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The Global Fund for AIDS, Tuberculosis and Malaria, an innovative funding mechanism founded in 2002 to fight three killer diseases across the developing world, is currently facing a $4 billion shortfall through 2010, according to the Fund’s Executive Director Michel Kazatchkine. This has led the Global Fund to ask countries to scale back their budgets for the most recent funding round - Round 8 - by 10% ($300 million in total), with the possibility of further cutbacks of up to 25% for the second phase of these 5 year grants if new funding does not come through.

The shortfall in funding to fight disease in the developing world is seriously troubling given the billions and trillions of dollars that developed countries are shelling out to fix their own faltering economies, especially given that many developing countries have few means of dealing with the effects of the global economic crisis on their own. But the crisis may provide the Global Fund with a rare opportunity to truly implement and test the model of performance-based funding that the Fund espouses in principle but has not fully embraced in practice (a forthcoming HIV/AIDS Monitor report will analyze the role of performance in the funding decisions of the Global Fund, PEPFAR, and World Bank MAP).

Consider this: To date, only 6 grants to 5 countries (out of a total of 700 grants to 140 countries) have been discontinued for their failure to achieve results (rather than due to mismanagement of funds). Instead, adjustments to grants have largely been around the margins (poorly performing grants might see small decreases in funding, while well-performing grants may see a small increase in funds). As a result, the consequences for good versus bad performance have not been well established, and the incentives to achieve results are not as strong as they could be.

So here’s a radical idea: Instead of responding to the funding shortfall by asking countries to cut back 10% across the board, why not ask those with poorly performing grants to take the biggest cuts while continuing to fully fund the most effective grants? The Global Fund already has the information it needs to implement a system like this—grants are evaluated over time and given a score from A (meeting or exceeding expectations) to C (unacceptable)—with B1, and B2 in between. Why not, for example, ask those countries with current grants garnering a C rating to make 25% cuts, those scoring B2 to make 15% cuts, and those scoring B1 to make 5% cuts while keeping the A-rated grants fully funded? This could then be applied to Round 8 grants as they roll out instead of asking for an ex-ante 10% across-the-board cut.

Using a differential formula such as this would reiterate the Global Fund’s commitment to a performance-based funding system while enabling it to adapt to a resource-scarce environment. In addition to shifting funds toward the most effective programs, it would create a very strong incentive for countries to improve their performance on Global Fund grants so as to avoid large budget cuts. As a result, we may just start to see an increase in the results that countries achieve with Global Fund money. And if that’s the case—what better way for the Fund to convince donors to increase their contributions than by pointing to a portfolio of ever more successful grants?

And what if stronger performance incentives lead to a majority of grants performing so well that they get rated an A, reducing the amount of money that the Global Fund is able to save? Well, I’m sure that’s a problem the Global Fund, its donors, and (most importantly) the people it serves would love to have…

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.