Fighting polio with financial engineering

In April 2014, the Gates Foundation, as part of its charitable activities, wrote a $51 million check to the government of Japan. And earlier this month, they wrote an even bigger check – for $76 million – to the same recipient.

Does Japan really need the Gates Foundation’s money? What’s going on here?

The answer is fascinating, and a great example of how foundations can do things that normal charities simply can’t.

Both checks were the result of something called a loan conversion mechanism – one of the very few positive financial innovations that the world has seen in recent years. And both of them were designed to eradicate the last pockets of polio in the world.

Fighting polio, of course, is the kind of thing lots of foundations and charities want to do; there are few bigger wins in the public-health field than being to say that you helped eliminate this dreadful disease from the planet, once and for all.

If you’re going to fight polio, you have to do it where it still exists. Today, that means two countries: Pakistan and Afghanistan had 17 cases between them in 2017. That’s how close we are to eradication. Still, the difference between 17 and zero is enormous: As the WHO says,

As long as a single child remains infected, children in all countries are at risk of contracting polio. Failure to eradicate polio from these last remaining strongholds could result in as many as 200 000 new cases every year, within 10 years, all over the world.

Fighting polio is incredibly hard work. It has to be done household by household, one country at a time, one vaccination at a time, including in some of the toughest, most war-torn regions of the world. What’s more, it’s expensive, even by Gates Foundation standards:

In 1988, when the Global Polio Eradication Initiative began, polio paralysed more than 1000 children worldwide every day. Since then, more than 2.5 billion children have been immunized against polio thanks to the cooperation of more than 200 countries and 20 million volunteers, backed by an international investment of more than US$ 11 billion.

Those billions are well worth it: Low-income countries are going to end up roughly $50 billion richer as a result of this program, which makes it an astonishingly effective form of wealth transfer from the rich world to the poor. And of course millions of families’ lives will be transformed for the better.

For many reasons, then, it behooves rich institutions and countries to pay for polio eradication programs in the few countries where the disease remains. At the same time, however, for reasons I explained in July, the actual work should be done by national governments, not by NGOs.

Happily, that’s exactly what’s happening. Rich governments and institutions are paying poor, largely war-torn countries to do the work of eradicating polio within their borders.

But it’s hard to do that just by writing a check. If you give tens of millions of dollars to a minister of public health in Pakistan or Afghanistan or Nigeria (where there were still polio cases as recently as 2016), it’s very difficult to ensure that the money will be targeted narrowly at polio programs. Specifically, while the Gates Foundation was happy to pay the cost of such programs, in Pakistan and Nigeria, they didn’t want to run the risk that their money would just go to waste, achieving nothing.

Thus was the loan conversion mechanism born. The money would be lent to the country by Japan: the first loan was to Pakistan in 2011, the second was to Nigeria in 2014. The loan would be in the form of official development assistance: it would be extended at concessionary rates, under a framework where the Japanese could be very confident that they would be repaid in full. (Defaulting on such a loan would not only imperil the country’s relationship with Japan, but also with all other sovereign lenders.)

Then, when the loan came due, it would be repaid not by the borrower, but rather by the Gates Foundation – if, and only if, the country had kept up its end of the bargain in terms of vaccinating children in hard-to-reach parts of the country against polio.

In both cases, happily, that’s exactly what happened. Pakistan and Nigeria did what they promised to do in terms of fighting polio, and the Gates Foundation picked up their tab to the Japanese.

At the end of the day, this mechanism is essentially a grant from the Gates Foundation to Pakistan and Nigeria, to help them fight polio. But a direct grant would have been tricky: they wouldn’t have had confidence that their money would be used for its intended purpose. So instead they paid after the fact, and the Japanese government provided the bridging loan. (It’s worth noting that the Japanese government has also been extremely generous in this fight, giving billions of dollars in outright grants on top of these kind of loans.)

There’s one more of these loans still outstanding with Pakistan, and if the other two are any indication, it too will be a success.

I hope that Warren Buffett knows about these things, because a lot of the money comes from him, and I think he’d enjoy the financial engineering aspect. It’s rare to see these schemes actually work in the wild, and I’m very glad that this one seems, to a first approximation, to be going to plan.

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