Australia's Art of the Deal

Welcome to Plugging the Gap (my email newsletter about Covid-19 and its economics). In case you don’t know me, I’m an economist and professor at the University of Toronto. I have written lots of books including, most recently, on Covid-19. You can follow me on Twitter (@joshgans) or subscribe to this email newsletter here. (I am also part of the CDL Rapid Screening Consortium. The views expressed here are my own and should not be taken as representing organisations I work for.)

I haven’t read The Art of the Deal but I did read about it. My general impression was that when it comes to negotiations, you shouldn’t worry about future promises or relationships and find the best deal for the moment. The anecdotes were for once off deals and not on-going stuff. As a teacher in a business school, this is precisely the opposite of what we teach of course.

Which brings me to Australia’s vaccine strategy. Compared with other countries — including the US under the Trump Administration — it seems like an outlier. Like many countries, Australia engaged in contracting for vaccines ahead of actual verification of their efficacy. But Australia went with a strategy of making a contract for AstraZeneca (and also one that was being developed at the University of Queensland) and that was it. Interestingly, it appears that Pfizer approached Australia in October 2020 and offered them enough doses for the entire country but was rebuffed. That is at least according to news reports and is also consistent with the obvious fact that Australia doesn’t actually have many doses of Pfizer available.

What appears to be the case is that Australia refused the offer in July and then ordered just 10 million doses from Pfizer in November. More recently, it went back to them for 20 million more to be delivered by the end of 2021. And there is now a new deal to get those delivered sooner. Compared with some peer countries, this makes Australia look pretty bad.

The Prime Minister declared “it was not a race.” That’s what you do when you are not winning of course. But the rationale was that Australia had done well keeping cases down so it could afford to wait.

But this is all a little odd. It smacks of deal making along the lines of the Art of the Deal. It sounds like Australia, believing it had the virus under control, decided to pay as little as possible for vaccines and certainly not to pay more by way of insurance — you know, if a candidate doesn’t work or has complications. But more critically, if this is the case, then it broke away from what would surely be the granted bargain when it comes to vaccines developed during a pandemic: richer countries end up footing the up-front bill for R&D and plant costs for the world and in return get the vaccines quicker. Australia is behind. That must mean they broke with the deal.

The Grand Deal

Let me explain the grand deal because I don’t think it is commonly thought about and it is certainly not explicitly written down. But it goes like this. If we were to think purely ethically, we would want every person in the world to have an equal chance of being the first to be vaccinated. That is we would take scarce supply and randomly allocate doses.

That doesn’t happen for lots of reasons. First of all, it is cheaper to surge vaccine doses in particular regions — aka countries — rather than send them out willy nilly. Second, some countries can actually get doses to people quicker than others which tips the balance. But the final consideration is: someone needs to pay for all of this. We don’t have a world government etc and so we have individual governments. Every single one of those has opted for some version of the ethical distribution (with adjustments) locally so it isn’t like this isn’t understand. But it is also understood that there were some billions of dollars to be paid for all of this and not just the vaccines we ended up using but the ones that didn’t work out.

When you have this type of problem — how to allocate fixed costs — you then move from ethics to economics. The social planner facing a budget constraint is going to allocate the funding of most of those costs to the groups most willing and able to pay for them. That means that everyone is happy to participate but also that if you happen to be poorer you are not obliged to pay more than you can afford. Now we could do this the fully ethical way world-wide if we just had a global tax system to sort out the allocation of costs but, as I mentioned, we don’t. So we just make do with what we have.

The thing you do then is the same thing many businesses do. You price discriminate. In this case, if you are a drug company, you set the prices of earlier deliveries many times higher than of later ones. Then you approach the groups you think might (a) afford to pay for those early deliveries and (b) might want to. This is what Pfizer and every other vaccine developer did. (Yes, even the ones from China and Russia).

The idea was that those countries would lock in deals and then the companies would go down the list with lower prices until the market cleared. From a global perspective, the rich countries get the doses sooner which means that it doesn’t look like the ethical outcome but hidden away there is the fact that the rich countries are, in effect, paying for the main costs of this. None of the companies is doing this as a charity. Ultimately bills need to be paid. So that must be happening.

Canada was a great example of a country that went with this deal. It bought country sufficient doses from many comers and then, when so many vaccines worked out, looked like it had embarrassingly ordered 10 times more than it needed. But the folks in Ottawa could actually add and they knew what they were doing. The doses they didn’t need would be gifted to other countries. This is the most transparent kind of way of dealing with the grand deal.

Australia’s cut and run

Australia didn’t do that. They won’t even reveal what they did do citing “national security” which is odd. Did they low-ball? It looks that way. Did they fail to diversify? Absolutely. Was that a crazy thing to do? To anyone who has thought for two seconds about the costs and benefits of any pandemic expenditures, it would seem so.

So why would it do this? Here’s my guess. Australia has prided itself on being able to do tough deals with large pharmaceutical companies. This is not necessarily a bad thing and is certainly not a problem when you are in somewhat of a buyer’s market.

But as I wrote in my book in April 2020 on the economics of the situation, there was no way that the Covid-19 vaccine market was going to be a buyer’s market. It would be a seller’s market and the Mission Impossible 2 movie, that was set in Australia, was premised on that whole thing.

Herein lies the Art of the Deal. Australia did not want to pay for the privilege of being one of the global rich. It wanted the best deal for the moment in the bet that it would come out of the other end of the pandemic having not blown the budget as everyone else has done.

That could have worked. But here is what the risks of doing that were. First, the vaccine you ordered may not be ones people wanted. AstraZeneca is actually a pretty fantastic vaccine historically but as it turns out there are ones that are slightly better and that matters for people’s choice of whether to be vaccinated.

Second, variants. There may be variants that come into play and so there is a race in that the variants might spread when you still have a largely unvaccinated population.

Finally, your policies that kept the virus out, being as they are probabilistic, don’t work 100% and you end with an outbreak and lockdowns again with a largely unvaccinated population.

In Australia’s case, we are now 3 for 3 on those risk outcomes all of which could have been avoided by having a better deal. You could have even done a deal that hedged this. For instance, a deal that gave you a low price but with an option to pay a high price to speed up deliveries if one of these risk factors didn’t turn in your favour. That would have taken some thoughtful economics thinking and it isn’t looking like that was present in the government there.

So now the government is doing ads like this to get people to fall in line with the new reality …

A Meal of a Deal

When it comes down to it, one thing about this from a global perspective is that Australia only has itself to blame and the costs will fall on it. It is not a large country and Pfizer and others will get their costs paid but others. The doses that would have been given to Australia these last few months have been given to others who can say “thank you” to the Australian government for giving up their place in the line.

But now it looks like Australia will live the three months plus of lockdown that many other countries had to face because they prioritised vaccine hope rather than testing and tracing as a means of keeping the virus at bay. That lockdown will cost the economy and will cost the government billions in taxes. Take it from me, sitting at home for months on end does get you to think about what might have been. I’m sad that it has come to this but that was the deal.