Rapid change in Gulf healthcare brings opportunities

20 October 2009

As governments in the region commit large sums to improving the quality of their healthcare provision, they are opening the way for the private sector to become increasingly involved.

After years of underinvestment, the GCC’s healthcare sector is undergoing rapid change. A combination of high population growth, increased life expectancy and increasingly common but costly diseases is forcing the region’s governments to place healthcare provision high on their agenda. 

GCC governments currently subsidise 75 per cent of healthcare costs but, with the region’s population of 38 million expected to double
by 2025, there is a pressing need to open up
the industry to private sector investment to build the healthcare infrastructure it is predicted to need.

According to a report published in June by Bahrain-based private equity firm Ithmar Capital – Expand, Consolidate & Support: Meeting the GCC Healthcare Challenge 2050 – the Gulf will need 138,965 additional hospital beds, more than 140,000 extra doctors and 227,000 extra nurses by 2050, just to maintain current levels of service.

Consequently, some GCC countries are working towards offloading as much as half of their healthcare costs to the private sector by 2015, creating vast scope for future investment opportunities.

Fourfold increase

Indeed, overall healthcare expenditure in the Gulf is expected to rise fourfold to $60bn in 2025 from the $15bn recorded in 2008, according to US management consultant McKinsey & Company.

“Given the historical importance of government funding, private initiatives in the GCC healthcare sector are a relatively recent development,” says Jarmo Kotilaine, chief economist at Saudi investment bank NCB Capital. “But GCC governments have actively started looking at ways to boost private sector participation in the sector, and Qatar, Bahrain and the UAE have been the most proactive.”

Indeed, these governments have provided concrete incentives to attract private sector companies, including commitments to
reimburse them for a minimum number of patient visits to their hospitals, even if the number of patients treated is below the minimum number.

They have also implemented regulatory reforms to make the healthcare sector a level playing field for private healthcare providers, which should also foster competition and raise the bar in medical provision.

“Healthcare has been underinvested for more than a decade,” says Imad Ghandour, executive director of Gulf Capital, an Abu Dhabi-based buyout firm. “The supply side has been very limited, mainly because of regulation, which has prevented the involvement of the private sector, and the immaturity of the health insurance market. But all of this is coming together to create positive dynamics for the sector.”

For example, Qatari law allows 100 per cent foreign investment in the healthcare sector. Meanwhile, since 1992, Bahrain’s Health Ministry has allowed Bahraini doctors to manage and operate private clinics after regular working hours.

In particular, private equity firms have begun ramping up their involvement in the financing of the Gulf’s healthcare sector. The Bahrain-based Gulf Venture Capital Association, a trade body for venture capital and private equity firms, estimates the healthcare sector attracted 16 per cent of all private equity investments around the GCC in 2008.

The profile of the healthcare sector is attractive to private equity firms because of the historical underinvestment in the Gulf’s hospitals, coupled with the low risk, given that the majority of healthcare expansion is being fuelled by government spending. For example, Riyadh allocated SR52.3bn ($14bn) for healthcare spending in its 2009 budget.

In June this year, Gulf Capital announced that it had raised $476m for a private equity fund, which it plans to invest partly in healthcare, and is already in talks to buy a regional healthcare business. 

Healthy returns

Gulf Capital’s Ghandour says he expects the company’s healthcare investments to generate an average 35 per cent annualised rate of return, with the most lucrative opportunities in specialist healthcare delivery and medical support services – for example, helping to recruit qualified nursing personnel, technicians and physicians.

In particular, there is an urgent need for specialist healthcare services to be established to treat lifestyle diseases in the GCC, which are increasingly prevalent. According to World Health Organisation estimates, diabetes, obesity, high blood pressure and coronary heart disease are responsible for nearly 50 per cent of all deaths in the region.

“The epidemic proportions of lifestyle diseases highlight the relatively underdeveloped nature of preventative medical care in the Gulf,” says Kotilaine. “The public healthcare system, which primarily focuses on general treatment, is ill equipped to meet the mounting challenges engendered by lifestyle ailments. This has highlighted the vacuum in this segment of healthcare services.”

The Gulf’s healthcare demand is exacerbated by its demographic bulges of very young and old, the age groups that typically have the highest demand for medical care. For example, 38 per cent of the Gulf’s population are under 14 years old, meaning there is an urgent need for more childcare centres. 

Meanwhile, inadequate services in UAE hospitals mean patients still travel abroad for many medical procedures. Despite boasting some of the most cutting-edge equipment and modern facilities, there is a shortage of support services, specifically medical personnel, to manage the infrastructure. 

In May this year, Abu Dhabi-based investment bank The National Investor (TNI) announced that it planned to spend up to $75m on UAE healthcare over the next 12-18 months. With the technical support of Zurich-based Santeum Partners, a financial adviser specialising in the healthcare and life sciences sector, TNI is setting up separate funds to finance five planned projects to expand the region’s $100m services segment.

While it has not yet named the five projects, the bank says it will invest at least $20m in setting up a simulation-training business for hospital staff, six disease management centres in Abu Dhabi and a further six across the rest of the UAE. Staff training and hospital support systems do not require a high level of capital investment, typically $5-30m, which makes them easily accessible to a large number of
private financiers.

In addition to these aspects of healthcare, Saudi Arabia, as the most populous country in the Gulf, with 22 million nationals, has particular appeal to private investors. In 2007, there were about 2,000 public primary healthcare centres, providing services to 12,590 people on average. These centres had 2.3 physicians, 4.9 nurses and 2.2 other health personnel for every 10,000 people.

With the population projected to increase to 27.6 million by 2013, the Saudi government recognises that it cannot finance a sustainable healthcare sector. In October 2008, the Saudi Arabian General Investment Authority and the Saudi Health Ministry announced plans to restructure the management of all 218 government-owned hospitals into private enterprises.

Furthermore, any additional hospitals or clinics will be private. In this way, Riyadh is progressing towards regulating medical services that will be provided by private companies, instead of financing the provision of healthcare itself.

Research conducted by Dr Soliman Fakeeh Hospital (DSFH), the largest private sector hospital in Saudi Arabia, estimates that there is potential for private healthcare service providers to invest up to $20bn in new medical facilities in the kingdom over the next seven years. 

The GCC countries are at varying stages of introducing compulsory health insurance, which once in place will inevitably boost demand for private health services and open up new financing opportunities.

“The immaturity of the insurance market has held back the development of the private sector,” says Imad Ghandour, executive director of Gulf Capital. “But there are various mandatory insurance schemes kicking in, which will change the landscape of healthcare provision in the coming years.”

In Abu Dhabi, mandatory health insurance laws direct all employers and business owners to provide health insurance coverage for expatriates and their families.

Mandatory insurance

In June 2008, the programme was extended to all UAE nationals in Abu Dhabi. Since then more than half a million UAE nationals have signed up for ‘Thiqa’ cards with Daman, the government-owned health insurance company in Abu Dhabi, which has a market share of more than 80 per cent.

The Dubai Health Authority plans to introduce a mandatory health funding system for expatriates and locals in 2010. Meanwhile, Bahrain is in the process of introducing compulsory private health insurance for all expatriates, with a target date of 2013 for providing full cover to expatriate employees.

The Gulf’s governments are not only looking for partners to share the burden of healthcare provision, they are also are paving the way for the private sector to become the main provider of healthcare services.

“We see increasing opportunities in all GCC countries,” says Achmed al-Shahrabani, senior vice-president at UAE-based Abraaj Capital, a private equity firm focusing on investments in healthcare. “Some need more investment in laboratories, others in pharmaceuticals, but the whole Gulf region is attractive.” 

With the private healthcare sector still fragmented in the Gulf, many people believe that private equity firms can play a vital role in consolidating the market through a series of mergers and acquisitions.

But Ali Hashemi, principal at US management consultant Booz & Company, warns that acquisitions must be made by design rather than by accident. “It is important for private equity firms to figure out their overall strategy,” he says.  

There is certainly no shortage of financing opportunities for private equity firms, with demand for high-quality healthcare services particularly strong in the region, given the high concentration of wealth. Medical tourism in the region is also expected to receive a major boost through the development of landmark projects such as the $1.8bn Dubai Healthcare City, which offers an academic complex, hospitals and pharmaceutical companies.

But while the GCC governments are making great strides towards improving the quality of healthcare in the region through a series of reforms, there are still major challenges that need to be addressed. “Unless the governments take strong ini-tiatives to overcome the undersupply of healthcare professionals, the ongoing efforts to reform healthcare will be rendered far less effective,” says Kotilaine.

As the need for facilities and services -escalates, the region will continue to generate considerable investment opportunities in the sector. While so many industries are feeling the bite of the credit crunch, healthcare projects continue to show strong growth rates across the region.

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