Scaling High-Impact Solutions with a Market-Shaping Mechanism for Global Health Supply Chains
Summary
Congress created the Development Finance Corporation (DFC) to finance private sector solutions to the most critical challenges facing the developing world. In parallel, the United States Agency for International Development (USAID) has committed to engaging the private sector and shifting more resources to local market providers to further the impact of U.S. foreign aid dollars.
USAID is on the verge of awarding its largest-ever suite of foreign aid contracts, totaling $17 billion over the next ten years and comprising nine awards as part of the “NextGen Global Health Supply Chain” (GHSC) contracts. This is a continuation of previous global health supply chain contracts that date back to the 1960s that have grown exponentially in total value but have underperformed and not meaningfully transitioned responsibility for deployment to low- and middle-income country (LMIC) governments and LMIC-based organizations.
Now is the time for USAID and the DFC to pilot new ways of working with the private sector that put countries on a path to high-impact, sustainable development that builds markets.
We propose that USAID set aside $300 million of the overall $17 billion package – or less than 2 percent of the overall value – to create a Supply Chain Commercialization Fund to demonstrate a new way of working with the private sector and administering U.S. foreign aid. USAID and the DFC can deploy the Commercialization Fund to:
- Create and finance instruments that pay for results against certain well-defined success metrics, such as on-time delivery;
- Provide blended financing to expand the footprint and capabilities of established LMIC-based healthcare and logistics service providers that may require additional working capital to grow their presence and/or expand operations; and
- If successful, invite other countries to participate in this model, with the potential for replication to other geographies and sectors where there are robust private sector markets, such as in agriculture, water, and power.
USAID and the DFC can pilot this new model in three countries where there are already thriving and well-established private markets, like Ghana, Kenya, and Nigeria.
Challenge and Opportunity
The world is facing an unprecedented concurrence of crises: pandemics, war, rising food insecurity, and a rapidly warming climate. Low- and middle-income countries (LMICs) are deeply affected, with many having lost decades’ worth of gains made toward the Sustainable Development Goals in only a few short years. We now face the dual tasks of regaining lost ground while ensuring those gains are more durable and lasting than before.
The Biden Administration recognizes this pivotal moment in its new U.S. Strategy Toward Sub-Saharan Africa. The Strategy acknowledges the continent’s growing importance to U.S. global priorities and lays out a 21st-century partnership to contribute to a strong and sustainable global economy, foster new technology and innovation, and ultimately support the long-envisioned transition from donor-driven to country-driven programs. This builds on past U.S. foreign aid initiatives led by administrations of both political parties, including Administrator Mark Green’s Journey to Self Reliance and Administrator Raj Shah’s USAID Forward initiatives. Rather than creating a new flagship program, the U.S. Strategy Toward Sub-Saharan Africa focuses on improved implementation and better integration of existing initiatives to supercharge results. Such aims were echoed repeatedly during the U.S.-Africa Leaders Summit in December 2022.
To realize a new vision for U.S.-Africa partnerships, the Biden Administration should more effectively fuse the work of USAID and the DFC. A key policy rationale for the DFC’s creation in 2018 was to counter China’s Belt and Road Initiative (BRI) and growing economic influence in frontier markets. By combining this investment arm with USAID’s programmatic work, Congress hoped to accelerate major development impact. However numerous mismatches between USAID and DFC priorities have limited and sometimes actively undermined Congress’ goals. In the worst cases, USAID dollars have been used to pay international aid contractors to perform work in places where existing market providers could. Rather than bolster markets, this can distort them.
This memo lays out a new approach to development rooted in better USAID-DFC collaboration, where the work of both agencies contributes to the commercialization of sectors ready to transition from aid-dependent models to commercial and trade-enabled ones. In these sectors, USAID should work to phase out its international aid contractor-led model and instead scale up the work of existing market participants, including by paying them for results. This set of recommendations also advances USAID priorities outlined in the Agency’s new Acquisition and Assistance Strategy and proposed implementation plan, as well as USAID’s policy framework, which each call for working more closely with the private sector and transitioning to more pay-for-performance models.
The global health supply chain is ideal for USAID and the DFC to test the concept of a commercialization fund because of the sector’s discrete metrics and robust existing logistics companies. Investing in cheaper, more efficient evidence-driven solutions in a competitive marketplace can improve aid effectiveness and better serve target populations with the health goods like PPE, vaccines, and medications they need. This sector receives USAID’s largest contracts, with the Agency spending more than $1B each year on procurement and logistics to get the right health products to the right place, at the right time, and in the right condition across dozens of countries. In the logistics space, only about 25%1 of USAID’s expenditure supports directly distributing commodities to health facilities in target nations; the other 75% is spent on fly-in contractors who oversee that work. Despite this premium, on-time and in-full distribution rates often miss their targets, and stockouts are still common, according to USAID’s reports and audits.2
A Commercialization Fund can directly address policy goals such as localization or private-sector engagement by building resilient health supply chains through a marketplace of providers that ensures patients and providers access the supplies they need on time. In addition to improving sustainability and results and cutting costs, a well-structured Commercialization Fund can improve global health donor coordination, crowd-in new investments from other funders and philanthropy that want to pay for outcomes, and hasten the transition from donor-led aid models to country-led ones.
Plan of Action
USAID should create the Global Health Supply Chain Commercialization Fund, a $300 million initiative to purchase commercial supply chain services directly from operators, based on performance or results. USAID should pilot using the Commercialization Fund to pay providers in three countries where there are already thriving and well-established private logistics markets, such as Kenya, Nigeria, and Ghana. In these countries, dozens of logistics and healthcare providers operate at scale, serving millions of people.
With an initial focus on health logistics, USAID should use $300 million from its yet-to-be-awarded suite of $17 billion NextGen Global Health Supply Chain contracts to provide initial funding for the Commercialization Fund. If successful, the Commercialization Fund will create an open playing field for competition and crowd-in high-impact technology, innovation, and more market-based actors in global health supply chains. This fund will build upon existing efforts across the Agency to identify, incubate, and catalyze innovations from the private sector.
To quickly stand up this Commercialization Fund and select vendors, Administrator Power should utilize her “impairment authority.” Though typically applied to emergencies, the “impairment authority” has been used previously during global health events like the COVID-19 pandemic and the Ebola response and could be used to achieve a specific policy priority such as localization and/or transforming the way USAID administers its global health supply chains. (See FAQ for more information regarding this authority).
The creation of this Fund, which can be fully budget-neutral, requires the following steps:
Step 1. USAID and DFC take administrative action to design and capitalize the $300 million, five-year, cross-cutting, and disease-agnostic Supply Chain Commercialization Fund. A joint aid effectiveness “tiger team” within USAID and the DFC should:
- Spearhead the design and implementation framework for the Fund and stipulate clear, standardized key performance indicators (KPIs) to indicate significant improvements in health supply chain performance in countries where the Commercialization Fund operates.
- Select three countries to adopt the Commercialization Fund, chosen in coordination with overseas USAID Missions and the DFC. Countries should be selected and prioritized based on factors such as analyses of health systems’ needs, the existence of local supply chain service providers, and countries’ desire to manage more of their own health supply chains. As a follow-on to the U.S.-Africa Leaders Summit, we recommend USAID and the DFC direct initial Commercialization Fund funds to support activities in Africa where there are already thriving and well-established private markets such as Ghana, Kenya, and Nigeria.
- Set pricing for each KPI and product in each Commercialization Fund country market. For example, pay-for-performance indicators could include percent of on-time deliveries. USAID and the DFC should set high expectations for performance, such as 95+ percent on-time delivery, especially in geographies where existing market providers can already deliver against similarly rigorous targets in other sectors. USAID bureaus and missions, partner country governments, and in-country private sector healthcare and logistics leaders, as well as supply chain and innovative financing experts, should be consulted during this process.
- Choose funding mechanisms that pay for results (see Step 2 for details).
- Provide blended financing to vendors that may need additional resources to scale their footprint and/or increase their capabilities.
- Select a third-party auditor(s) to audit the results upon which providers are paid.
Step 2: USAID structures financial instruments to pay service providers against results delivered in selected Commercialization Fund countries
USAID should pay Commercialization Fund providers to deliver results, consistent with the KPIs set in Step 1 by the joint aid effectiveness “tiger team.” Pay-for-performance contracts can also provide incentives and/or price assurances for service providers to build infrastructure and expand to areas they don’t traditionally serve.
Structuring pay-for-performance tools will favor providers that can demonstrate their ability to deliver superior and/or more cost-effective results relative to status quo alternatives. Preference should be given to providers that are operational in the target country where there is existing market demand for their services, as evidenced by factors such as whether the host country government, national health insurance program, or consumers already pay for the providers’ services. USAID should work with the host country government(s) to select vendors to ensure strong country buy-in.
To maximize performance and competition, USAID should explicitly not use cost-reimbursable payment models that reimburse for effort and optimize for compliance and reporting. The red tape associated with these awards is so cumbersome that non-traditional USAID service providers cannot compete.3
USAID should consider using the following pay-for-performance modalities:
- Fixed-price, milestone-based awards that trigger payment when a service provider meets certain milestones, such as for each delivery made with a 95% on-time rate and with little-to-no product spoilage or wastage. Using fixed-price grants and contracts in this way can effectively make them function as forward-contracts that provide firms with advanced price assurances that, as long as they continue to deliver against predetermined objectives, the U.S. Government will pay. Fixed-amount grants and contracts are easier for non-traditional USAID partners to apply for and manage than more commonly-used “cost reimbursement” awards that reimburse vendors for time, materials, and effort and have enormous compliance costs. Because pay-for-results awards only pay upon proof of milestones achieved, they also increase accountability for the U.S. taxpayer.
As USAID’s proposed acquisition and assistance implementation plan points out, “‘pay-for-result’ awards (such as firm fixed price contracts or fixed amount awards) can substantially reduce burdens on [contracting officers] and financial management staff as well as open doors for technically strong local partners unable to meet U.S. Government financial standards.” - Innovation Incentive Awards (IIAs) that pay providers retroactively after they meet certain predetermined results criteria. This award authority, expanded by Congress in December 2022, enables USAID to pre-publish its willingness to pay up to $100,000 for certain well-defined, predetermined results; then pay retroactively once a service provider can demonstrate it met the intended objective.
Unlike a fixed-price award, which establishes a longer-term relationship between USAID and the selected vendor, USAID can use the IIA modality to provide vendors with one-time spot payments. However, USAID could still use this payment modality to move more money at scale provided a vendor(s) can successfully meet multiple objectives (e.g. USAID could make multiple $100,000 payments for multiple on-time deliveries). - USAID could pursue Other Transaction Authority (OTA) opportunities without additional authorization, but the Agency may also benefit from consultation with the White House, the Office of Management and Budget (OMB), and The Office of Information & Regulatory Affairs (OIRA), as well as Congress, to secure additional authorities or waivers to disburse Commercialization Fund resources using innovative pay-for-results tools, including OTA, which other federal agencies have used to invite greater private sector participation from nontraditional U.S. Government partners.
Step 3: USAID and DFC should provide countries with additional technical assistance resources to create intentional pathways for selected countries to contribute to the design and management of program implementation.
To ensure these initiatives support countries’ needs and facilitate country ownership and increase voice, USAID should also consider establishing a supra-agency advisory board to support the success of the Commercialization Fund modeled after DFC’s Africa Investment Advisor Program that seats a panel of experts that can continually advise both agencies on strategic priorities, key risks, and award structure, etc. It could also model elements of the Millennium Challenge Corporation’s compact model to ensure participating countries have a hand in the design of relevant aspects of the Commercialization Fund.
USAID should additionally provide participating Commercialization Fund countries with Technical Assistance resources to ensure that host country governments can eventually take on larger management responsibilities regarding the administration of Commercialization Fund pay-for-performance contracts.
Step 4: As needed, USAID and the DFC should collaborate to provide sustainable pathways for blended financing that allows existing market providers to access working capital to scale their footprint.
While the DFC and USAID have worked on blended finance deals in the past, the Biden Administration should explicitly direct the two agencies to work together to identify and scale the footprints and capabilities of logistics and healthcare providers in targeted Commercialization Fund countries.
Many of the existing healthcare and logistics providers that could potentially manage a greater share of global health supply chains could need additional financing to expand their operations, increase working capital, or grow their capabilities, but they often find themselves in a chicken or the egg problem to secure financing from financial institutions like the DFC.
Traditional banks and DFC investment officers often consider these companies to be potentially risky investments because their revenue in health supply chains is not assured, especially because one of the largest healthcare payers in many LMICs is the U.S. Government, but USAID (and other global health donors) have historically funded international aid contractors to manage countries’ health supply chains, not local firms or alternative service providers. However, at the same time, USAID and other donors have not relied more on existing logistics service providers to manage health supply chains because many of these providers do not operate at the scale of larger international aid contractors.
To break this cycle, and to enable the DFC and other lenders to offer better financing terms to firms that need it to grow their capabilities or secure working capital, USAID could provide identified firms with more blended finance deals, including guaranteed eligibility to receive pay-for-performance revenue using the funding modalities described above. It could also provide unrestricted early-stage and/or phased funding to cover operational costs associated with working with the U.S. Government.
Increasing available credit to firms via the DFC and using a USAID pay-for-performance contract as collateral would also enhance firms’ overall ability to raise credit from other sources. This assurance, in turn, reduces the cost of capital for receiving firms, resulting in more significant, impactful investments from private capital in the construction of other supply chain infrastructure, including warehouses, IT systems, and shipping fleets.
Step 5: Pending success, USAID and the DFC should replicate the Commercialization Fund in additional countries. Congress should codify the Commercialization Fund into law and authorize larger-scale commercialization funds in additional geographies and sectors as part of the BUILD Act reauthorization in 2025.
While this initial Commercialization Fund will focus on building sustainable, high-performing global health supply chains in three LMICs, the same blueprint could be leveraged in other countries and in other sectors where there are robust private sectors, such as in food or power.
- Congress should require USAID and DFC to report overall Commercialization Fund performance every six months for a minimum of three years.
- If the Commercialization Fund proves successful after the first year, USAID and the DFC should proactively invite other countries to participate to expand this model to other geographies, where appropriate.
- If successful with healthcare supply chains, the Commercialization Fund should also be expanded to cover additional sectors and geographies and included in the BUILD Act 2025 reauthorization.
Conclusion
Continued reliance on traditional aid in commercial-ready sectors contributes to market failures, limits local agency, and minimizes the opportunity for sustainable impact.
As a team of researchers from the Carnegie Endowment’s Africa Program pointed out on the heels of the U.S.-Africa Leaders Summit, “A persistent humanitarian approach to Africa…creates pathologies of unhelpful dependency, insufficient focus on the drivers of inclusive growth, and perverse incentives for the continuation of the status quo by a small coterie of connected beneficiaries.” Those researchers identified 18 new initiatives announced at the Summit supported with public money in economic sectors that can facilitate trade, investments, entrepreneurship, and jobs creation, signaling an unprecedented readiness in this Administration to prioritize trade alongside aid.
The Commercialization Fund outlined in this memo — a market-shaping mechanism designed to correct market failures that conventional aid models can perpetuate — has the potential to become a model for accelerating the transition of other key economic sectors away from the status quo and toward innovation, investment, impact, and long-term sustainability.
The global health supply chain is an ideal sector for USAID and the DFC to test the concept of a Commercialization Fund:
First, virtually every industry relies on robust supply chains to get goods around the world. There are dozens of African logistics companies that deliver goods to last-mile communities every day, including hard-to-transport items that require cold-chain storage like perishable goods and vaccines. These firms can deliver health commodities faster, cheaper, and more sustainably than traditional aid implementers, especially to last-mile communities.
Second, health supply chain performance metrics are relatively straightforward and easy to define and measure. As a result, USAID can facilitate managed competition that pays multiple logistics providers against rigorous, predetermined pay-for-performance indicators. To provide additional accountability to the taxpayer, it could withhold payment for factors such as health commodity spoilage.
Third, global health receives the largest share of USAID’s overall budget, but a significant share of those resources pay for contractor overhead and profit margin, so there is considerable opportunity to re-allocate those resources to create a pay-for-performance Supply Chain Commercialization Fund. Only about 25 percent of USAID’s in-country logistics expenditures pay for the actual work of distributing commodities to health facilities in target nations; the other 75 percent pays for larger aid contractors’ overhead, management, and other costs. Despite this premium, on-time and in-full distribution rates often miss their targets, and stockouts are still a common occurrence, according to USAID’s reports and audits.
Investing in cheaper, more efficient, and effective operators in a competitive marketplace can improve aid effectiveness and better serve target populations with essential healthcare. A Commercialization Fund can directly address policy goals of “progress over programs” by building resilient health supply chains that, once and for all, ensure patients and providers get the supplies they need on time. Since local providers can typically provide services faster, cheaper, and more sustainably than international aid contractors, transitioning to models that pay for results with fees set to prevailing local rates can also advance USAID’s localization priorities and bolster markets rather than distort them.
The administrator could activate her unique “impairment authority” to fashion the scope of procurement competitions at will. The fundamental concept is that if full and open competition for a contract or set of contracts—the normal process followed to fulfill the U.S. Government’s requirements—would impair foreign assistance objectives, then the administrator can divide procurements falling under the relevant category to advance an objective like localization. This authority, which is codified in USAID’s core authorizing legislation (the Foreign Assistance Act of 1961, as amended), along with a formal U.S. Government regulation, was previously used to quickly procure during Iraq reconstruction, Afghanistan humanitarian needs, and the Ebola and COVID-19 responses. While “impairment authority” may be an untested pathway for global health supply chains, it does offer the administrator a viable pathway to launch the Fund and ensure high-impact operators are receiving USAID contracts while continuing to consult with Congress to codify the Fund’s activities long-term. The administrator’s extraordinary “impairment authority” comes from 636(a)(3) of the Foreign Assistance Act and AIDAR (the USAID-specific Supplement to the FAR) Section 706.302-70 “Impairment of foreign aid programs.” See especially 706.302-70(a)(3)(ii).
Many LMIC governments increasingly embrace technological solutions outside of traditional aid models because they know technology can lead to greater efficiencies, support job creation and economic development, and drive improved results for their populations. Sustaining a marketplace within a country or region is an advantage to supporting new entrants and existing firms in the sector. The impact of these companies’ services can also be scaled via pay-for-results models and domestic government spending, as the firms that deliver superior performance will rise to the top and continue to be demanded, and those that do not meet established metrics will not be contracted with again.
Supply chain and innovative financing experts who deeply understand the challenges plaguing global health supply chains should be consulted to design successful pay-for-results vehicles. These individuals should support the USAID/DFC tiger team to support the design and implementation framework for the Commercialization Fund, define KPIs, set appropriate pricing, and select auditors. USAID Missions and local governments will be most familiar with the unique supply chain challenges within their jurisdictions and should work alongside supply chain experts to define the desired supply chain results for the Commercialization Funds in their countries.
Through the Commercialization Fund, USAID will contract any supply chain service provider that can meet exceptionally high performance targets set by the Agency. USAID will increase its volume of business with providers that consistently hit relevant targets over consecutive months. Operators will be paid based on their performance under these contracts, providing them with predictable and consistent cash flows to grow their businesses and reach system-wide scale and impact. Based on these anticipated cash flows, DFC will be well-positioned with equity investments and able to provide upfront and working capital financing.
As the highest-performing operators scale, they gain cost efficiencies that allow them to lower their pricing, just as with any technology adoption curve making services accessible to more customers. Over time, as clear pricing and operating standards are realized, USAID will transition from directly paying these operators for performance to supporting governments to remunerate them against transparent, auditable service contracts.
The Supply Chain Commercialization Fund will also facilitate an exchange of expertise, greater interagency learning, and long-term coordination. DFC will share with USAID how to commercialize sectors, transition them from aid to trade, and lay the groundwork for DFC deal flow, while USAID will help DFC evaluate smaller, riskier deals in sectors with fewer commercial entrants. Both institutions can use the Fund to align on clear measures of success through USAID’s contracting directly with supply chain service providers that get paid only if they hit exceptionally high performance targets and DFC’s increasing investment in companies based on their development effectiveness.
The risk of supply chain disruptions is low because the initial three countries proposed—Kenya, Ghana, and Nigeria—already have existing African-based logistics providers that provide essential health commodities to communities every day, including in last-mile and low-resourced settings. Many of these providers deliver products faster, cheaper, and more sustainably than international aid donor-funded distributors. The capacity-building fund mechanisms described above can also mitigate risks to ensure firms have the capital investment to scale their existing work to meet contract requirements.
USAID should hire third-party auditors to verify the impact and results of Fund investments. We anticipate the Agency should draw from Commercialization Fund resources to pay for these services.
While $300 million represents less than 2 percent of the overall Global Health Supply Chain suite of awards, this commitment would send important, long-term market signals for firms in partner countries over a multi-year period. It would also provide sufficient capital to scale selected companies and demonstrate how a new supply chain funding model can work.
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