The AfCFTA and the procurement of pharmaceuticals and vaccines

Abudu, Derrick; Ayele, Yohannes Research Report The AfCFTA and the procurement of pharmaceuticals and vaccines ODI Report Provided in Cooperation with: ODI Global, London Suggested Citation: Abudu, Derrick; Ayele, Yohannes (2024) : The AfCFTA and the procurement of pharmaceuticals and vaccines, ODI Report, ODI, London, https://odi.org/en/publications/the-afcfta-and-the-procurement-of-pharmaceuticals-and-vaccines/ This Version is available at: https://hdl.handle.net/10419/314362 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0/ The AfCFTA and the procurement of pharmaceuticals and vaccines Derrick Abudu and Yohannes Ayele October 2024 Supporting Investment and Trade in Africa (SITA) Report ODI Report 2 Readers are encouraged to reproduce material for their own publications, as long as they are not being sold commercially. ODI requests due acknowledgement and a copy of the publication. For online use, we ask readers to link to the original resource on the ODI website. The views presented in this paper are those of the author(s) and do not necessarily represent the views of ODI or our partners. This work is licensed under CC BY-NC-ND 4.0. How to cite: Abudu, D. and Ayele, Y. (2024) ‘The AfCFTA and the procurement of pharmaceuticals and vaccines. ODI Report. London: ODI (https://odi.org/en/publications/the-afcfta-and-the-procurementof-pharmaceuticals-and-vaccines) ODI Report 3 Acknowledgements This report has been prepared under the Supporting Investment and Trade in Africa (SITA) programme, an initiative funded by UK International Development from the UK government to support the negotiations and implementation of the African Continental Free Trade Area (AfCFTA). All views provided are those of the authors and not the responsibility of ODI, the AfCFTA Secretariat or the UK Government. The authors would like to thank Mr Themba Khumalo and Kirti Narsai for their comments. About the authors Derrick Abudu is a Senior Research Officer at ODI. Yohannes Ayele is a Senior Research Officer at ODI. ODI Report 4 Contents Acknowledgements ...................................................................................... 3 Acronyms ..................................................................................................... 5 Executive summary ...................................................................................... 6 1 Introduction ...................................................................................... 9 2 Analysis of pharmaceutical and vaccine initiatives on continental procurement ................................................................................... 11 Pooled pharmaceutical initiatives at continental level .................... 11 Modes of pooled procurement ....................................................... 13 Regional bloc pooled procurement experiences ............................ 14 2.3.1 Southern African Development Community ................................... 14 2.3.2 East African Community ................................................................. 14 2.3.3 Gulf Cooperation Council Group Purchasing Program .................. 15 2.3.4 Pan American Health Organization ................................................ 15 2.3.5 Organisation of Eastern Caribbean States ..................................... 15 3 Assessment of continental and AfCFTA policies and protocols ..... 16 Trade within Africa and with the rest of the world in critical products.16 3.1.1 Intra-Africa pharma and vaccine trade ........................................... 18 3.1.2 Tariffs ............................................................................................. 20 Rules of origin on pharmaceuticals and vaccines .......................... 20 3.2.1 Rules of origin for pharmaceuticals under the AfCFTA .................. 21 3.2.2 Possible actions to support continental-level procurement ............ 22 Protocol provisions in relation to rules and procedures in the AfCFTA ....................................................................................................... 23 3.3.1 AfCFTA protocols for trade in goods and services ......................... 23 3.3.2 Protocol on rules and procedures on the settlement of disputes ... 24 3.3.3 Protocols on investment, intellectual property rights and competition policy .............................................................................................. 24 Pharmaceuticals standards, their harmonisation and/or mutual recognition arrangements .............................................................. 25 3.4.1 Procurement of pharmaceuticals ................................................... 26 3.4.2 Harmonisation regulations ............................................................. 27 4 Crosscutting issues and synergy assessment ............................... 29 Poverty impact ............................................................................... 29 Climate and environment ............................................................... 30 Gender ........................................................................................... 31 5 Policy recommendations ................................................................ 33 References ................................................................................................. 37 Appendix 1 HS classifications for selected vaccine-related inputs ........ 41 ODI Report 5 Acronyms AfCFTA African Continental Free Trade Area Afreximbank African Export-Import Bank Africa CDC Africa Centres for Disease Control and Prevention AIDS Acquired Immune Deficiency Syndrome AMA African Medicines Agency AMRH African Medicines Regulatory Harmonization API active pharmaceutical ingredients ARSO African Organisation for Standardisation AU African Union BADEA Arab Bank for Economic Development in Africa ∆CC change of chapter ∆CTH change of tariff heading ∆CTSH change of tariff sub-heading CPPM Centralised Pooled Procurement Mechanism CTC Change in Tariff Classification EAC East African Community ECDS Eastern Caribbean Drug Service EU European Union GCC GPP Gulf Cooperation Council Group Purchasing Program GHG greenhouse gas GPO group purchasing organisation HIV Human Immunodeficiency Virus IPR intellectual property rights ITFC International Islamic Trade Finance Corporation MFN most-favoured nation OECS Organisation of Eastern Caribbean States PAHO Pan American Health Organization R&D research and development RoOs rules of origin SADC Southern African Development Community SP Specific Production SPPS SADC Pooled Procurement of Pharmaceuticals Services UNECA United Nations Commission for Africa UK United Kingdom US United States VA Value Added WITS World Integrated Trade Solution ODI Report 6 Executive summary Prices of essential medicines are significantly higher in many African countries compared with the lowest international reference levels. One of the reasons for this is buyer fragmentation and lack of domestic pharmaceutical manufacturing capacity. Efforts are underway to coordinate the procurement of vaccines and other pharmaceutical products across the continent to capitalise on cost advantages. Simultaneously, there is a concerted effort to develop continental value chains within the pharmaceutical sector, encompassing multi-step production processes, including the sourcing of raw materials. The African Continental Free Trade Area (AfCFTA) can play a pivotal role in facilitating these endeavours, thereby contributing to the advancement of the pharmaceutical sector in Africa. This report benefits from the collaboration with the Nelson Mandela School of Public Governance of the University of Cape Town aimed at developing a continental strategy for the development of the pharmaceutical industry under the AfCFTA (UCT-ODI, 2024). In this sense, both reports feed each other with information and insights. The AfCFTA provides tariff-free access to African markets for firms that meet its rules of origin (RoOs). However, products that do not meet RoO criteria are subject to tariffs. Complying with RoOs incurs costs: firms must compare the preferential tariffs under the AfCFTA with the costs of compliance. Our analysis indicates that the RoOs for pharmaceutical products are moderately restrictive. Additionally, African countries impose either zero or very low most-favoured nation (MFN) tariffs on pharmaceutical and vaccine products. Consequently, the preferential tariff benefits for firms meeting RoOs under the AfCFTA are minimal. Firms may opt to trade under MFN tariffs regardless of RoO restrictiveness, with positive implications for pooled procurement. Given these low tariff rates, the pooled procurement initiative may remain largely unaffected by RoOs. Waiving the RoO requirement for pharmaceutical and vaccine products could further simplify procurement. Conversely, RoOs could influence initiatives to produce pharmaceutical and vaccine products within Africa. RoOs affect sourcing decisions for intermediate inputs and the development of regional value chains. Strict RoOs may encourage sourcing within the AfCFTA, whereas lenient RoOs may lead to sourcing from ODI Report 7 outside the region, potentially hindering regional value chains. For vaccine ingredients and packaging, several African countries impose higher MFN tariffs, creating significant preferential margins if these inputs are sourced or produced within Africa. This incentivises pharmaceutical producers to source inputs within the AfCFTA and encourages non-African firms to relocate to Africa, fostering local pharmaceutical manufacturing and regional value chains. Balancing RoOs and tariffs are crucial to support pooled procurement initiatives and the development of local manufacturing in Africa. Therefore, a careful balance must be maintained in this context. Furthermore, negotiating the relaxation of the current RoOs for pharmaceutical products in pooled procurement scenarios could allow for the importation of goods without strict adherence to RoO requirements, thus easing trade across borders. Moreover, it may be important to consider the implementation of self-certification for RoOs. Currently, RoO certification must be carried out by an approved exporter or a designated competent authority of the exporting state party. This process can be burdensome and time-consuming, particularly for small and medium-sized enterprises. Introducing self-certification, currently limited to consignments valued below $5,000, could substantially reduce the expenses linked with RoOs for traders. Reducing tariffs and non-tariff barriers on imported critical pharmaceutical components like active pharmaceutical ingredients (APIs) will foster the cost-competitiveness of producers of critical final health products. Common external tariffs could be necessary to protect African producers and achieve the goal of boosting trade and economic integration. However, they may also hinder the growth of the pharmaceutical sector, given limited production capacity, particularly for APIs. Therefore, decreasing tariff barriers on imported essential pharmaceutical components like APIs could be economically advantageous in the short to medium term. This measure aims to support producers in attaining cost-competitiveness in manufacturing critical healthcare products. Additionally, unnecessary technical barriers, in the form of non-tariff barriers such as non-coherent medicine regulations, weak medicine regulatory capacity and fragmentation of standards across countries, hampers pharmaceutical production and trade. To this end, the effectiveness and efficiency of the African Organisation for Standardisation (ARSO) and the African Medicines Regulatory Harmonization (AMRH) programme is crucial to creating a regulatory environment and guaranteeing standards to foster the advancement of the pharmaceutical industry. Specifically, rapidity and effectiveness in the adoption of standards and technical regulations ARSO is currently implementing as part of its Standards for Pharmaceutical and Medical Devices in Africa Project will ODI Report 8 significantly support expanded production and intra-African trade in quality pharmaceutical products. Adopting capacity-building measures will boost the technical capacity of procurement bodies and border management authorities. Improving the technical capacities of buyers or procurers will be crucial. Such capacities, especially those related to forecasting potential demand and assessing the health product needs of a particular demographic group or population, are vital. Capacity-building here will contribute to the timely procurement of health products, especially urgently needed ones like vaccines during times of health crisis. To enhance the efficiency of cross-border trade facilitated by pooled procurement, the technical capacities of personnel responsible for cross-border trade, crucially, border management authorities, should be improved. ODI Report 15 2.3.3 Gulf Cooperation Council Group Purchasing Program The GCC GPP, initiated in 1997 among seven Persian Gulf states (with Yemen joining in 2004), jointly issues tenders for vaccines, drugs and medical goods. This programme addresses the challenge of high prices and the difficulty of procuring the small quantities that countries require. The pooled procurement model is a ‘group contracting’ programme whereby countries independently contract with and pay producers once the group has selected the winning bids. The programme has issued 10 tenders involving nearly 8,900 different products valued at $508 million in 2003 and has been increasing. It has successfully cut costs and ensured a consistent and sufficient supply of vaccines for member countries. 2.3.4 Pan American Health Organization The PAHO Revolving Fund was established in 1979 to enhance immunisation programmes across the Americas. It procures supplies on behalf of more than 35 countries in Latin America and the Caribbean. The pooled procurement model is the ‘central contracting' model, which manages most aspects of procurement, from tendering to contracting with and paying producers. It uses a common fund to compensate producers before reimbursement by countries upon receipt of goods. The programme has successfully reduced costs and ensured a consistent supply of medicines. 2.3.5 Organisation of Eastern Caribbean States The OECS established the Eastern Caribbean Drug Service (ECDS) in the late 1980s, comprising nine small island nations. The ECDS procures pharmaceuticals and medical supplies for the nine ministries of health of the OECS countries. It uses a centralised contractual purchasing model. The ECDS operates a centralised, restricted tendering system, pre-qualifying all approved suppliers through a registration questionnaire. It solicits bids from international suppliers, awards annual contracts, places orders directly with suppliers and monitors delivery and supplier performance. Parmaksiz et al. (2022) conducted a systematic review of various studies on the pooled procurement of medicines and vaccines to identify the key elements of success. They identified several essential factors necessary for the effective functioning of pooled procurement mechanisms. First, for participation in pooled procurement, buyers require adequate levels of technical and financial capacity, and compatible laws and regulations. Second, for the execution of pooled procurement, the organisation must possess sufficient financial and technical expertise, and operate independently. Third, to ensure the provision of health commodities to the mechanism, suppliers need adequate incentives, such as a sufficiently large market size and a prompt payment mechanism. ODI Report 16 3 Assessment of continental and AfCFTA policies and protocols Trade within Africa and with the rest of the world in critical products Africa relies heavily on imports of pharmaceutical and vaccine products from the rest of the world. Figure 1 shows the dynamics of extra-Africa exports and imports in pharmaceuticals and vaccine products as well as critical vaccine inputs. Over the past decade, there has been a consistent increase in these imports. In 2021, Africa imported a substantial $17 billion worth of pharmaceutical products from outside the continent, a significant rise from $6.6 billion in 2017. The surge in vaccine imports in 2021 was driven significantly by the COVID-19 pandemic. Conversely, Africa’s exports to the rest of the world amounted to only $0.9 billion in the same year. This results in a considerable trade deficit in pharmaceutical products and vaccines. This deficit has been on the rise over the past two decades. Figures 2C and 2D show imports and exports of vaccine-related inputs by category from the rest of the world.3 Most of the imports consist primarily of packaging materials rather than ingredients for further processing. The majority of vaccine-related inputs in exports and imports pertain to secondary packaging for vaccine administration and packaging materials for storage and distribution. India is Africa’s main source of imports for pharmaceutical products (Figure 3). In 2022, African imports from India were at $3 billion, covering 21% of the continent’s total imports. This was followed by imports from France, at $1.2 billion (11%) and from Germany and the US, each at $1.2 billion (8%). These four countries account for close to 50% of Africa’s pharmaceutical imports. Except for in India, almost all imports are mainly from advanced countries’ economies such as the EU and the US. Belgium and the US are the main sources of vaccine imports for Africa, each covering 28% and 16% of vaccine imports in 2022. 3 See Appendix 1 for the list of selected vaccine-related inputs considered in this study. ODI Report 17 Figure 2 Extra-Africa trade in pharmaceutical and vaccine products, 2012–2022 ($ million) A. Pharmaceutical products B. Vaccines C. Exports of vaccine-related inputs D. Imports of vaccine-related inputs Source: Authors’ elaboration from WITS database Figure 3 Sources of imports for pharma products (extraAfrica), 2022 (%) A. Sources of pharma imports B. Sources of vaccine imports Source: Authors’ elaboration using (2022) data from the WITS database -20,000 -15,000 -10,000 -5,000 - 5,000 10,000 15,000 20,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Balance Export Import -4,000 -3,000 -2,000 -1,000 - 1,000 2,000 3,000 4,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Balance Export Import - 200 400 600 800 1,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Secondary packaging-Vaccine administration Secondary packaging-Storage and distribution Primary packaging Ingredients - 1,000 2,000 3,000 4,000 5,000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Secondary packaging-Vaccine administration Secondary packaging-Storage and distribution Primary packaging Ingredients 0 5 10 15 20 25 India France Germany United States Belgium China Switzerland Netherlands Italy Ireland Denmark Spain United Kingdom Rest of the World 010 20 30 Belgium United States China Netherlands India France Denmark Hong Kong, China Germany Korea, Rep. Ireland Rest of the World ODI Report 18 Figure 4 shows extra-Africa pharmaceutical and vaccine product exports and imports by individual African countries. It shows that South Africa and Egypt are the predominant exporters of pharmaceutical and vaccine products from Africa to the rest of the world (extra-Africa exports). These two nations alone accounted for over 75% of Africa’s exports in 2022. Over 2015–2022, they collectively represented more than two-thirds of the continent’s exports globally. Specifically, in 2022, South Africa exported pharmaceutical products totalling $420 million, while Egypt exported $283 million worth of products to international markets. Both Egypt and South Africa are also the two largest importers of pharmaceutical products within the continent. Egypt imported products valued at $3.5 billion, while South Africa imported goods worth $2.5 billion. Following closely behind as top importers are Nigeria ($1.1 billion), Morocco, and Ethiopia (each at $0.8 billion). Figure 4 Africa pharmaceutical exporters and importers countries (extra-Africa) A. Export B. Import, 2022 Source: Authors’ elaboration from WITS database 3.1.1 Intra-Africa pharma and vaccine trade The intra-Africa pharmaceutical and vaccine trade is not significant. For instance, in 2021, the intra-Africa trade of pharmaceutical products amounted to $536 million; vaccine trade was smaller, at $51 million, in the same period. A significant portion of pharmaceutical products is exported within the continent. For instance, in 2021, approximately 35% of Africa's global exports were traded within Africa. However, this is a decline in 2012, when more than 70% of pharmaceutical Africa's exports were intra-continental. Regarding vaccine-related inputs in intra-Africa trade, Figure 5 illustrates that a substantial share of intra-Africa exports is related to 0 10 20 30 40 50 60 70 80 90 100 2015 2016 2017 2018 2019 2020 2021 2022 % Egypt Kenya Morocco Rest of Africa South Africa Tunisia 02,000 4,000 Egypt South Africa Nigeria Morocco Ethiopia Kenya Tanzania Angola Tunisia Cote d'Ivoire Zambia Senegal Burkina Faso Mozambique Congo, Dem. Rep. Rest of Africa $ million ODI Report 19 packaging and vaccine administration products, while trade in ingredients remains minimal. In 2021, total exports in intra-Africa trade amounted to $807 million. However, only $11 million of this constituted ingredients, with the remainder comprising primary and secondary packaging and vaccine administration products. Intra-Africa pharmaceutical exports are driven predominantly by a few countries. South Africa leads, with exports totalling $307 million, comprising 57% of the total intra-Africa pharmaceutical trade. Kenya follows with $98 million, accounting for 18%. Although Egypt is a major exporter of pharmaceutical products globally from Africa, its share of exports to Africa stands at just 5%. Figure 5 Intra-Africa pharmaceutical trade A. Africa intra-pharmaceutical products exports B. Africa intravaccine-related inputs exports C. Intra-Africa pharma exporters, 2021 D. Share of pharma imports from Africa, 2021 Source: Authors’ elaboration from WITS database In terms of critical vaccine-related inputs in intra-Africa exports, South Africa maintains its leading position, with exports valued at $291 million. Rwanda and Morocco follow, with $88 million and $84 million, respectively. Tunisia and Egypt emerge as major exporters of vaccine-related inputs; however, the majority of their exports are directed outside of Africa rather than within. A handful of countries import a portion of their total pharmaceutical products from Africa. Namibia has 46% of its imports originating from 0 10 20 30 40 50 60 70 80 0 100 200 300 400 500 600 700 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 % $ million Export share of africa export that goes to africa (%) 0 200 400 600 800 1000 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Secondary packaging-Vaccine administration Secondary packaging-Storage and distribution Primary packaging Ingredients 0100 200 300 400 South Africa Kenya Uganda Egypt Morocco Botswana Tunisia Rest of Africa $ million 010 20 30 40 50 Namibia Botswana Eswatini Lesotho Zimbabwe CAR Zambia Comoros Seychelles % ODI Report 20 Africa; Botswana follows closely with 40%. Eswatini and Lesotho import 29% and 28% of their total pharmaceutical products from Africa, respectively, with Zimbabwe close behind at 26%. These countries are located in Southern Africa. 3.1.2 Tariffs Several countries in Africa impose tariffs on imported pharmaceutical products. Table 1 reports the average applied most-favoured-nation (MFN) tariff on pharmaceutical products and inputs for 2021. Twenty African countries maintain a zero-applied MFN tariff. The rest impose tariffs. Morocco has the highest tariffs, at 12.9%, followed by Algeria at 4.9% and Ethiopia at 4.2%. Table 1 Pharmaceutical product tariffs Country Pharma Vaccine Vaccine-related inputs Ingredients Primary packaging Secondary packaging – storage and distribution Secondary packaging – vaccine administration Algeria 4.9 2.5 15.0 22.5 21.0 21.7 Angola 0.5 0.0 0.0 13.0 35.0 0.0 Benin 0.0 0.0 5.0 10.0 12.4 5.0 Botswana 0.3 0.0 0.0 7.4 9.7 5.0 Burkina Faso 0.0 0.0 5.0 10.0 12.4 5.0 Burundi 0.6 0.0 1.7 17.5 18.1 0.0 Cape Verde 0.7 0.0 0.0 7.5 3.1 0.0 Comoros 0.0 0.0 20.0 12.5 9.2 0.0 Côte d'Ivoire 0.0 0.0 5.0 10.0 12.4 5.0 Eswatini 0.3 0.0 0.0 7.4 9.7 5.0 Ethiopia 4.2 0.0 10.4 25.0 12.2 5.0 Gambia, The 0.0 0.0 5.0 10.0 12.4 5.0 Ghana 0.0 0.0 5.0 10.0 12.4 5.0 Guinea 0.0 0.0 5.0 10.0 12.4 5.0 Guinea-Bissau 0.0 0.0 5.0 10.0 12.4 5.0 Kenya 0.6 0.0 1.7 17.5 18.3 0.0 Lesotho 0.3 0.0 0.0 7.4 9.7 5.0 Liberia 0.0 0.0 5.0 10.0 12.4 5.0 Libya 0.1 0.0 5.0 5.0 3.9 0.0 Madagascar 0.0 0.0 4.2 14.4 7.6 0.0 Malawi 0.2 0.0 0.0 17.5 13.8 0.0 Mali 0.0 0.0 5.0 10.0 12.4 5.0 Mauritania 0.0 0.0 5.0 10.0 11.2 5.0 Mauritius 0.0 0.0 0.0 0.0 0.4 0.0 Morocco 12.9 10.0 9.4 29.2 17.4 2.5 Mozambique 0.0 0.0 1.7 13.8 10.0 5.0 Namibia 0.3 0.0 0.0 7.4 9.7 5.0 Niger 0.0 0.0 5.0 10.0 12.4 5.0 Nigeria 0.0 0.0 5.0 10.0 12.4 5.0 Rwanda 0.6 0.0 1.7 17.5 18.1 0.0 Senegal 0.0 0.0 5.0 10.0 12.4 5.0 Seychelles 0.0 0.0 0.0 5.0 0.0 0.0 Sierra Leone 0.0 0.0 5.0 10.0 12.4 5.0 South Africa 0.3 0.0 0.0 7.4 9.7 5.0 Tanzania 0.6 0.0 1.7 17.5 18.1 0.0 Togo 0.0 0.0 5.0 10.0 12.4 5.0 Uganda 0.6 0.0 1.7 17.5 20.0 0.0 Zambia 0.3 0.0 5.4 13.5 18.8 0.0 Zimbabwe 3.8 0.0 4.2 16.9 29.6 2.5 Source: Authors’ elaboration from WITS database Rules of origin on pharmaceuticals and vaccines The AfCFTA provides tariff-free access to Africa’s markets provided firms meet the RoOs outlined in the Agreement. The aim of the RoOs ODI Report 21 is to provide preferential tariff benefits exclusively to AfCFTA member nations while preventing trade diversion from non-member countries. Consequently, products failing to meet RoO requirements are subject to tariffs. However, challenges arise in the context of the initiative on pooled procurement for pharmaceutical products at the continental level. Pharmaceutical products may be procured either within Africa or from outside the continent. If the pooled procurement is from manufacturers and products produced within Africa and all meet RoO requirements, this does not pose an issue for the pharmaceutical initiative. Implementation of the AfCFTA will facilitate this process. However, it is improbable that all pharmaceutical and vaccine production within Africa will meet the RoOs outlined in the Agreement. This is primarily because of the global nature of pharmaceutical and vaccine production, which relies on multiple ingredients and value chains spanning across the globe. Also, Africa imports a significant portion of its pharmaceuticals and vaccines from outside Africa. If pharmaceutical products are procured from outside Africa as part of pooled procurement, they do not meet RoO requirements and are thus subject to tariffs. In addition, in 2022, over 20 African countries still impose tariffs on pharmaceutical products. This highlights how RoO origin requirements for pooled procurement of pharmaceutical products can have significant impacts on trade, especially in scenarios involving inter-country trade. The extent of this impact varies based on the chosen procurement mode. Stringent and costly RoOs have the potential to hinder trade in pharmaceutical products among African countries, thereby affecting regional pharmaceutical and vaccine procurement initiatives. 3.2.1 Rules of origin for pharmaceuticals under the AfCFTA Under the AfCFTA, product-specific RoOs are set at the 6-digit HS code level. For pharmaceutical products, the RoOs stipulate ‘Manufacture from Materials of any Heading, except that of the Product or Manufacture in which the value of the Materials used does not exceed 60% of the ex-works price of the Product or Chemical processing rules as per Introductory Note 8 to this Appendix.’ This implies that traders or firms have the option to choose between Change in Tariff Classification (CTC), Value Added (VA) or Specific Production Process (SP) to comply with the rules. In other words, there must be a sufficient production process to claim origin. These rules apply to all pharmaceutical products in the AfCFTA. The CTC rule requires substantial transformation in production leading to a change in tariff classification from non-originating materials used when exported as a final product. The VA rule sets a limit on the maximum non-originating value that can be used for an ODI Report 22 exported product. Under this rule, the maximum value of nonoriginating materials is defined. The SP rule grants originating status to a good if it has undergone a specific production process, specifying a set of production processes necessary for a good to be considered originating. The challenge for firms in meeting RoOs for pharmaceutical products varies depending on the specific firm and product. However, existing literature, including works by Estevadeordal (2000), Anson et al. (2005) and Cadot et al. (2006), indicates that RoOs based on changes of chapter (∆CC) are more stringent compared with those based on changes of heading (∆CTH), which, in turn, are more restrictive than rules based on changes of subheading (∆CTSH). Currently, one of the criteria for meeting RoOs is a change in heading. Additionally, the VA requirements, where the value of materials used should not exceed 60% of the ex-works price of the product, signify that a significant portion of the value added in the manufacturing process originates from within the country or region where the product is claimed to be manufactured. The difficulty level in complying with the SP rule can vary significantly across industries but it specifies a set of production or chemical processes sufficient for the product to be considered origin. In summary, these rules indicate that meeting RoO requirements for firms is not easy. In addition to product-specific RoOs, there are also regime-wide RoOs, which are applied to all goods traded under the AfCFTA. These are not specific to any product. Some of these regime-wide RoOs offer flexibility to the product-specific RoOs, including de minimis (or tolerance) and cumulation. The de minimis rule provides leniency in RoOs by permitting the use of a small percentage of nonoriginating materials in production. This means that, even if a product does not meet the product-specific RoO criteria for preferential tariff treatment, it may still qualify as originating under the broader de minimis RoO criteria. The cumulation rule allows producers within a free trade area to utilise inputs from other member countries without losing the preferential status of the final product. In bilateral cumulation, an originating input from one country retains its origin status when used in another country's production process. In diagonal cumulation, originating inputs from each member country are considered to originate from inputs in other member countries. The AfCFTA allows diagonal cumulation, treating all African countries as a single territory for origin determination. Consequently, any product that has obtained origin status in any part of the area covered by the AfCFTA will be deemed as originating in another country when used as an input in producing another product. These rules provide support for initiatives such as pooled procurement. 3.2.2 Possible actions to support continental-level procurement ODI Report 23 One possible solution to support the pooled procurement initiative under the AfCFTA arrangement is the option to negotiate relaxation of the current RoOs for pharmaceutical products in pooled procurement scenarios or outline alternative RoOs origin or procedures for determining eligibility for tariff preferences. This may permit the importation of products without the need to strictly meet the usual RoO requirements, facilitating trade across borders. Protocol provisions in relation to rules and procedures in the AfCFTA The AfCFTA has protocols that can facilitate increased production, trade and investment, which could contribute to economic development. This is because, as for other priority industries of the AfCFTA, the provisions and objectives of these protocols seek to support the development of a robust pharmaceutical industry. Expanding the pharmaceutical industry will be crucial as Africa has a high disease burden and limited access to medicines and is still highly import-dependent for its pharmaceuticals. Thus, if successfully implemented, the protocols can bolster access to affordable, highquality, efficacious pharmaceutical products. 3.3.1 AfCFTA protocols for trade in goods and services The AfCFTA protocols for trade in goods and services were negotiated in the initial stages (phase I) of the Agreement, with discussions centred on areas like tariff schedules and RoOs and services such as transportation and business services. As detailed in Article 3 of the AfCFTA Agreement, the protocols advocate for the gradual removal of tariff and non-tariff barriers, paving the way for a liberalised product market. Thus, they can bolster intra-African trade in pharmaceuticals. Creating a substantial regional market has the power to attract more manufacturers, thereby expanding the size of Africa’s pharmaceutical industry. To put things in context, the market size of Africa’s pharmaceutical industry, gauged as the value of the industry, was estimated to be between $40 billion and $60 billion in 2020, which is pale compared with those of the US (estimated value of $393 billion) and Japan ($123 billion) (McKinsey & Company, 2015). The small size of Africa’s pharmaceutical industry, even though the continent bears significant shares of the world’s communicable and noncommunicable disease burdens (Narayan, 2016; Bigna and Noubiap, 2019), owes to the small number of pharmaceutical companies. More specifically, in 2020, Africa had 600 pharmaceutical manufacturers, much lower than the number in India (20,500) and China (5,000), which have populations similar in size to that of Africa (Conway et al., 2019; Ussai et al., 2022). Hence, effective use of the protocols for goods and services can be critical for increasing the size of manufacturing capacity and making ODI Report 24 it more capable of increasing access to affordable, high-quality and efficacious pharmaceutical products. Studies (Sidibé et al., 2014; Lakdawalla, 2018; Bennett and Yin, 2019) show that economies of scale, contributing to cost reduction and higher quality of pharmaceutical products, are associated with producing for larger markets. 3.3.2 Protocol on rules and procedures on the settlement of disputes The AfCFTA recognises the need for a framework of rules and procedures for dispute resolution associated with issues, including the trade and procurement of pharmaceutical products. The main objective is to ensure that the framework established for dispute resolution is transparent, fair, accountable, and predictable, according to the provisions of the AfCFTA Agreement. The efficacy of procurement in expanding the market for Africanmanufactured pharmaceuticals will depend mainly on the rules and regulations regarding dispute resolution associated with procurement. These can strengthen trust and cooperation between producers and buyers on the continent, especially in pooled procurement mechanisms. However, the current form of this protocol is effective only for resolving inter-state disputes, as it is not accessible to the private sector or individuals. Thus, since the private sector will be salient for the effectiveness of pooled procurement, this protocol will need to be made accessible to the private sector to enhance its effectiveness by strengthening trust and cooperation between buyers and sellers. Additional support to this argument is that existing dispute settlement mechanisms in Africa tend to have more cases when accessible to the private sector, as in the Economic Community of West African States and the EAC (Tsighe, 2019). 3.3.3 Protocols on investment, intellectual property rights and competition policy To increase the local supply of pharmaceuticals, more intra-African investment underpinned by a better investment environment, providing a climate for fair competition, will be required. The AfCFTA protocols on investment, intellectual property rights and competition were created for this purpose. These were negotiated in phase II of the Agreement and adopted on 19 February 2023 by the AU Assembly of Heads of State and Government (UNECA, 2023b). The protocol on investment aims to facilitate intra-African investment with transparent and predictable legal provisions to guide flows and settle disputes. Increasing intra-African investment in the pharmaceutical sector will be critical to spreading the economic benefits (e.g., creating jobs and increasing foreign exchange ODI Report 31 a result of the potential rise in local manufacturing and efficient procurement mechanisms on the continent. Sustainable access to affordable, high-quality, efficacious pharmaceutical products, especially in areas hard-hit by climate change, like North and West Africa, will be crucial in attenuating the health issues induced by accumulated climate impacts. Second, the AfCFTA protocols on investment governance and IPR could have significant implications for pharmaceutical R&D. This could influence the extent to which the industry can contribute to the impacts of climate change. More pharmaceutical R&D and stringent IPR (to support more FDI inflows) will be required to increase the industry’s capacity and produce innovative medicines to respond to health needs. By providing provisions on investment governance and IPR, the AfCFTA can thus help increase investor inflows and R&D in the pharmaceutical sector. As a notable example, most pharmaceutical supply chains in Africa do not have the infrastructure (e.g., cold chains) for adequate storage, delivery and implementation of medicines. Innovations to develop more heat-tolerable medication will be crucial in this regard. Third, efficient pooled procurement mechanisms, enabled through the potential creation of a sizeable liberalised pharmaceutical market as a result of the AfCFTA, underpinned by harmonised regulations, will influence how much manufacturers emit. Harmonising manufacturing standards will ensure manufacturers across the continent produce more medicines with less environmental impact. Gender Implementing the AfCFTA protocols may have significant implications for gender. These could stem from participation within the pharmaceutical industry and how the protocols affect the accessibility of affordable, high-quality, efficacious pharmaceutical products. The pharmaceutical workforce will be crucial to the effectiveness of the AfCFTA in improving Africa’s health industry. It plays a pivotal role in producing, distributing and implementing pharmaceutical products, which are all salient for developing a robust pharmaceutical industry. Globally, women make up most of the pharmaceutical workforce (Bukhari et al., 2020). Yet they tend to be found primarily in low-paying industry segments, underrepresented in leadership and decision-making roles compared with their male counterparts. One study found that men headed 69% of global health organisations and were board chairs for 80% (Bukhari et al., 2020). Increasing the representation of women in the industry is imperative not only for gender equality but, more importantly, to drive productive innovation, enhance the standards of medicines, especially those required by women, and ensure more effective decision-making. Specifically, on the innovation-enhancing prospects of gender inclusion, increasing the pool of pharmaceutical workers, especially ODI Report 32 in top hierarchies, to include women, ensures that the pool is more diverse regarding knowledge, skills and experiences to support innovative ideas for women-related health needs. Since Africa aspires to leverage opportunities provided through the AfCFTA to develop a robust pharmaceutical industry, this will be an opportunity to make the sector more gender-inclusive to enhance its robustness. Similarly, in the context of procurement mechanisms, ensuring that women are represented in all categories (buyers, procurement organisations and suppliers) of procurement mechanisms will be imperative for the efficiency and effectiveness of these mechanisms, especially for women-related health needs. More females participating as buyers and in the procurement organisation in a procurement mechanism will increase the potential to use monopsony power (bargaining) and negotiations to procure highquality medicines more conducive to the health needs of women. Similarly, a more gender-inclusive supplier pool is likely to consider producing medications of high quality that are more conducive to women’s health needs. Job inequality is not the only area in which women are disadvantaged; they are disadvantaged in pay as well. Women earn as much as 29% less than men in the broader health sector (Bukhari et al., 2020). Such disparities can weaken women’s contribution to economic prosperity through low labour force participation and less human capital development, among other things. Aside from these labour market influences, women carry a disproportionate disease burden in developing countries (Iyer, 2020). Considering the case of HIV, women have on average, a 60% higher risk of infection than their male counterparts (Magadi, 2011). Such a broad disparity warrants sufficient women’s representation in the whole chain of actors of procurement mechanism agencies to harmonise regulations and standards in the health sector and implement drugs to ensure effective development and delivery of drugs on the ground. ODI Report 33 5 Policy recommendations In the pharmaceutical sector in Africa, two key interests are evident. First, there is a desire to coordinate the procurement of vaccines and other pharmaceutical products at the continental level to leverage cost advantages, such as through the pooled African medicines procurement mechanism of Africa CDC. This collective procurement effort can source products either within Africa or internationally (UCTODI, 2024). However, limited production capacity within the continent means procurement is likely to occur predominantly from sources outside Africa. Consequently, RoOs play a significant role in intraAfrican trade post-procurement. UCT-ODI (2014) contains a wider range of recommendations aimed at developing and strengthening the pharmaceutical industry in Africa, using the AfCFTA as main instrument. Second, there is a focus on fostering the development of continental value chains within the pharmaceutical sector. Pharmaceutical sectors involve multi-step production processes, including raw material sourcing. These processes have the potential to be localised within regions, offering opportunities to drive Africa’s industrial transformation under the AfCFTA. The AfCFTA can help facilitate these two key objectives. Implement policy measures to reduce the restrictiveness and associated costs of meeting RoOs for pharmaceutical products while keeping RoOs as is for vaccine-related ingredient inputs and primary and secondary packaging, to promote higher preference utilisation rates and foster the development of global value chains. The RoOs for pharmaceutical products under the AfCFTA are moderately restrictive. To benefit from the preferential tariff rates provided under the AfCFTA, firms needs to meet these RoOs, which involve compliance costs. Pharmaceutical firms need to decide whether to comply with RoO regulations for preferential tariff treatment or opt to pay the MFN tariff. Given that many African countries already impose zero or near zero tariffs on pharmaceuticals and vaccines, the preferential tariff margins provided by the AfCFTA are minimal. Given these low tariff rates, the pooled procurement initiative may remain largely unaffected by RoOs. Waiving the RoO requirement for pharmaceutical and vaccine products could further simplify procurement. ODI Report 34 On the other hand, RoOs also influence firms’ decisions on sourcing intermediate inputs and thus the building of pharmaceutical regional value chains and manufacturing. If RoOs are highly restrictive and costly, firms may source within the AfCFTA to qualify for preferential tariffs. Conversely, lenient RoOs may encourage firms to source inputs from outside the AfCFTA, potentially hindering the development of regional value chains. Manufacturing pharmaceutical and vaccine products requires ingredients and primary and secondary packaging. The RoOs for vaccine ingredients and primary and secondary packaging under the AfCFTA are also moderately restrictive. However, unlike for pharmaceutical products, several African countries have higher MFN tariffs for vaccine ingredients and primary and secondary packaging. This means there are significant preferential tariff margins if manufacturers decide to source inputs or produce packaging within Africa. This is particularly significant for pharmaceutical global value chains, where inputs cross borders multiple times. The higher MFN tariffs incentivise pharmaceutical producers to source inputs from within the AfCFTA or encourage non-African firms to relocate to Africa to benefit from preferential tariffs. This could foster local pharmaceutical manufacturing in Africa and the creation of regional value chains. Head et al. (2021) suggest that the relationship between RoOs and regional production resembles a Laffer Curve: RoOs promote regional production up to a point, beyond which firms prefer paying tariffs over compliance. Therefore, balancing RoOs and tariffs is crucial to support pooled procurement initiatives and the development of local manufacturing in Africa. Negotiate the relaxation of the current RoOs for pharmaceutical products in pooled procurement scenarios or outline alternative RoOs or procedures for determining eligibility for tariff preferences. This may permit the importation of products without the need to strictly meet the usual RoO requirements, facilitating trade across borders. Other measures could involve relaxing product-specific RoOs for pharmaceuticals and mitigating compliance costs related to administration and certification. Furthermore, it may be important to consider self-certification of RoOs. Currently, under the AfCFTA, RoO certification must be conducted by an approved exporter or a designated competent authority of the exporting state party. This process can be burdensome and time-consuming, especially for small and medium-sized enterprises. Introducing self-certification, which is currently permitted only for consignments valued below $5,000, could significantly alleviate the costs associated with RoOs for traders. This would facilitate trade within the AfCFTA, promote preference utilisation and support the establishment of regional value chains. ODI Report 35 Ensure regulatory harmonisation of medical standards within the pharmaceutical trade sector. Another significant aspect through which the AfCFTA can contribute to the trade of pharmaceutical products relates to regulatory harmonisation of medical and pharmaceutical standards. At the continental level, efforts are being made to align pharmaceutical and medical regulations and country-specific requirements. This is reflected in the Standards for Pharmaceutical and Medical Devices in Africa Project, created in 2020 through a partnership between Afreximbank, ITFC, BADEA and ARSO. ARSO has already harmonised 113 standards and Technical Regulation Guidelines, which have been published and disseminated to partners and stakeholders in the pharmaceutical industry (ARSO, 2021; Kithome, 2022). However, harmonisation of standards and Technical Regulation Guidelines for products under the broader categories Medical Devices and Equipment (ARSO TC 78), Pharmaceutical and Medicinal Products (ARSO TC 80), African Traditional Medicines (ARSO TC 82) and Technical Regulation Subcommittee (ARSO CACO WG5) is ongoing. Rapid harmonisation of these products and robust capacity-building efforts to enhance the effectiveness of their implementation will be crucial for enhancing the production and intra-African trade of quality pharmaceutical products. Reduce tariffs and non-tariff barriers on imported critical pharmaceutical components like APIs to foster the costcompetitiveness of producers of critical final health products. Although a common external tariff is required to shield African producers to meet the objective of increasing trade and economic integration, this could hamper the growth of the pharmaceutical sector, owing to the paucity in production capacity, especially for APIs. Thus, in the short to medium term, it could be economically beneficial to reduce tariffs and non-tariff barriers on imported critical pharmaceutical components like APIs to foster the costcompetitiveness of producers of critical final health products. Adopt capacity-building measures to boost the technical capacity of procurement bodies or buyers to improve the efficiency of pooled procurement to serve as a sustainable incentive for the manufacturing of health products. The technical capacities of buyers or procurers will be crucial to promoting efficient, low-cost procurement of health products. Such capacities, especially in forecasting potential demand and assessing health product needs for a particular demographic group or population, and the ability to assess health product attributes will be vital. To this end, boosting the technical capacity of procurement bodies or buyers will be essential in improving the efficiency of ODI Report 36 pooled procurement to serve as a sustainable incentive for the manufacturing of health products. In the case of regional procurement agencies, financial capacity will be imperative to ensure a predictable budget. This will guarantee the timely procurement of health products, especially for urgently needed health products like vaccines during times of health crisis. 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