The Business Model

At the core of the Debt2Health mechanism is a three party agreement among the main partners:

• the creditor - usually a development bank or development agency
• the beneficiary country - usually the Ministry of Finance
• the Global Fund – the Innovative Financing team

Under a concluded Debt2Health agreement, the creditor agrees to forgo payment of a portion of interest and principal on the condition that the beneficiary invests an agreed counterpart amount in health through the Global Fund. The exact amount of counterpart payment to be made depends on the individually-negotiated terms and conditions of each Debt2Health agreement.

Once a Debt2Health agreement has been concluded, the first step is the counterpart payment by the beneficiary to the Global Fund, either as a one-time payment or in installments that correspond to the annual interest payments. The counterpart payment does not come from health-related budgets or expenditures by health ministries. Once the counterpart payment has been made, the creditor reduces the debt stock covered by the swap. This usually involves a bilateral side agreement or amendment to existing bilateral agreements concerning outstanding claims. The side agreement is signed at the same time as the overall Debt2Health agreement to maintain complete understanding of the various parts and stages of the Debt2Health transaction. An early or “upfront” debt stock reduction is possible because both parties rely on the credibility and effectiveness of the established and proven systems of the Global Fund. This includes systems for soliciting proposals through the Country Coordinating Mechanism (CCM), technical review, and performance-based funding and performance- and results-based monitoring. For example, the CCM ensures coordination with all local activities in government, civil society, and other donors. The Technical Review Panel (TRP) consists of international health and development experts and reviews all proposals for technical and scientific merit. The TRP review assures all three parties involved (creditor countries, beneficiary country and the Global Fund) that funds are used for proposals that are technically sound, that follow best practices and that fit into the country’s overall health priorities.

Debt2Health funds are disbursed through normal Global Fund channels and procedures. Once a grant is approved, the funds are disbursed in small tranches based on disbursement requests filed by the Principal Recipient (PR) of a grant. Debt2Health resources are disbursed on a first-out basis as the Secretariat honors a disbursement request.

The Debt2Health agreement comes to an end upon successful disbursement of the counterpart payment to Global Fund programs in the beneficiary country. In the unlikely event that Debt2Health funds are not able to be disbursed because either the country’s grants were terminated or because the country was not successful with new proposals, an exit clause is invoked. This exit clause is subject to negotiation between the parties, but it is generally thought to be acceptable that if the beneficiary country is not able to use Debt2Health funds within a period of five to eight years, the Global Fund Secretariat can re-allocate the money to successful proposals in other countries.

The Global Fund does not charge any fees or other expenses related to the Debt2Health mechanism to the two parties involved in the transaction. The full value of the counterpart payment goes to finance grants.

In the first Debt2Health agreement, which was signed in September 2007, Germany cancelled €50 million of Indonesian foreign debt granting a 50 percent discount. This resulted in a counterpart payment by Indonesia of €25 million toward approved Global Fund programs in their country. The payment schedule arranged with Indonesia was aligned to the interest payment due to Germany every year thus avoiding any impact on the Indonesian budget. In instances where no discount is offered by the creditor either because of an overall economic outlook, favorable debt indicators or creditor policies, the counterpart payment would correspond to the full amount converted.