PEPFAR: Exploring Co-Financing as a Tool for Domestic Resource Mobilization

There is growing pressure on PEPFAR, the U.S. global HIV program, to increase its planning for sustainability, including through domestic resource mobilization and, ultimately, transitioning financing at least in part to recipient countries.¹ While this is connected to a broader push in global health and development, driven by a constrained financing environment and desire to promote more country ownership of programs and services², there are specific questions facing PEPFAR’s future. A National Academy report from 2017, for example, recommended that PEPFAR look toward phasing down its spending and supporting countries in their transition from bilateral aid to domestic financing for HIV. At a Senate hearing last year, PEPFAR was asked how it was working to increase domestic resources and under what conditions would it need less resources to accomplish its goals. Recent challenges in securing a five-year reauthorization of the program have only served to heighten the focus on sustainability and domestic resource mobilization.  How PEPFAR does this, however, remains an ongoing question.

One potential tool is “co-financing” (sometimes referred to as “cost-sharing” or “co-investment”) – that is, to require country recipients of PEPFAR funding to contribute resources to the HIV response. Co-financing is used for a variety of reasons, including to help share or spread costs and to promote ownership and sustainability in programs.³  Indeed, several global health and development institutions employ some kind of co-financing arrangement, as do some U.S. government programs.  While PEPFAR, and most U.S. global health and development programs, are bound by requirements under the Foreign Assistance Act to ensure some level of cost-sharing by countries,⁴ some stakeholders have specifically recommended that PEPFAR adopt a policy either to mobilize additional resources or to facilitate reduced U.S. funding.⁵

This policy brief identifies options and issues PEPFAR could consider if it moves in the direction of a new co-financing policy, based on the experiences of other global health and development institutions. It first examines current U.S. law regarding co-financing and PEPFAR’s prior experience with domestic resource mobilization. It then assesses the co-financing policies⁶ of six other institutions to draw out questions and issues for PEPFAR. The six institutions examined were: Gavi, the Vaccine Alliance (Gavi); the Global Environment Facility (GEF); the Global Fund to Fight AIDS, Tuberculosis and Malaria (Global Fund); the Green Climate Fund (GCF); the Millennium Challenge Corporation (MCC) and the Pandemic Fund (PF).

Current U.S. Law and PEPFAR’s Experience

U.S. Law

The Foreign Assistance Act (FAA)⁷, which governs U.S. foreign assistance and programs including PEPFAR and other global health efforts, has long had a co-financing requirement (which it refers to as “cost-sharing”). Specifically, Section 110 of the FAA, as amended, states that:

“No assistance shall be furnished by the United States Government to a country under Sections 103 through 106 of this Act until the country provides assurance to the President, and the President is satisfied, that such country will provide at least 25 per centum of the costs of the entire program, project, or activity with respect to which such assistance is to be furnished, except that such costs borne by such country may be provided on an “in-kind” basis.”⁸

The requirement applies to bilateral development and global health assistance that is obligated to a host country (but not to grants, cooperative agreements, or contracts with public international organizations, non-governmental organizations, or other implementing partners unless obligated through a bilateral agreement with the host country.)  Sources of cost-sharing are expected to come from host country budgets, although in some cases, they may come from other country resources. In-kind contributions (e.g., buildings, materials, personnel, as well as policy actions or institutional changes that further project goals) are also allowable. There is also an option to waive the cost-sharing requirement (under Section 124(d) of the FAA) on a case-by-case basis for “relatively least developed countries”, defined as countries on the DAC list of aid recipients categorized as “least developed countries” or “other low income countries” or those on the World Bank’s “heavily indebted poor countries” (HIPC) list.  This policy, while assuring some level of cost-sharing by countries, does not require progressive or additional country financing over time.

PEPFAR’s Experience

While created in 2003 as an emergency program, the importance of building sustainable capacity  in PEPFAR countries was recognized from the onset, including in PEPFAR’s authorizing legislation and first strategy. When the program was reauthorized five years later, in 2008, Congress placed an even greater emphasis on sustainability and instructed PEPFAR to develop new compacts or framework agreements with countries to promote sustainability that, among other things, included “cost sharing assurances” that met the requirements of FAA Section 110 (essentially reiterating the current law). ⁹  PEPFAR developed “Partnership Frameworks” guidance and, in addition to the cost-sharing requirement, encouraged countries to increase domestic resources where possible. For example, the guidance stated: “For purposes of Partnership Frameworks, promoting sustainability means supporting the partner government in growing its capacity to lead, manage, and ultimately finance its health system with indigenous resources (including its civil society sector), rather than external resources, to the greatest extent possible.” In addition, it called for the development of a timeline of increasing partner government financial commitments and criteria for tracking such support. Ultimately, PEPFAR developed Partnership Frameworks with 22 countries and regions, but these were time limited arrangements that ended after a five-year period. In addition, an evaluation identified several challenges with realizing increased domestic resources, including: vague indicators that made monitoring and measurement difficult; the absence of financing commitments in some agreements or inclusion of non-domestic sources as commitments; the lack of evidence for increased domestic investment; and economic hardship that made it difficult for some countries to contribute resources.

Beyond Partnership Frameworks, PEPFAR has, at other times, sought to emphasize the importance of and/or mobilize additional domestic resources from countries. For example:

• In its 2012 Blueprint for Creating an AIDS Free Generation, PEPFAR stated that it would work to “implement incentives for annual progressive increases in domestic cofinancing that complement strategic investments by donors”.
• In 2013, PEPFAR guidance included the need for countries to increase and report on the use of their own resources for the HIV response, and categorized countries by their economic capacity, including countries that could “co-finance” more of their response. Also at that time, PEPFAR instituted Sustainability Plans as a way to work with countries to, among other things, increasingly finance the national HIV response.
• In 2019, PEPFAR introduced “Minimum Program Requirements” (MPRs), one of which was the need for countries to provide evidence of increased resource commitments by host governments annually.
• Currently, PEPFAR is working to develop “Sustainability Roadmaps” with countries that will include the need to increase domestic financing of the HIV response.

Beyond the cost-sharing requirement that already exists under the FAA, however, PEPFAR has not instituted a policy designed to mobilize additional domestic resources over time from countries, as some have called for, and there is limited information available on the status of its prior efforts.

Considerations for PEPFAR

Should PEPFAR choose to institute such a requirement, analysis of the co-financing policies of six other institutions raises questions and issues for PEPFAR to consider, including (see Box and Appendix):

1. Linking co-financing to mission and objectives. All six institutions examined link co-financing to their organizational missions, priorities, and/or project objectives. For example, Gavi’s co-financing requirement is specific to the purchase of vaccines; the GEF policy is intended to support implementation of a GEF-financed project or program and achievement of its objectives; and the MCC requires contributions from countries toward meeting MCC objectives. The Global Fund has a mix: it ties some co-financing to Global Fund programs, but also to broader, health system financing.  In PEPFAR’s case, co-financing could be tied to the national HIV program, as it was in its prior Minimum Program Requirement. This approach would support Congressional intent to combat HIV, and sustainability of the HIV response specifically. Additionally, PEPFAR could consider tying co-financing to a specific HIV-related service or activity only (as Gavi does). On the other hand, a broader approach, similar to the Global Fund’s tying co-financing to the health system, may yield wider health benefits (although not necessarily for HIV).
2. Scaling co-financing to country income/fiscal health. Three institutions – Gavi, the Global Fund, and the MCC – scale co-financing amounts or policies to country income classifications (requiring greater contributions from countries with higher incomes). Scaling a new co-financing policy this way would protect PEPFAR recipient countries with less fiscal capacity and recognize the greater capacity of countries with stronger economies. However, since such an approach may not capture the full fiscal health of a country or burden on individuals and households, PEPFAR could also consider using additional measures, such as debt burden, share of household out-of-pocket expenditures on health, and/or share of domestic revenues spent on health, to assess country fiscal capacity.
3. What “counts” as a co-financing source. The six institutions examined vary in the sources and types of resources they count towards fulfilling co-financing requirements. While all six include domestic resources, only the Global Fund limits allowable co-financing to domestic revenues; in its case, these could be domestic public resources (government revenues, government borrowings, social health insurance, and debt relief proceeds) and/or domestic private resources (contributions from domestic corporations and philanthropies). The others allow multiple sources to fulfill co-financing requirements, including, in some cases, external donor support. Two institutions – the GEF and the MCC – explicitly include in-kind contributions as a source of co-financing. If PEPFAR pursues a new policy, assessing and identifying allowable sources would be important for setting clear expectations. Whether such sources are limited to domestic revenues only (as in the case of the Global Fund) or broader sources (as in the case of other institutions) may depend on PEPFAR’s goals (e.g., if it is interested in mobilizing additional domestic revenues specifically or in substituting for U.S. government resources more generally).
4. Specifying co-financing amounts/shares. Few institutions examined include a specific co-financing amount. Exceptions are Gavi and the MCC (Gavi has specific price per dose requirements and the MCC has specific percentage requirements, each scaled in some way to country circumstances). The Global Fund, on the other hand, has a more general requirement to increase the amount invested over time and the GEF, GCF, and PF do not have any specifications for countries or projects, though the GEF does have overall co-financing targets at its full portfolio level. PEPFAR could consider specifying an amount or percentage of co-financing, which might be easier to measure and provide predictable projections of co-financing. Alternatively, it could consider a more general requirement to increase co-financing over time (akin to its earlier Minimum Program Requirement and the Global Fund’s policy), which may be easier to implement and allow for more flexibility for countries based on their unique circumstances, but not provide predictability and could be harder to measure.
5. Specifying progressive co-financing. While all six institutions include the importance of “additionality” in their definitions (that co-financing brings additional resources to the project, mission, or health system) only two institutions – Gavi and the Global Fund – specifically require an increasing share of resources to be provided over time. Gavi’s policy is designed to have countries progressively co-finance their vaccines until they are fully funding vaccine procurement. The Global Fund requires countries to demonstrate progressive government expenditure on health and increasing co-financing of Global Fund supported programs. While not a requirement, the PF encourages countries to progressively commit to increasing co-financing over time. On the other hand, the MCC’s requirement is static, set at a specific percentage that does not change over time, and the GEF and GCF do not have any specific requirements for countries. If PEPFAR’s goal is to mobilize additional domestic resources it might consider setting a co-financing level above what a country does now or designing a progressive co-financing policy, along the lines of what Gavi has done (having countries increasingly finance their own programs over time).
6. Allowing for exceptions/waivers. All but one institution (the GCF) includes an explicit provision regarding waivers of co-financing in exceptional circumstances, typically for fiscal or humanitarian crises. Including such a provision is intended to protect countries when they encounter unexpected or protracted difficulties or otherwise face challenging conditions. U.S. law already allows for this in its cost-sharing requirement, albeit only for certain countries. PEPFAR could consider expanding this to apply to any country it supports, if it were to institute a co-financing requirement.
7. Identifying clear measurement, monitoring, and reporting criteria. How institutions measure, monitor, and report on co-financing contributions varies significantly and is generally more stringent if co-financing is required and there are repercussions for non-compliance (see below). For example, for Gavi, measurement and monitoring are based on the actual purchase of vaccine doses by countries. The MCC requires verifiable country records and may conduct on-site monitoring and verification. The Global Fund requires government letters of commitment and monitors commitments based on verified budget or other documentation. The PF, however, more generally states that co-financing will be documented in annual reports. Choosing clear measurement and monitoring, as well as reporting, criteria, will be important for the success and accountability of any new policy.
8. Addressing non-compliance. While all six institutions require co-financing information to be submitted in applications, only three – Gavi, The Global Fund, and the MCC – state that they will take action for non-compliance, including the potential to lose financial support. The other three do not specify any consequences for non-compliance, although the GCF and PF say they score applications, in part, based on submission of co-financing information. Whether PEPFAR decides to include consequences for non-compliance will likely affect the strength of the policy but also could potentially risk adverse consequences on program outcomes (e.g., if non-compliance resulted in loss of funding that threatened vital services). To address this concern, PEPFAR could consider implementing “guardrails” that protect certain services (e.g., antiretroviral treatment) or populations (e.g., key and vulnerable populations) from loss of funding due to country co-financing non-compliance.
9. Piloting or phasing-in a new policy. Because a co-financing policy would introduce a new element to PEPFAR’s relationships with countries, it could consider piloting the requirement in a subset of countries or for a subset of services and/or phasing it in over time. Gavi, for example, explored interim approaches to co-financing a few years before fully implementing its policy for all countries.¹⁰ As part of a pilot, PEPFAR could test whether incentivizing countries, at least in the short term (e.g., by offering additional matching funds for certain services or guaranteeing a certain amount of support for a period of time), might assist in a transition to co-financing, and help mobilize country resources over time.
10. Coordination with other donors. Finally, if PEPFAR were to decide to institute a co-financing requirement, there is a risk that such a policy could overburden countries facing similar requirements from other institutions, and/or create mixed or cross-purpose incentives that could impact health outcomes. Coordinating across institutions would help to mitigate against these risks. In PEPFAR’s case, coordination with the Global Fund would be particularly important, given that both PEPFAR and the Global Fund support many of the same countries in their HIV response.

Whether PEPFAR ultimately decides to institute a new co-financing requirement remains to be seen, although Congress and other stakeholders are increasingly asking the program to identify ways in which it will promote sustainability and less reliance on U.S. government support over time. This analysis of other institutional co-financing policies offers a range of questions and issues for PEPFAR to consider should it move in this direction.