The innovative financing mechanism in action
- The HIV/AIDS response in Botswana had, prior to 2008, been heavily focussed on providing HIV treatment and as
a result less focus was accorded to prevention.
- To address the gap in prevention the country sought technical and financial assistance from the World Bank to
help the country transition from an emergency response to a broader, more strategic and sustainable response.
- As an upper middle-income country, however, Botswana is excluded from access to the World Bank’s highly
concessional IDA lending programme.
- The government of Botswana negotiated a loan of US$50 million from the IBRD to finance the strengthening of
HIV prevention eorts as part of the Botswana National HIV/AIDS Prevention Support Project (BNAPS).
- In an attempt to improve the terms of a proposed IBRD loan the government of Botswana requested that part of
the loan involve a “buy-down” using donor funds.
- The IBRD loan “buy-down” mechanism was developed to increase the flexibility and concessionality of funding for
projects where it is justified by global public good or cross-border externalities.
- A “buy-down” combines a loan to a developing country with a donor commitment to pay (“buy down”) part or
all of the loan, with the “buy-down” component performance managed and debt “bought” only if predetermined
objectives are achieved
- In essence, the IBRD loan can become a grant if the loan is used to achieve negotiated results but will remain a
repayable loan where satisfactory results are not achieved.
What is the health financing mechanism?
- A concessional loan is a credit extended on terms substantially more generous than market loans. The
concessionality is achieved either through low interest rates below those available on the market (typically 1% to
7%). This can also be provided through generous lending terms such as grace periods, repayment terms and up-
front fees, or through a combination of the two.
- The loans are typically provided over long repayment periods of between 10 and 40 years and are commonly
provided by multilateral financial institutions. They are provided directly to national governments and usually for
the purpose of financing large-scale programmes in a particular sector such as health, infrastructure and education.
- The ‘concession’ component of the loan also commonly includes providing a proportion of the ‘loan’ in the form
of a grant. Under new terms recently negotiated by OECD member states (October 2015), concessional loans may
only be considered as Ocial Development Assistance (ODA) if at least 45% of the loan is provided in the form of
a grant.
- The ocial OECD definition of concessional lending in fact classifies giving by any of the major regional
development banks (African Development Bank, Asian Development Bank, and the Inter-American Development
Bank) and from the IMF and World Bank as concessional lending – with concessionality defined on the basis
of each institution’s own classification of concessional lending. [International Monetary Fund: External Debt
Statistics: Guide for Compilers and Users, June 2003 (2013 edition)].
- The World Bank provides concessional loans through dierent lending mechanisms depending on a recipient
country’s creditworthiness and income level. Loans to low-income countries are provided through the International
Development Association (IDA) – which is vested with the authority to provide financing at lower interest rates
and at more generous payment terms. Loans to middle-income countries are managed by the International Bank
for Reconstruction and Development (IBRD).
- During the most recent fiscal year (which ended June 30, 2015), IDA commitments totalled $19 billion (including
IDA guarantees), of which 13 percent was provided on grant terms. IDA has averaged $19 billion annually over the
three previous financial years. Since 1960, IDA has provided $312 billion to 112 countries.
- The IMF as well as Regional Development Banks have similar lending policies and mechanisms.
- The IMF provides concessional loans to low-income country member governments through the Poverty Reduction
and Growth Facility (PRGF). In 2012 the IMF adopted a strategy to establish an annual concessional lending
capacity of SDR 1¼ billion ($2 billion).
CASE STUDY SIX:
CONCESSIONAL BORROWING
CONCESSIONAL BORROWING TO FINANCE THE HEALTH SECTOR
IN BOTSWANA
20 Documenting good practices and lessons learnt