Opportunities of Health Business in Africa Investment opportunities in health business in Africa are increasingly visible. In 2008, the international Finance Corporation (IFC) published results of data on health business collected by McKinsey and Company over a six month period, in a report titled The Business of Health in Africa: Partnering with the Private Sector to Improve People’s Lives. In this report, the IFC identified major opportunities in health business in Africa in five domains. The first domain of business opportunity is the health services organizations such as hospitals, health centers, and medical clinics. The second domain is the life science companies such as pharmaceutical and medical device manufacturing. The third domain is the health risk pooling companies that provide health insurance plans. The fourth domain is the sales and distribution companies such as pharmacies and medical retail outlets, and the fifth domain is education institutions such as schools of nursing, medicine, and allied health professionals. The five domains do not carry equivalent business opportunity; some domains are more lucrative than others. For example, sales and distribution systems yield the highest return on investment. In spite of this inequality in return on investment, the demand for health services is very high. According to the IFC report the African continent needs an additional 550,000 to 650,000 hospital beds, 90,000 physicians, 500,000 nurses, and 300,000 community health workers. IFC estimated that US$25-30 billion will be needed to meet demand for better distribution and retail system. IFC suggested that $11-20 billion of this new investment is likely to come from the private sector. Without attempting to disagree with the IFC, we believe that private sector will contribute much more than the estimated amount. We estimate that the private sector will contribute to more than two thirds of investment in health, at least in East Africa. Two major forces are working synergistically to fuel the participation of the private sector in health business in Africa. The first force is the increased entry of local entrepreneurs in all the five domains of health business. Private hospitals, medical clinics, and health centers that provide health services of better quality than government sponsored programs are common. Many pharmacies can be found in most shopping centers in many urban centers across the country. Fewer though, are in rural areas. Private companies providing health insurance are on the increase. Private medical schools are few and far between, but private companies providing nursing education are many. Pharmaceutical and medical devise manufacturing business is slowly coming up. Presently, only generic manufacturing seems to be possible in many African countries. This will not be for a long time, as African scientist team up with people in the international community to devise collaborative approaches of translating local knowledge into pharmaceuticals and medical devices. The second force is the shift of mind in the international donor community. Traditionally, donors worked through governments or non-governmental organizations to fund development. Massive failure of the traditional development model has spurred interest in the international community to thinking of enterprise models for financing development. Consequently, individuals and organizations are exploring various models of supporting entrepreneurs in Africa. Support for entrepreneurship ranges from a microfinance model to advance techniques of structured finance in large capital investment. Microfinance operations are well understood, and have registered serious development impact in many regions of Africa. Microfinance has transformed lives of many people in the continent. Equity Bank, a major microfinance institution has transformed lives of millions of people in rural Kenya. The success of microfinance is a good testimony that people living in Africa are a good credit risk. They pay back their loans, contrary to the belief popularized by the International Monetary Fund (IMF), that Africans are bad credit risk. This increased visibility of creditworthiness of African entrepreneurs has created a secondary interest in large capital financing from the international community. Granted, microfinance has its role in funding small operations. Hospital construction or development of a life science company is not a microfinance operation. Such operations require large capital injection ranging from $3 million to more than $100 million. Such amount of funding is necessary for building institutions, services, and manufacturing operations. Encouraged by the creditworthiness of African entrepreneurs, international investors are willing to invest in such large projects. International investors use three financing methods to supply large capital to local entrepreneurs. Some supply pure debt in form of loans, some supply pure equity by buying stake in the company, and some supply a mixture of debt and equity. At this level of financing, international investors are concerned about two major types of risks: the political (or sovereign risk), and financial risk (or creditworthiness). The investors seek guaranteed protection from these two risks. The Multilateral Investment Guaranteeing Agency (MIGA) and the Overseas Private Investment Corporation (OPIC) are two companies in the United States that provide sovereign risk protection. The MIGA is an agency of the World Bank, while, OPIC is an agency of the U.S. government. Similar guaranteeing agencies can be found in European countries and Japan. Sovereign risk protection gives the foreign investors comfort in the face of nationalization, or expropriation of the venture by unscrupulous government or political officers. Financial risk guarantee gives the local entrepreneur an investment grade rating. Banks or similar financial institutions provide such guarantee. This means that the local entrepreneur borrow in the name of the bank, or the creditworthiness of the bank. Needless to say, the bank will conduct its due diligence to make sure that the local entrepreneur has a sound business plan. It is wise to work with a bank with a good international credit rating. Credit rating for companies is reported by Moody, Standard & Poor or Fitch, and can be found on the internet. The most creditworthy companies are rated AAA, while the companies with bad credit are unrated. AAA rated companies are few, but they are able to obtain loans cheaply. Once the local entrepreneur has found a bank willing to stand by him, the entrepreneur can issue a paper (a bond, a debenture, a note, or shares of stock), which the international investor would buy. Alternatively, the guaranteeing bank could issue the paper, and the local entrepreneur would draw down the money from the bank. Reference International Finance Corporation. (2008). The Business of Health in Africa: Partnering with the Private Sector to Improve People’s Lives. Washington, DC: The World Bank Group.
Posted on: Tue, 23 Dec 2014 12:32:44 +0000
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