documentAcknowledgements
View the documentExecutive summary
Open this folder and view contents1. Introduction
Close this folder2. Financing reforms
View the document2.1 Public financing though general revenues
View the document2.2 Health insurance
View the document2.3 User charges
View the document2.4 Voluntary and other local financing
View the document2.5 Donor financing and drug donations
View the document2.6 Development loans
Open this folder and view contents3. Affordability and efficiency
Open this folder and view contents4. Organizational reforms
View the documentConclusions
View the documentReferences
View the documentBack Cover
 

2.6 Development loans

The financial role of development banks in health is substantial and increasing. For the World Bank, during the period 1989-1995, pharmaceutical lending amounted to US$ 1,311 million out of a total of US$ 7,945 million extended in to launch projects in health, population and nutrition (16.5%). Of the US$ 1,311 million, US$ 779 million was for drugs, US$ 268 million for pharmaceutical equipment, and US$ 257 million for training and various other uses [28]. More information is provided in Box 4.

This form of funding is best used to support the development of long-term infrastructure and human resource capabilities, and is decidedly less suitable for covering recurrent expenses such as drug procurement. As with donations, loans can provide short-term solutions which diminish the incentives to develop long-term, sustainable financing modalities. But with loans there are additional drawbacks. The country must not only pay from its own limited resources the loan principal and any interest, but it may also bear opportunity costs as loans may be better used for other development plans of a different nature. Although it can be argued that the overall debt burden for the country will remain the same (because a set sum is borrowed, whether this is used for pharmaceutical procurement or not), the opportunity cost remains a reality which many developing countries can ill afford.

This being said, the pressing needs of many developing countries to meet their immediate pharmaceutical requirements cannot be ignored and this complicates matters significantly. Poverty can force countries (as well as individuals) to make decisions to meet urgent needs which are not “rational” from a long-term perspective. Indeed, Box 4 indicates that it is the poorer countries which most use pharmaceutical loans for procurement (both in overall amount and in percentage of pharmaceutical lending received). While the poorest countries benefit from soft loan conditions (International Dispensary Association credits), the issue remains: loans are not generally an optimal financing mechanism for the purchase of recurrent goods.

Box 4. Data on World Bank loans involving pharmaceutical components for fiscal years 1989-1995


HNP loans and their pharmaceutical components


HNP Projects


Pharmaceutical loans by country classification

Figures refer to data for fiscal years 1989-1995

• Data are estimates

HNP: Health, Nutrition, and Population

“hardware”: includes drug procurement; equipment procurement; civil works and computers & information systems

drug procurement: can include vaccines, medical supplies & chemicals

“software”: training, education & technical assistance

Types of loans and conditions

International Bank for Reconstruction and Development (IBRD) loans:

• Variations on the loan conditions exist depending upon the GNP/capita of the country, country preferences, as well as other factors.

• Grace period: 3-5 years.

• Maturity: 15-20 years.

• Payment: market interest rates; amortization on annuity basis although, in some cases, level repayments of the principal are made.

International Development Association (IDA) credits:

• For countries with GNP/capita less than 905 US$ and who are uncreditworthy for IBRD lending.

• Grace period: 10 years.

• Maturity: 40 years.

• Payment: Principal repaid at 2% for years 11-20; at 4% for years 21-40.

• Blend countries (those with GNP/cap < 905 US$, but who are partially creditworthy for IBRD lending)

• Grace period: 10 years.

• Maturity: 35 years.

• Payment: Principal repaid at 2.5% for years 11-20; at 5% for years 21-35.

Note: These terms and eligibility conditions are generalizations; exceptions may exist.

During the fiscal years 1989-1995, for HNP projects with pharmaceutical components:

• DA credits committed amounted to 2233 million US$;
• IBRD loans committed were 2018.2 million US$.

Source: Pharmaceutical Team, HNP, World Bank.

As the resources of these countries are extremely limited, interventions by the international community to support pharmaceutical financing can be of great value. This assistance to the poorest countries will enable these to meet urgent needs and avoid opportunity costs, as well as give them additional time to develop internal financing mechanisms to meet long-term objectives rather than short-term necessities. This should lead to more sustainable development.

Although pharmaceuticals usually constitute recurrent expenses, there can exist certain exceptions to this which may justify the use of loans for procurement. These situations (presented and discussed in [7]) are: 1) to stock a revolving drug fund; 2) drug procurement as part of a larger adjustment loan which supports the balance of payments by financing all import requirements for a limited period of time; and 3) in certain cases, the financing of pharmaceutical supplies for vertical programmes aimed at eliminating specific diseases which can be effectively treated by drugs which are not widely employed for other health problems.

Beyond these issues, another important topic to consider is the connection between loans and policy advice. Pharmaceutical loans should be accompanied by sound technical advice which supports a country’s national drug policy. But policy advice should be made available to countries independently of any financial instrument. The use of loans as vehicles to disseminate specific policies (regardless of the merits or demerits of these) can prove detrimental to countries which do not actually benefit from pharmaceutical loans in the long-term. Loan conditionalities are necessary, but they should not define pharmaceutical policy in a country. Rather, it is the policy which should determine the appropriate mix of financing modalities in a country. The availability of independent advice ensures that the financing choices support national objectives and priorities in health and pharmaceuticals.

 

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