As the Novel Coronavirus (COVID-19) spreads throughout the United States, there are many opinions from the experts on how to mitigate the effects of this devastating health emergency.
Over the weeks, three main factors clearly are key in winning the “war” on COVID-19: readily available and accurate testing, social distancing, and an eventual vaccine. Although all three are high priorities, testing kits arguably are the most important because they help inform the other two.
We are in a fight with a pandemic that expert epidemiologists predict could result in 100,000 deaths. To date, it has already caused $2 trillion in emergency stimulus, intervention in private production, a stock market poised for free fall, a record 6.6 million unemployment claims, and blanket lockdowns for most of the U.S. (and world). Much of this is linked to our inability to comprehensively test for COVID-19.
Reactive Threat Responses are Insufficient
On March 6, the president signed an $8.3 billion emergency spending bill to fight COVID-19, followed by the activation of the Defense Production Act of 1950 (DPA) powers to intervene in private markets on March 18. Both measures evidence the value of testing kits, yet they ultimately proved insufficient. As of March 29, we have only tested approximately .04% of our population. That’s right—.04%.
How did this deficiency in testing capabilities arise? Policymakers, military leaders, and economists infamously tend to “fight the last war,” which may lead to undervaluing pandemic preparedness. Private sector leaders like Bill Gates have been warning of our shortcomings in the face of a future pandemic threat for years. But it seems our systems for evaluating national security threats did not accurately predict the value of producing and delivering unfettered testing kits.
In fact, the fiscal year 2021 Presidential Budget requested $216 million to fight influenza, and approximately $5.5 billion—a 15% reduction—for the entire Center for Disease Control (CDC) budget.
Yet within that same budget proposal was a request for $2.4 billion to modernize the F-15 Strike Eagle fleet. Although the F-15 fleet is a more traditional national security asset, one would think investing in testing at a level south of 9% of the F-15’s upgrade budget should send a clear signal that new ways to proactively value critical assets are sorely needed.
So, how much should the U.S. invest to guarantee reliable production and delivery of COVID-19 testing? What is the value of this capability for our national security? Several months ago, any suggestion that testing be valued near 20% of our total budget would be considered absurd. Given the current circumstances, however, that number looks a lot more reasonable.
With the hindsight afforded to us by the testing shortage during COVID-19, let’s explore how a national security valuation (NSV) framework could help us learn from past mistakes so we are better prepared to make proactive investments in the future.
Establishing A National Security Valuation Framework
The COVID-19 pandemic presents an opportunity to affect positive changes in how we view our national security, international relationships, and private market cooperation, among other things. It can also help shape the way we approach solving difficult national security problems embedded in complex international economic markets. A unified and flexible NSV framework, similar in purpose to what investors use, could:
- Help proactively guide resources to the most important threats.
- Mitigate public and private risks.
- Increase transparency in critical supply chains.
- Better advance our increasingly interdependent economic and national security goals.
National security valuation explained
An NSV, like the more widely known investment valuation models, analyzes the past and present in order to predict the future national security value of an asset. A broad NSV framework for an asset or capability helps all stakeholders determine future threats to better guide their respective investments and mitigate respective risks. However, policy makers, investors, regulators, and other stakeholders also require nuanced NSV analysis for their respective purposes.
Regulatory regimes’ approach to risk evaluation
Although termed differently, many regulatory regimes determine some national security value to help further their specific charter. For instance, export control regulators evaluate weapons and defense articles to determine whether to control the international trade of the item—and to what level.
The nation’s security-driven investment review program, commonly known as the Committee on Foreign Investment in the United States (CFIUS), evaluates foreign investment in assets deemed important to national security. CFIUS is not designed to outline a systematic determination of national security value. Rather, it reserves the right to determine national security on a “case-by-case” basis due to the sensitivity of the analysis and its mission to protect national security assets.
Nonetheless, the CFIUS method to identify the national security risk posed by an investment transactional provides useful components for the NSV framework. CFIUS analyzes risk by looking at these three elements:
- Threat of the investor
- Vulnerability of the asset
- Consequence of foreign investment in critical assets
It is important to note, that although threat implies ill-intent, risk assessment is not necessarily intent-based. The supply of an asset might be degraded because the country or investor has the capability to disrupt a fragile supply line.
While a comprehensive and effective NSV framework should include elements of both structured and “case by-case” methods, there are several other important factors to include as well. These include:
- Present and past procurement
- Market structure
- Supply chain risks
- Regulatory history
- Past outcomes of degradation
- Analogous assets
- And “red cell” threat scenarios to stress test foreign access and control
With these framework elements determined, it’s time to put them all together to assess the value of widespread access to COVID-19 testing.
NSV at Work: Putting a Price on the Value of Coronavirus Testing
Using what we’ve learned about valuation frameworks, could we put a NSV price on testing kits? The answer is yes.
We now know that testing kits are valuable. However, knowing how valuable, or the NSV of testing kits, ahead of time would drastically improve our ability to deliver this critical national security service. In this case, like with a private market sale, we can understand the value through a real-world outcome. Analysis of the pandemic and testing also serves as a useful comparison of the market value of analogous assets, which can guide future evaluation of critical assets for future health national security threats.
Understanding the NSV asset
On a general level, we should first understand the asset, its capability, and how critical it is to solve the national security problem. As discussed above, both developing a vaccine and social isolation depend on accurate and timely identification of the virus through testing to be effective.
In military terms, testing serves an intelligence or reconnaissance function—they deliver key information on the enemy virus that is critical to our victory. In fact, given that COVID-19 symptoms overlap with other common flu and cold variants, the ability to perform high-volume precision testing is arguably the most critical component of this “search and destroy” mission.
Assessing the consequences
Incorporating the CFIUS approach, we could assess the consequence of having, or not having, a monopoly on delivering COVID-19 testing. The timely delivery of precision testing provides better information on the enemy to understand the true mortality rate, identify vulnerable demographics, follow contagion characteristics, and generally dampen fear and improve decision-making. Rapid identification would also allow for precision isolation (or eventually vaccination), reducing the need for economy-killing blanket lockdowns and limiting the spread of the virus.
For example, on March 20, the U.S. ranked tenth in the world in testing capacity with .03% of the population tested. While other factors certainly contribute to mortality, prolific testing, at a minimum, improves our understanding of lethality.
Top testing countries like Norway, South Korea, Germany, and others all have lower death rates than the U.S., which became the nation with the highest number of confirmed cases on March 29.
Clearly COVID-19 testing is critical, and yet we are not able to control and deliver testing effectively. How was this asset and capability threatened or vulnerable?
Even with an emergency investment of $8.3 billion, extraordinary regulatory powers like the DPA activated, and significant private sector participation, our ability to produce and deliver testing kits was threatened and vulnerable.
The international production supply chain was not something we could immediately control. Instead, we relied on countries like South Korea and Germany to supply kits and critical chemical reagents. While South Korea and Germany are important allies, we cannot expect either country to prioritize our citizens over their own.
Then there is China. This problem started in China, and the current solutions all seem to run through there as well. For instance, several of the entities that notified the FDA of their ability to deliver serology testing for the coronavirus are Chinese companies. Spain recently ordered 640,000 rapid test kits from Chinese companies furiously standing up production, but had to return the entire first batch because inspectors discovered they were faulty.
China also controls critical ingredient supply chains. According to the U.S.-China Economic and Security Review Commission, China is the largest producer in the world of active pharmaceutical ingredients of all varieties. These production dependencies create a health national security risk because the FDA must further screen pharmaceuticals and medical supplies whose production is poorly monitored.
China may want to cooperate, but it may not; it may want to monitor drug quality, but cannot; or it may justifiably prioritize its own population—in any scenario, the U.S., and the world, are far too reliant on China for these supplies. And this reliance puts us all at risk.
Additional NSV inputs
Finally, as discussed earlier, we could calculate specific amounts to assist with valuation, including the current time and money invested to produce adequate testing, and also factor in the remedial spending for the economic damage caused by not having adequate production and delivery of testing. When the dust settles, it should be clear that the NSV of testing kits was not properly valued and is indeed quite high.
Learn from the Present, Value the Future
The COVID-19 pandemic is delivering a real-world NSV example of testing kits—and the same framework can be used to evaluate the NSV of vaccines, N95 masks, and other critical supplies. Ultimately, the NSV of testing kits is extremely high and may even justify $1 trillion in short- and long-term investment.
While forward-looking regulatory programs like CFIUS help identify and protect national security assets on a transactional basis, the present testing kit example reveals a need for another kind of framework, too. Executing a more structured NSV or risk framework promises a flexible systemic approach to guide public and private U.S. investment toward future critical assets. It will also proactively promote the mutual goals of investors, regulators, and policymakers—while mitigating their respective risks inherent in today’s complex competitive markets.