From Theory to Practice

Amid budget constraints, global development funders are increasingly pushing for higher overall aid effectiveness. In response, funders and program implementers alike are exploring novel approaches to develop solutions with limited funding. Over the past decade, “innovative financing mechanisms” that address market failures have become increasingly popular. These results-based models allow funders to reward outcomes, in contrast with traditional models of funding, which provide funds upfront based on expectations.

Pull mechanisms and prize funds are examples of this new wave of innovative funding. Another promising approach is advance market commitments (AMCs), which allow funders to pre-commit a pool of funding for distribution to actors who successfully deliver solutions to a problem—thus, creating a new market.

For example, imagine a new vaccine that would be costly to develop but would protect against a neglected tropical disease. Manufacturers might balk at investing in research for a vaccine that benefits communities that have limited ability to pay. But development funders can encourage vaccine manufactures to invest in research, development, and production by setting up an AMC to guarantee the purchase of a certain number of doses from whichever company (or companies) produce the vaccine first, thereby creating a market for the vaccine.

The idea of an AMC for vaccines was purely theoretical until 2005, when designers came together to develop an AMC pilot for a low-cost pneumonia immunization—called the pneumococcal conjugate vaccine—to test the concept. At the time, pneumonia was the most common vaccine-preventable killer of children under five years of age. However, uncertainty about market demand in low-income countries led vaccine manufacturers to overlook the strains of pneumonia most common in Africa and the Global South. By collecting a pool of funds up front and pledging to purchase up to two billion doses of the vaccine at a set price, this AMC created a demand and prompted two vaccine manufacturers to develop a vaccine to address those strains. This pilot, administered today by the GAVI Alliance, offers lessons for future designers about navigating the complex nature of this approach.

Dalberg Global Development Advisors recently published a process and design evaluation of the AMC pilot that drew upon more than 400 historical documents and 50 interviews to identify best practices and lessons learned. Through this evaluation, Dalberg identified five critical questions to help facilitate the design and implementation of a successful AMC.

1. Is an AMC an appropriate intervention for this problem? Some market failures are better addressed through alternative solutions—for example, negotiating directly with a supplier to lower prices on an existing product for low-income countries. For the pneumococcal AMC pilot, program designers offered funding to every vaccine producer that could meet their product requirements to discourage a monopoly. Understanding the specific market failure that you are trying to address and designing a tailored approach to meet the program’s goals will lead to the best outcomes.

2. Do you have the right team? One major success factor in this pilot was the presence of strong project advocates, who drove the design process and launch. In particular, the Italian government assumed an early leadership role, contributing nearly 50 percent of the initial funding. Future AMCs would benefit from having strong advocates who can drive the project forward through a long and complex process.

3. How quickly do you need results? AMCs require iteration. They aim to create a new market, and each aspect of the AMC’s design influences a critical piece of the market later on. Designers should expect to develop the AMC in an iterative fashion over time, revisiting each decision as needed, rather than proceeding along a linear, sequential path. The design of this AMC pilot ultimately took four years.

4. How much risk are you willing to take? Designing an AMC to address a global market failure requires a significant amount of research, analysis, time, and appetite for risk. Growing supply and demand simultaneously for a new market and matching the two in the early years is extremely difficult. Further, each design decision can shift risk between the AMC funders and funding recipients. Designers must decide and make clear who bears which risk throughout the program.

5. Do you have data to set the right price? An AMC can potentially entail identifying a market problem and determining a price for a product that does not yet exist. Not surprisingly, pricing the award amount is one of the most challenging aspects of designing an AMC; it is also the decision most likely to face questions and criticism. Designers should factor in the need for robust collection of data—on both the market and potential applicants for the prize.

While AMCs and other innovative financing mechanisms can be risky and difficult to establish, they are worth understanding and replicating, as they offer a value-conscious way for the global development community to propel innovation. The pneumococcal AMC pilot attracted support from six major donors, securing a preliminary $1.5 billion commitment in 2007. Over the ten-year lifespan of the pilot, donors will spend an estimated total of $8 billion. The success of this AMC in attracting funds leading to vaccinations for millions of children highlights the potential benefits of AMCs.

The process and design evaluation for the pneumococcal vaccine AMC offers important insights for future designers to increase their likelihood of success. For more details, we encourage you to view the full report.

Read more stories by Angela Rastegar Campbell.