Good Morning. My remarks today fall into two separate topics; tariffs and medicines and then afterwards, mission creep in aid agency health policy. My main remarks will be on the former topic but I have one slide in this presentation and some key points on the latter.

Tariffs and Access to Medical Interventions

Last summer Kenya dropped its 10% import tariff on essential medicines and medical devices (other port charges still remain unfortunately). The reason for the change is because of pressure from AIDS activists, academics, a couple of pharmaceutical companies as well as good media reporting of the harm of such tariffs.

Under pressure from Kenya’s action other Finance Ministers contemplated such a move. At stake was the access of thousands of the poorest Kenyans to essential medicines. The move was important for hundreds of thousands across East Africa, and perhaps millions across Africa.
 
Unfortunately no country has so far followed suit, although the Indian Government had lowered tariffs earlier in 2005. And Governments should follow Kenya’s move because this is one means by which access to essential medical interventions is limited and sometimes entirely prevented--that is by the imposition of taxes and tariffs on medicines and medical devices in many countries of the world.

Few people in the poorest parts of the world have ready access to good medical supplies. In some countries, (such as Uganda) coverage is quite good in others (such as Nigeria) it is disastrously low. The lack of access costs lives, millions of them. The critical reasons for lack of access are most significantly poverty and the resulting lack of health systems infrastructure, but lack of political will is also an important factor (and something that can be changed almost over night).

As I have discussed before PACHA before, but it is important to remind ourselves, it is the sovereign right of any nation to raise revenue as it sees fit. Having said that--given that so many people in these nations do not have access to the most basic life-saving interventions it does seem odd to slap tariffs on the entry of these products and then tax them--perhaps the most regressive form of policy intervention there is, hurting the sickest, often poorest people in the land. It is my opinion, and that of my colleagues from numerous countries that I am now working with that these regressive policies be repealed instantly. Incidentally, this was also the advice of WHO and HAI from a project started in 2004 on drug pricing in 9 African nations, and a report from WHO economist’s Laing and Olcay last year on tariffs.

My original working paper (and it is very much a paper that is being updated as new data/evidence arises, first publication last April, revised version was out this February) looked at essential drug access as defined by WHO. The list we had to work from was fairly old in order to compare with the available and consistent tariff and tax data. We identified the customs classification of these drugs using an international benchmark namely the Harmonised System (HS) produced by the Customs Cooperation Council. The HS forms the basis by which goods are encoded, trade statistics are developed and from which the customs and excise authorities in various countries compile their tariffs.[1] We looked at various product categories and settled on chapter 29 and chapter 30 categories of the harmonized system. We found partial data for most countries but only reliable data for 53.  We simply averaged the various category weightings to come up with a single figure (some country data were quite disaggregated others were not, so we stuck with the best average we could calculate).

There were a variety of academic disagreements about all the measurement, and we re-analysed the data using a data set that WHO economists had access to and now our analysis uses data from fully 151 countries.

Minor differences remain between WHO’s analysis and our own, but the key point is that it is remarkable for WHO to publish it because it implicitly criticizes member States of the WHO. And vitally Richard Laing comes to the same conclusions as our paper. His conclusions: “ It is vital that policy makers, both at a national and international level, address the issue of tariffs on medicines and recognize the regressive nature of these duties, which ultimately tax the sick without regard for their economic status or ability to afford these medicines. Pharmaceutical tariffs could be eliminated without adverse revenue or industrial policy impacts.”

Many of the poorest African nations impose substantial tariffs and taxes on medical products. As will become clear shortly, note the tariff rates more than the taxes--taxes are regressive, but it’s the tariff numbers that are more important in denying access. Note especially Nigeria and India--countries with large populations, low access and significant tariffs

There are some highlights, well that should be lowlights. Note Iran which has high tariffs and skewed our econometric results and so we had to remove them from the analysis. Morocco and DR Congo have particularly high tariffs (and in the latter’s case it makes up a substantial part of legal revenue for the country. As I mentioned earlier the Eastern African Customs Union imposed a 10% tariff in January (and Kenya has repealed the tariff although other charges remain).

The new more market orientated Indian Government lowered taxes and tariffs from a combined amount of 61%, to about 20% although there is some disagreement as to how much the new policy is being implemented at the state level (this still persists nearly a year after alleged implementation).

Much like the 22 countries party to the pharma agreement of the GATT Uruguay round, the Southern African Customs Union imposes no tariffs on finished medicines, in fact all chapter 30 items. Many countries have low tariffs, although any tariffs probably increase the possibility for corruption given the way that tariff payments are sometimes made--I’ll talk more on that later. Also, ARVs for HIV patients are often exempted--we welcome insights you all may have on these exemptions, or lack thereof in practical settings.

BUT even where ARVs are exempted most drugs for opportunistic infections are often not exempted, and neither are anti-malaria, or anti-TB treatments which are often deadly companion diseases to those with HIV--so celebrating the ARV exemptions is premature. But the fact that pressure on poor countries, as well as, more importantly, their own enlightened self-interest, has exempted products shows that it can be done. Further exemptions should be encouraged.

It is important to note that the funding raised from tariffs and taxes on medical products is not, generally speaking, spent on health care, although it is unclear in many countries, given opacity of spending figures. However, in four countries, Ecuador (1.29%), Lebanon (2.48%), Nigeria (2.49%) and Democratic Republic of Congo (8.24%) pharmaceutical import tariffs generate income equivalent to more than 1% of the total healthcare budget. But even if these funds were actually allocated to health, it is not the most effective method to raise funds anyway. Collecting revenue from personal income tax or sales taxes on non-essential products is more efficient and better method.

Our econometric analysis found that income level was the most significant positively correlated variable determining access to drugs - wealthier countries have far greater access than poorer ones. However, tariff rates are also highly statistically significant as a negative determinant of access--countries with higher tariffs on average have lower access. The key finding was that a lowering of tariffs could lead to an increase in access. And this association was most strong for vaccines, but also true generally for drugs. Vaccines are often donated by Western NGOs and nations and maybe much more sensitive to tariffs.

So its pretty safe to say that tariffs lower access - Recall that Nigeria had a 20% tariff rate a 10% access rate and India a 16% tariff rate and 35% access. These countries are highly populous and if this equation and relationship are causal, as we suspect, then scrapping these tariffs would increase access for millions of people.
 
Sales taxes are negatively correlated with access, much like tariffs, but the relationship is not statistically significant. This is probably because tax payments are collected broadly across an economy, whereas tariffs are indicative of less free (and hence less wealthy) economies. Also, tariffs are often collected in an ad hoc fashion in many countries - ships docking and charges collected locally allowing for some level of corruption in many locations. Furthermore revenue is received by small autonomous customs and excise units, which makes bribery/kick-backs etc. more possible.

One of the findings of the Laing WHO paper was that the amount of money raised by tariffs and the benefit to local producers of import substitutes (this is probably more often companies producing devices--bandages, sterilized gloves etc. than local pharma producers) would not be significant and therefore was not a reason for the tariffs to remain. Unfortunately, while this is true if one were looking at what was most beneficial for a country, it is not true in the real world, where selected individuals and firms can benefit hugely from the political process. Tariffs always benefit someone--and the defenders of tariffs were usually well-organized to have promoted them in the first place and are often entrenched. So it requires a consistent and broad-based campaign to get change.

A point I have not stressed before but I am looking into today is the impact that tariffs have on the supply chain as a whole. In some countries the Government mandates mark-ups for wholesalers, retailers (often pharmacies) and other end of chain providers. The amounts can be shockingly high, 40-60% in some instances. Depends on the services given whether this is a fair markup, but the point for me is that these markups build on existing pricing, so tariff may elevate a price 10% but then this elevation has impact throughout the entire chain.

Further ongoing analysis shows an interesting and worrying positive association between tariffs and corruption indices--it is not statistically significant but relationship is strongly positive, and the lack of significance may be due to a paucity of good data.

Tariffs provide additional bureaucratic hurdles such as increased time spent by legal personnel to get shipments through, delays of customs approval increasing other costs (freight costs of donors/traders), bribes demanded and extorted to get products into countries. The impact of all this is higher costs and often temperamental products going bad (poorly refrigerated products--antibiotics- spoiling on docks)

I am currently investigating this topic for its impact on pricing and delays.

Although the impact of taxes is not as obviously detrimental to access they do place a burden on patients. We looked at the tax paid on the average cost of ARVs in South Africa. It amounts to about $12 a month. The food list is what could be bought for that amount on a monthly basis. ARVs are expensive medicines, but at the margin even taxing cheaper drugs, (remember a 14% VAT rate in South Africa, and the taxes levied elsewhere of 20% in many African countries), hit the poor and malnourished patients - these sales taxes should be scrapped since they are so regressive.

A less well documented problem is the non-tax and non-tariff barriers. While there is no doubt that drug safety is a vital issue, and rigorously testing new drugs or drug combinations is important--the furor over generic non-FDA approved FDC ARVs is obvious here--it does seem that many countries are delaying unnecessarily the approval of new drugs. South Africa here is an example of delay costing lives. Namibia requiring the re-registering of all drugs was madness.

With the apparent resolution of the TRIPS issue at WTO, I had pushed for the promotion of removal of tariffs on life-saving interventions. With support from NGOs and AIDS groups in particular--thank you for PACHA’s support in this regard--USTR took the issue up in February.

Along with the Swiss and Singaporean Governments USTR has launched a sectoral initiative as can be seen from the following quote:

But this isn’t enough. I spoke for USTR in Geneva last month and there is opposition, and as importantly inertia at WTO. The entire Doha round may fail and this issue is important to USTR but its not the make or break issue for Doha.

We need more pressure for change from all US funding sources to development. Senators Brownback, Landrieu and Inhofe introduced a bill on neglected diseases, which is floundering in the Senate - section 9 of the bill if it became law would prevent US donations from going to countries which impose tariffs (this section could be adopted in other legislation to encourage the best use of US donations). The bill argues that these interventions are not needed, only protect industries that could do better from being exposed to competition, and harm the poorest. We need this bill’s clause 9 used elsewhere. So any more help that PACHA can give in support of this appreciated.

Incidentally Dr Mark Dybul has helped me send out a questionnaire I designed to all field personnel working with PEPFAR (he knows that although tariffs are not supposed to be charged on these donations, bribes are sometimes extorted, especially from NGO groups, which do not have the power of the USG in opposing them). You can see the types of questions we’re asking. We hope for responses and soon (I expect a draft of new research, which we’ll use at WTO in a month, or maybe July at latest.

Mission Creep

More briefly I am now going to discuss mission creep at various agencies/programs that work on health. This is a long way from comprehensive, its just an introduction, but since this problem is significant I urge PACHA to analyse this more closely--most significantly there is increasing evidence that efforts in HIV work are indirectly damaging systems in some of the poorest countries.  When it comes to mission creep the two most obvious countries to discuss are the World Bank and World Health Organisation.

The first thing to appreciate is that I believe both of these organizations have done important work before and will do so again. But they have encountered significant problems over the past few years, and some of that is down to mission creep.

These two groups came out of meetings at Bretton Woods and the establishment of the United Nations Organizations towards the end of or immediately after the Second World War.

The Bank’s aim was to promote development and reduce poverty around the world, the WHO to combat disease (notably the horrific diseases largely of the tropics). To this end the Bank helped countries with health financing (to ensure countries finances were enhanced to improve healthcare) and helping to improve infrastructure (building hospitals, and the power and running water they require), the WHO ran vertical disease programs, sometimes financed by the Bank, and advised Governments about disease control.

The WHO conducted commando like insurgencies into countries with foreign doctors to dispense immunization, spray villages to kill insects transmitting malaria, dengue etc. provide medicines and train locals to do likewise. By 1970s it became obvious that with a few exceptions (Small pox eradication being the most famous) it was impossible to sustain the vertical interventions without either constant donor effort (which was objected to because of charges of neo-imperialism) or better health infrastructure and endogenous changes of the governments themselves.

The Bank was finding that it was hard to persuade unstable, and potentially unstable, country leaders, which was a vast array of recipient countries, to invest in its own health care systems when they feared, or even desired, conflict. While success occurred in some places funding often went on arms expenditure, ‘hero’ projects of dictators--the archetypal palace for tens of millions while the people starve - and Swiss bank accounts.

What was missing therefore was health system development in many countries. The WHO established a health for all target in 1978 and to achieve the target it decided to move more into horizontal development (the building of the health systems), but without the funds required it simply became overly stretched and dropped many of its vertical disease programs. The Bank in the 1990s became frustrated that the funding they were providing for health systems development wasn’t being used properly, or at least well enough to demonstrate results to increasingly wary and fatigued donors. The Bank decided to become more involved in disease control--in fact I believe HIV was one of its first ventures, more recently its disastrous foray into malaria (I was one of the authors of last week’s paper to the Lancet which was highly critical of the Bank’s malaria work).

As mentioned one of the reasons for the Bank’s move was donor pressure, but also because its frustrating funding projects with few tangible results, and disease programs have the potential to provide quick tangible results. Malaria programs can demonstrate drastic reductions in disease (of up to 70%) in less than two years--but without endogenous changes they will not sustain.

The upshot of this is that over the past 10 years, there has been a blurring of the roles of the Bank, WHO and more recently Global Fund (no doubt you’ve seen the Shakow report, which explains the overlapping roles (and therefore, unfortunately, competition between the Bank and Global Fund). Indeed the failure of health aid in many locations led to the development of the new entities PEPFAR, Global Fund and even MCC.

There are dangers, even for the issue of HIV, that concerns this Council, that competition between agencies and overlap of missions, without accountability can cause major problems.

Sierra Leone provides a stark reminder of this fact, with HIV spending overwhelming the rest of the health budget. In 2004 $8m was spent on HIV, while the rest of the health budget was $6m (for over 1 million people). With child immunization being a vastly cheaper and arguably far more important health priority for this country where HIV rate is perhaps 6% (although 25% in the military). This economist at least would say that 65% spent on HIV is way too much of that budget - given the much cheaper and badly needed interventions required in that wretched country.

Of course, and here’s the rub, the budget wouldn’t be so large were it not for interest in HIV. But from available data (leaked to me from agencies that do not want to upset their primary donor--the USG) the budget should be re-allocated away from HIV, but this won’t happen. The danger is that doctors and nurses and other healthcare professionals are paid far more to work on HIV than child immunization and so naturally some move to this work. Those of us who care about combating HIV should be careful that our urgency to help those afflicted with the virus are not going to die of measles, or malaria, or most likely dysentery, because no one is paying attention to these diseases. Sierra Leone is extreme, but it is not unique.

Agencies are competing where their approach should be complementary. And this should change. For starters the old agencies should get back to their respective missions. But the reason I dwelt on the history is that it takes a long time to turn around policy at these large agencies, and it will require advocates of combating specific diseases to get involved. I am a Director of a health advocacy group Africa Fighting Malaria, and care about the disease a great deal, but if you note in the Lancet paper we suggest that the World Bank get out of malaria control, for lack of competence and transfer budget to those agencies with more competence. Part of combating mission creep means HIV groups stopping agencies spending money on their disease so that health systems can be built, and pushing existing agencies that are supposed to work on the disease to stop getting involved with topics they have little competence at and get back to doing what they are paid to do.

Note

1. There are 23 major sections of the HS, containing a total of 98 chapters which have 1 241 main 4-figure headings. Theses headings are further divided into approximately 5000 subheadings or codes. The headings and subheadings in the HS are mandatory and cannot be changed. However, each national authority can extend the codes and add any subdivisions, which it may find necessary.