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India – Healthcare PPP Opportunity Has Arrived.

22 May, 2012

 

First published in Infrastructure Journal in a two part series with Part I published on the 19 April 2012 and Part II on the 9 May 2012.
 
Foreign investment policy is extremely liberal in the hospital sector in India. Since 2000, 100 per cent foreign direct investment (FDI) is permitted under the automatic route (i.e. without the need for approval of the Foreign Investment Promotion Board).
(see Master Circular on Foreign Investment in India (RBI/2011-12/15 Master Circular No. 15/2011-12)).
 
Furthermore, with the growing affordability of the middle class, rising incomes and changing lifestyles, more and more Indians are willing to pay for quality healthcare. Penetration in to the market of private health insurance is also increasing and it is only a matter of time before health insurance is offered to all employees as a matter of course. Yet despite the liberal regulatory environment and the huge (largely untapped) market opportunity, FDI presence in Indian hospitals is very limited.
 
So what’s stopping foreign investors from capitalising on this untapped potential when growth opportunities in this sector are good? Although we are witnessing the emergence of healthcare on the political agenda and the promotion of public private partnerships (PPP) by the Government, there is still no clear road map or regulatory framework or body, resulting in lack of transparency and inefficient procedures.
 
There is also the perception that the hospital business requires localised and in depth knowledge of local market and laws and the view that the process of obtaining clearances and approvals is long and costly which may delay establishment and drive up costs.
 
Furthermore, with the limited domestic manufacturing capacity for medical equipment, most medical devices have to be imported at high costs having a major impact on operations and returns. Another major operating challenge is the lack of quality manpower resulting from inappropriate regulations on medical education suppliers and inadequacies in medical education.
 
However, the Union Budget came out last month and although it was not expansive, it did highlight some important initiatives taken by the Government to try to address some of these constraints.
 
The Finance Minister proposed an exemption of customs duty on certain medical devices and extended concessional basic customs duty of 5 per cent with full exemption from excise duty / CVD to six specified life-saving drugs/vaccines. He also proposed to reduce basic customs duty on soya protein concentrate, on isolated soya protein, iodine and on probiotics.
 
The government has increased weighted deduction of capital expenditure for businesses setting up hospitals from 100 per cent to 150 per cent. The Budget doubled infusion into the National Skill Development Corporation (NSDF) to INR10 billion (US$191.04 million), raising the corpus of the fund to INR25 billion. It is hoped that this will spur some increase in semi-skilled healthcare workers for healthcare services.
 
The finance minister also provided tax benefits to manufacturers for costs incurred in talent development and exempted vocational training institutions from service tax. And has set a target of imparting skills training to 500 million people by 2022. To further tackle shortage of skilled manpower in the manufacturing sector, the Budget has proposed to provide weighted deduction of 150 per cent of expenditure incurred on skills development in manufacturing.
 
The Government also announced an increase in the allocations for the National Rural Health Mission (NRHM) to INR208.22 billion for 2012-13, around 15 per cent more than INR181.15 billion for 2011-12, coupled with the launch of the National Urban Health Mission for encompassing the primary healthcare needs of people in urban areas. The programme was launched in 2005 and aims to provide quality healthcare to villagers. Initiatives have been taken by NRHM to undertake PPPs to meet the growing needs for health services in rural areas.
 
There is still a lot more the Government needs to do to make the healthcare sector more attractive to foreign investors. At a macro level, there needs to be a comprehensive and strong policy on PPPs for use by Central and State Governments in the healthcare sector together with better regulatory framework and an independent regulatory body.
 
The Government needs to assist in the promotion of health insurance for a larger percentage of the population by perhaps making it mandatory for employers to provide health insurance. The facilitation of land acquisition, quick regulatory approvals, reduced duties on imported equipment and of course higher spend on healthcare by the Government are also a few other measures which could be adopted to incentivise private investment in to this sector.
 
However it’s not just the Government who has a role to play. We think the time has come for the private sector to take a serious look at the healthcare sector, and considering the changing dynamics of the healthcare market in India, to bring innovative models to this sector and take advantage of the opportunities and enabling conditions.
 
Recently the Indian Deputy Chairman of the Planning Commission acknowledged that the Indian healthcare sector needs new models of PPP if the goal of universal healthcare is to be realised. Entrepreneurship and innovation in healthcare delivery models will be a great catalyst for the growth and transformation of the Indian healthcare sector, and we are not far from that happening.
 
Innovation for Indian Healthcare
 
The Indian healthcare sector needs new models of PPP, if the goal of universal healthcare is to be realised, according to the Planning Commission Deputy Chairman of India.
 
The fact that the Indian government is looking for innovative and new models suggests that the current approaches that have been used to date have not been adequate. It's important for any potential entrant to have a good understanding as to exactly why that has been the case, as it will have a defining role on what the appropriate entry route would be.
 
The Governments view is that one of the issues of concern is supply-side constraints including manpower shortage. Clearly then models that include the development of a medical college as part of the hospital project are going to address this issue to a large extent and will be more likely to win bids. This model has already been successfully developed by the Government of Meghalaya in India whereby a medical college and teaching hospital are being developed on a PPP model in the capital city of Shillong. In addition the selected private partner is allowed to develop ancillary medical and educational activities as a private undertaking. Other benefits from the government to the private partner include monetary support in the form of capital support, annuity support, land and the option of providing patient referrals directing patients from the government hospitals to the project to meet bed occupancy requirements. The Union Budget 2012 also highlighted various tax incentives provided by the government for skills training and development.
 
It is important that players that aim to take a significant position in this sector, that is primed for opening up, invest time in dialogue with public sector decision makers to understand needs, requirements, pressures and in particular take a proactive stance on shaping the market, rather than simply wait to respond to RFPs.
 
For players that are looking to capture a significant PPP healthcare opportunity in India, scale can be a significant source of advantage. Scale can be approached both in terms of 'breadth' and ‘depth'.
 
Breadth is fundamentally about creating scale opportunities that are too large for potential ‘low cost’ competitors to address. Rather than approaching PPP tenders on a per project basis, players should look to proactively discuss the opportunity to bundle several projects of the same type in a contiguous region together. An example of this is the UK Local Investment Finance Trust (LIFT) model which aims to “bundle” together various schemes in a particular area to encourage strategic planning of the healthcare facilities and integrated delivery of health and social services. There are several reasons why this makes sense both for the public sector and the private sector.
 
It automatically screens out less capable local players, due to the scale of financing required.
 
Several projects packaged together makes the project economically more attractive to bidders especially in terms of bid costs.
 
It favours international players that can leverage existing lines of credit in countries with a lower cost of capital than India. Indian players can leverage external commercial borrowing, but it is unlikely that they could match the value that foreign players could achieve. A one to two percentage point swing in the interest rate is likely to have a massive impact on the profitability of the PPP contract and this puts foreign players at a substantial advantage.
 
  • The scale of such a contract should favour players that have execution experience; it simply becomes too risky to select a relatively untested bidder if the contract is large enough.
  • There will be synergies that can be leveraged across multiple sites (e.g. upfront contracting and legal costs, some reduced operating costs if sites can share suppliers), part of which could be passed onto the public sector client as a better price.
  • Of course with scale comes greater risk so the benefits would need to be balanced, and due diligence and proper structuring of the project becomes absolutely critical to managing this.
 
Scale can also be approached in terms of ‘depth’. Instead of focusing on a particular level of the healthcare system (e.g. secondary level hospitals), a private player should aim to bundle elements across a broader spectrum of the healthcare value chain, e.g. PHCs, CHCs, secondary hospitals, and perhaps some ancillary specialist clinics / labs and medical colleges. Similar sets of advantages and disadvantages exist here as mentioned above but also include the following:
 
  • This approach pushes out less capable or experienced players by creating contracts that only players with substantial diversity of experience could be equipped to handle. For the public sector, a proposition where someone is essentially offering a ‘turnkey healthcare system’ is also very attractive, given the prevalence of dysfunction across all levels of Indian healthcare.
  • Excellent alignment of incentives between the private and public sector i.e. great health outcomes lead to lower escalation rates of patient cases across the system; fully joined up thinking in investment decisions and capacity planning across the healthcare system and training of medical staff at newly built medical colleges to address the manpower deficit means that this should be a particularly strong sell to the public sector.
  • Players with experience in these types of projects (e.g. LIFT) are limited and so this creates a particularly small and well-known competitor set.
 
However, this could potentially be challenging to execute, especially if several public sector departments have jurisdiction over the different layers of the healthcare system in a particular project area, and also in terms of the sheer challenge of making it happen on the ground. To overcome such challenges foreign players will need to partner with local players and hire local advisers who have in depth knowledge about the local environment.
 
Scale can be extremely powerful in this setting. Once a project like this is in place, the private player would have exclusive right to develop all new projects relating to health and community care facilities in the particular region. It is up to the private sector to be proactive in initiating dialogue with the public sector now so that they can influence the way in which projects are structured rather than simply being reactive to proposals from the public sector.
 
For further information, please contact:
 
Liz Jenkins, Partner, Clyde & Co
liz.jenkins@clydeco.com
 
Sahina Jada, Clyde & Co

Sahina.Jada@clydeco.com

 

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