There has been a lot of controversy over the differential pricing of vaccines in India. The debate, unfortunately, rather than being about broader principles, has largely been around an individual, Adar Poonawalla, who is the CEO of the Serum Institute of India (SII). The company is producing the Oxford-AstraZeneca vaccine – branded as ‘Covishield’ in India – which has supplied over 90% of the vaccines procured by the government. It is, I believe, pointless to infer or argue about the intentions of a private individual. The real question is this: what are the conditions that allow these firms to be in a position of potentially selling at exorbitant prices in the first place?
The most effective way of countervailing supernormal-profiteering tendencies is competition in a free market. The more the competition, the better prices we can expect. With completely misguided ideas such as vaccine nationalism, the government effectively stopped potential competition. It was only after a full-blown crisis that India fast-tracked approval for vaccine candidates approved by internationally reputed and credible regulators.
Vaccines create what economists call ‘positive externalities’: by getting vaccinated, an individual not only helps herself but others as well (by restricting transmission and reducing the load on the healthcare sector). The gains from vaccination might be underestimated at the individual level, but the cumulative gain to society from large-scale vaccination is huge. Therefore, the government arguably needs to offer universal free vaccination to increase the coverage: to save lives and mitigate economic devastation.
The Union government did not place sufficient orders with advanced payments early on, which would have enabled SII to stockpile enough. Instead, it has been placing orders in small batches, without making any clear and credible commitment for further purchase. At the same time, others were then not allowed to directly place their orders with the manufacturers. All of this resulted in a lack of liquidity and incentives, if not disincentives, for manufacturers to rapidly scale up. Poor planning, excessive control, and vaccine nationalism led us to a situation with more scarcity of vaccines than would have been otherwise.
As of now, the reality is that there is a supply shortage of vaccines, mostly as a result of the poor policies and decision-making discussed above. The shortage could persist for some time, as there are constraints on scaling up supplies: it will take time for existing firms to scale up vaccination production and there are substantial barriers to the entry of new firms. Besides, the supply shortage is global. This, coupled with immediate demand globally, limits the efficiency of free markets. As long as the shortage persists, the vaccines will effectively be rationed.
Patent waiver for vaccines
The US recently announced support for temporarily waiving intellectual property rules for COVID-19 vaccines. Many argue that, coupled with compulsory licensing, this could lead to mass production of vaccines, thereby ending the supply shortage. There are, however, many unknown unknowns here.
First, there needs to be consensus in the World Trade Organization (WTO). While the US has supported it, the UK, Switzerland and other European nations are yet to do the same. The negotiations could take some time if they end up being successful at all.
Second, even after a consensus on the patent waiver, it could still take some time for firms to develop the technical capabilities, understand the know-how of production, procure and establish supply chains of raw materials and so on.
We are racing against time, and cannot sit idle in anticipation of something that may or may not happen over the next few months. As of now, we must address the immediate problems and cannot afford to waste any time. Once the situation with patent waiver becomes clearer, the policies may be revisited and readjusted.
A policy proposal
The first priority is to maximise vaccination – whichever option delivers the highest vaccination is the best. One set of people are advocating more of what has been done so far: that only the Union government procures and distributes the vaccines. This has not worked out very well given the limited state capacity. In addition, it creates bad incentives for SII and other firms because there is monopsony – that too from a coercive actor. Besides, this is what resulted in our current situation in the first place.
On the other hand, some are calling for the completely unregulated sale of vaccines. Their argument is that it will encourage the entry of other vaccine manufacturers as well as firms ramping up their production. However, when supply is very limited – as it is now – this could lead to a situation where only the rich and affluent get access to the vaccines: the condition of ‘social darwinism’ as recently described by Pratap Bhanu Mehta. In other words, we need a policy that secures the government’s stock of vaccines to make them available to economically disadvantaged, while also incentivising higher production. This would mean that the government does not hinder the prospects of profit-making.
How do we balance the two? Here is a modest proposal for the Union government to consider while negotiating with big suppliers, like SII.
In the present scheme of things, it is not clear how and on what basis the vaccine makers will supply between various states and private entities (as both are included under the 50% quota). The prices for state governments and private entities are different, which makes things even more complicated.
First, therefore, the Union government should procure the vaccines for all the states as it has more fiscal resources as well as a better negotiating position. Once procured and distributed, the logistics and inclusion criteria should be left to the state governments to decide.
It is unclear how the price of Rs 150 per dose was decided for the Union government’s procurement. Forget what was paid earlier, if it is not enough for covering marginal and overhead costs (and making a reasonable profit), new prices could be negotiated based on international benchmarking: with orders on advance payment. It is important that the government does not get too fixated on the price: it must make sure that firms are making adequate profits to avoid creating perverse incentives for production. A few hundred extra crores will not matter in the bigger picture when compared to potential gains.
As I have argued elsewhere, the Union government should have clear and transparent criteria for distributing vaccines to state governments. This could include a combination of the current levels of infection and the number of vaccines administered by the state in, say, the last seven days. This will incentivise state governments to administer higher doses as well as avoid unnecessary ambiguity and bickering over the allocation of vaccines. The current policy is not exactly clear on the relative weightage given to each of these factors.
There is a real risk for firms in dealing with the state, it being a coercive actor. Hence, the contract between the government and manufacturers could restrict the government’s quota for the prioritised delivery of vaccines.
For instance, it could include a certain percentage (say, cumulatively 120%) of the rolling mean of the number of vaccinations carried out by the government across India: so, the partner firms will sell to the government based on the average number of the vaccinations done by it in the two weeks for next two weeks of delivery. Hence, if and when the supply is really short (i.e. below the government’s capacity to vaccinate), all the stock will go to the government and be universally accessible. Once SII (and other partner firms) outstrip the government’s capacity to vaccinate, they can simply sell the excess vaccines to private entities.
The above plan has three benefits. First, the government gets priority delivery even during supply constraints at the prior agreed-upon price with the firms. Second, partner firms (like SII) have assured sales of huge volumes to a single entity, the Union government, with decent profits (and simple logistics). Third, partner firms have an incentive to scale up production – outstripping the government’s vaccination capacity – so that they can sell those in the private market with a potential of even higher margin.
Apart from the manufacturers with whom the government enters into such agreements of prioritised delivery, the rest of them should be free to produce and sell to whomever and however they want. This will give confidence to new firms for entering the market.
Private players must not be deterred from – if not facilitated by the government in – carrying out their own initiatives for vaccinations. If a company wants to vaccinate its staff by importing vaccines from other countries or procuring domestically at exorbitant prices, let them do it. Remember, vaccination has positive externalities. By doing this, they are helping others as well.
So far, the response of the government has been disappointing. Despite the policy of so-called “fast-tracked” approval of vaccines, Pfizer is yet to get the nod, having applied long ago. Forget vaccines, even the urgent aid for COVID-19 relief has reportedly often got stuck for various clearance issues. All of this bureaucratic control-freak attitude needs to go away immediately.
Fahad Hasin studies political science at Ashoka University.