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Recent research by McKinsey & Company indicates that over the next decade $25–$30 billion is needed for health sector investments in Africa.

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It sets the agenda for the IFC's investment strategy for the health sector.

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Journal of Health Investment & Finance

January 1, 2008
Volume 8: Issue 1

Risks & Rewards 

A private equity fund is a collective investment scheme (fund) that invests in companies and/or entire business units with the intention of obtaining a controlling interest.

The investors usually become a majority shareholder, sometimes by becoming the largest plurality shareholder.

This puts them in a position to restructure the target company's reserve capital, management, and organizational infrastructure.

Once one or more of these objectives are accomplished, the target companies are delisted from public stock exchanges (unless already unlisted), held private, restructured over a period of 3–7 years, and then, again, relisted through an IPO.

Restructuring may be done through leveraged buyouts, venture capital, growth capital, angel investing, mezzanine debt, management share participation programmes and others.

Major investors in this industry include:

The Carlyle Group
Goldman Sachs Private Equity Group
The Blackstone Group
KKR (Kohlberg, Kravis, Roberts & Co.)
Texas Pacific Group
Permira, Apax Partners
Bain Capital
Apollo Management
Hellman & Friedman
Silverlake
Berkshire Hathaway

People

In the Leadership Forum, Lars H. Thurnell, describes the tremendous opportunity to leverage the private sector in ways that improve access and increase the financing and quality of health care goods and services throughout Africa.

In a region where public resources are limited, the private sector is already a significant player.

Around 60 percent of health care financing in Africa comes from private sources, and about 50 percent of total health expenditure goes to private providers.

Just as important, the vast majority of the region’s poor people, both urban and rural, rely on private health care.

A poor woman with a sick child is more likely to go to a private hospital or clinic than to a public facility.

The IFC provides opportunities for developing, engaging, and supporting a well managed and effectively regulated private sector to improve the region’s health.

We hope that governments, donors, investors, nongovernmental organizations, and health care providers find our support complementary to traditional public sector approaches.

We look forward to exploring partnerships with African companies, banks, and investors, as well as policy experts and other stakeholders in health care.

Markets

Iternational Finance Corporation (IFC) is a member of the World Bank Group and is headquartered in Washington, DC.

It shares the primary objective of all World Bank Group institutions - to improve the quality of the lives of people in its developing member countries.

Established in 1956, IFC is the largest multilateral source of loan and equity financing for private sector projects in the developing world. It promotes sustainable private sector development primarily by:

. Financing private sector project located in the developing world;
. Helping private companies in the develping world mobilize financing in international financial markets; and
. Providing advice and technical assistance to businesses and governments.


The Journal of Health Investment & Finance is a leading ePublication that explores issues of interest
to investors and the business community working in the health sector. The 
Journal contains all
the articles from the online
Policy Watch and selected archive issues.

Health Investment & Finance is pleased to offer

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Journal of Health Investment & Finance

January 1, 2008
Volume 8: Issue 1

This issue looks at the financial crisis and its impact on the health care industry.


Editor's Choice

Editorial

Adam Smith's Invisible Hand

This Editorial provides a discussion on the contribution by the private sector to healthcare in Africa.



OpEd

Investment Climate

This OpEd discusses the important choices firms and entrepreneurs face in terms of the investment climate  in face of the current economic and financial challenges.




TABLE OF CONTENTS


MAIN MENU

Home Page: Alexander Preker
Home Page


Journal

Journal Main: Journal Editor
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Cover Page: Journal Editor
Cover Page
Table of Contents: Editorial Staff
Table of Contents


Debate

Debate Main: Editorial Staff
Controversy about Private Equity
Viewpoint: Alexander Preker
Business of Health Care in Africa
Editorial: Editorial Staff
Adam Smith's Invisible Hand
OpEd: Editorial Staff
Investment Climate


Analysis

Analysis Main: Editorial Staff
Private Sector in Development
InDepth: Alexander Preker
Private Sector in Development
Review: Alexander Preker
2007 Full of Surprises
Outlook: Alexander Preker
Mixed Outlook for 2008




Profiles Main: Editorial Staff
New Equity Investment in Development
Leadership Forum:
IFC's Private Sector Health Startegy
Market in Focus:
American Depository Receipts (ADRs)

The Journal of Health Investment & Finance is a leading ePublication that explores issues of interest
to investors and the business community working in the health sector. The 
Journal contains all
the articles from the online
Policy Watch and selected archive issues.

Health Investment & Finance is pleased to offer

Free Access to the Journal for low-income countries,
and is a signatory to the
DC Principles for Free Access to Science
.


Health Investment & Finance Corporation
© All Rights Reserved


Crossfire



The Debate Main section of Health Investment & Finance provides a more detailed analysis of topical subjects that may be of interest to investors and industry leaders looking for advice or capital.

The International Finance Corporation (IFC), the private-sector arm of the World Bank, is to co-ordinate a $1bn package of debt and equity funding to strengthen health care in Africa through investments in the private sector.  Will this have a positive or negative impact on health care in developing countries?

 

Opinions

Viewpoint

IFC and healthcare in Africa.  More ...


Editorial

What do others say?  More ...


OpEd

Is US$1 billion enough?  More ...

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Forum

Participate in this debate through the Health Investors' Forum.

 

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Share your views on other topics in the Health Investors' Blog.

 

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Viewpoint

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Guy Ellena

Business of Health Care in Africa

In this Viewpoint, Guy M. Ellena discusses the role of the private sector and the IFC's new strategy for investing in health care in the Africa region.


Health care in Sub-Saharan Africa remains the worst in the world, with few countries able to spend the $34 to $40 a year per person that the World Health Organization considers the minimum for basic health care. And despite widespread poverty, an astonishing 50 percent of the region’s health expenditure is financed by out-of-pocket payments from individuals.

Donor attention has yielded remarkable efforts to fight HIV/AIDS, tuberculosis, and malaria. But most of the region lacks the infrastructure to deliver health care and faces a severe shortage of trained medical personnel. As Africa's economies improve, the demand for good quality health care will only increase further.

Role of Private Sector

Based on recent research, the IFC estimates that over the next decade, $25-$30 billion in new investment will be needed to meet Africa’s health care demand.

Fortunately, increased political stability has led to improved prospects in the region. Vibrant local stock markets and an influx of new foreign investors attest to the increasing role of the private sector across all economic activities in Sub-Saharan Africa, and health care is no exception.

The private sector already accounts for a remarkable share of the region’s health care. Private parties financed roughly 60 percent of all health expenditure – predominantly in the form of out-of-pocket payments by individuals, and about 50 percent of that went to private providers. Examples of private sector participation – complementing and supplementing the public sector and improving quality, accessibility, and efficiency in health care – can be found throughout the region.

Rather than serving only the rich, in Africa today the private sector is sometimes the only option for health care in many rural areas and poor urban slums. A poor woman in the region is as likely to take her sick child to a private hospital or clinic as to a public facility.

Private providers, including for-profit and not-for-profit enterprises, also fill an important medical need by offering products and services that are not otherwise available, such as advanced medical equipment and procedures and higher-quality services.

The vibrancy and positive contribution of the private sector to health care in Sub-Saharan Africa is very encouraging. It calls for a close partnership between the public and private sectors, including improvements to regulatory oversight of private health care, and outlines ways that the private sector could be better engaged to improve its sustainability.

Need for a Facilitating Policy Framework

But private health care will require support and increased supervision if it is to continue to play the important role that it currently plays. Reactions to the private sector among donors, ministries of health, and other public policy official vary.

Some know little about the sector, and some are ideologically opposed to its participation in health care, believing that the financing and provision of health care should be strictly within the public sector’s domain.

Many others recognize its potential, but are suspicious of the profit motive and have legitimate concerns about consistency of quality and the difficulties of regulating a diverse group of entities.

There are a number of significant impediments or barriers to the further development of a sustainable and socially responsible private health sector, integrated into the broader strategies and health systems development by the governments and Sub-Saharan Africa.

To help know down those barriers, it will be necessary to:

• Develop and enforce quality standards through both government and self-regulation to foster the development of a more formal, sustainable and higher-quality private sector;
• Foster risk pooling program to improve the financing of health care;
• Use the private sector to deliver services by encouraging the public sector and donors to more closely engage that sector;
• Modify local policies and regulations to support and mobilize the private sector by streamlining bureaucratic processes, liberalizing human resource regulations, and reducing tariffs and other import barriers; and
• Improve access to capital from financial institutions by educating local banks about the true risk profile of the health care sector, using international financial institutions to lend to health care enterprises, and developing equity-focused financing vehicles for health care enterprises.

Opportunities for Investment

There is considerable demand for investment over the next decade, including:

• Over half a million additional hospital beds;
• Better production facilities and distribution/retail systems for pharmaceuticals and medical supplies;
• About 90,000 physicians, 500,000 nurses, and 300,000 community health workers; and 
• About half of the investments are expected to be made by for-profit entities, with the rest spread between social enterprises and nongovernmental organizations. 

Most opportunities will be in the small and medium enterprise sector. Meeting the demand can deliver strong financial returns and has an enormous potential for development impact, by expanding access to health services for the poorest people and reducing the financial burden on governments.

How IFC Will Help

To help Africa address its health care challenges, IFC will work with local businesspeople, financial intermediaries, policymakers, donors, and other stakeholders in the international community.

IFC and partners are planning to mobilize up to $1 billion of investment and advisory services support over the next five years. IFC’s strategy includes:

• Creating an equity investment vehicle for health care entrepreneurs and businesses;
• Partnering with local financial institutions to improve access to long-term debt for health care organizations;
• Providing advisory services to build the capacity of local financial intermediaries and health care companies;
• Expanding the activities of IFC’s life sciences team in the region;
• Helping expand education of health care workers;
• Encouraging development of health insurance companies;
• Improving the business environment by working with governments to reform private health care regulation and expand public-private partnerships; and
• Supporting country assessments and a biannual report on the health care investment climate.

Looking Ahead

The private sector will continue to play a key role in improving the health of Africa’s people, and health expenditure will continue to grow rapidly. Donors, governments, and the investment community each have a role in developing a responsible, sustainable, and vibrant private health care sector in the region.

Our assessment is based on inputs from a wide range of local and international stakeholders. Going forward, IFC will continue to engage with these groups. Stakeholder forums in Cameroon, Kenya, Nigeria, Senegal, and South Africa and civil society meetings in Europe are planned for the first quarter of 2008.

Contact details

Guy Ellena

Director
International Finance Corporation (IFC)
2121 Pennsylvania Ave., NW
Washington, DC
20433
United States of America

Office: 1 (202) 458-8139
Fax: 1 (202) 974-4792
Email: gellena@ifc.org
web: www.ifc.org



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Editorial

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Adam Smith's Invisible Hand

This Editorial provides a discussion on the contribution by the private sector to healthcare in Africa.


The International Finance Corporation (IFC), the private-sector arm of the World Bank, is to co-ordinate a $1bn package of debt and equity funding to strengthen health care in Africa through investments in the private sector.

This strategy is based on recommendations in a report commissioned from McKinsey & Company with support from the Gates Foundation.

Initial plans include setting up a $100m (£50m, €69m) Equity Fund to support healthcare entrepreneurs and businesses, with the IFC's contribution being capped at 20 percent of the total.

The value of this initial investment will increas will increase to $500m over five years with support from other private investors and donors.

The new strategy by the International Finance Corporation (IFC) to support private sector development in Africa has triggered a lively debate with the global public health community, officials in Ministries of Health and outspoken left-wing experts who do not like the proposal.

Critics of the new policy would rather see the international development community focus on strengthening provision of health services through the public sector, public employment for health workers and an exclusion of the private entrepreneurs from the social sectors like health.

They also worry that strengthening the private sector runs the risk of eroding already weak public health systems.

They also worry that additional investments in the private sector could entrench systems where people who could afford to pay more for services would get better health care than those who had less money at their disposal.

Proponents recognize that:

 

  • up to 80 percent of healthcare expenditure in the Africa region is already in the private sector because the low quality of health services that are often provided through the public sector does not respond to the needs and expectation of the population in most countries;
  • fiscal constraints prevent the public sector from hiring enough staff to supply health service with needed healthcare workers; and  
  • the private sector has already demonstrated superiour performance in coming up with innovative solutions to known bottlenecks in the production of goods and services, supply chain management and mitigating financial risks.

The McKinsey study confirmed these observation, showing that half of the funding, provision and distribution of healthcare in sub-Saharan Africa is already conducted by the private sector, which serves poor and rural populations as much as urban and rich ones.

The real challenge ahead is to work in a constructive way with both governments and the private sector to:

 

  • expand service delivery in Africa;
  • strengthen the health workforce;
  • improve supply chain management;
  • introduce new financing and risk mitigation instruments;
  • subsidize care for the poor; and
  • regulate and improve quality in both the public and private sector.

Contact details

Editorial Staff

Editorial Staff
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Fax: 1 (212) 348-2866
Email: estaff@healthfinance.org
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OpEd

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Investment Climate

This OpEd discusses the important choices firms and entrepreneurs face in terms of the investment climate  in face of the current economic and financial challenges.


Every day, firms and entrepreneurs around the world face important choices.

Their decisions play a key role in economic growth and poverty reduction. And they will depend in good part on government policies and behaviors.

There is general agreement that a good investment climate is essential for growth and poverty reduction. It is less clear is how to achieve this.

Crisis and new governments are important catalysts, but so is the competition generated by trade integration and new benchmarking information.

Law and order are fundamental to creating a stable investment climate in the health sector as it is in other sectors of the economy.

Countries that have had long-standing political instability, civil strife and wars such as Somalia, Liberia, Sierra Leone, Cote D'Ivoire also have a low rate of investment in the health sector - domestic and foreign.

Weak public sector governance and corruption have a similar negative impact on capital flows and overall economic development.

But excessive state intervetion also has a negative impact on investments in the health sector.

Years of centralized planning and goverment monoply in the former communist countries of Central and Eastern Europe led to a striking under-investment in the health sector.

A similar observation has been make in the case of the UK during the 1980 and 1990 and in many developing countries where the state health services predominate.

Both too little and too much government is therefore bad for investments in health.

Striking a balance between these two extremes is not always easy. What is needed is more "steering" and less "rowing".

A good public policy framework for private sector investments in the health sector includes several critical elements:

 

  • Facilitating policy and regulatory environment
  • Enforcement mechanisms
  • Political stability
  • Transparency
  • Competition

 

All of this translated into good governance - one of the most critical elements needed to promote a good investment climate for private sector activities in health care as it is in other sectors of the economy. This means investing early in the institutions and the process of reform.

Contact details

Editorial Staff

Editorial Staff
170 East 88th Street
New York, NY
10128
United States of America

Office: 1 (212) 348-1866
Fax: 1 (212) 348-2866
Email: estaff@healthfinance.org
web: www.healthfinance.org



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Analysis

The Analysis Main section of Health Investment & Finance provides a more detailed assessment of topical subjects that may be of interest to investors and industry leaders looking for advice or capital.

In this InDepth analysis, Judith G. Hazelwood discusses the important role of the private sector in health care in the Africa region.

More

 

Review

The meltdown in the US sub prime market sent shock waves throughout the financial markets.

What was the impact on the health sector in developing countries?

More

Outlook

In the short-run, the still-slumping housing market, escalating credit crunch and inflationary pressures, will force the U.S. economy to limp along at a 1% to 2% snail pace in 2008.

In the medium-term, the emergence of a growing middle class in China, India, Eastern Europe and elsewhere will make global dependence on the U.S. economy a thing of the past.

More










Health care in most of Sub-Saharan Africa remains the worst in the world.

Despite decades of foreign assistance, few countries in the region are able to spend even the $34–$40 per person per year that the World Health Organization (WHO) considers the minimum necessary to provide a population with basic health care.1

In spite of the billions of dollars of international aid dispensed, an astonishing 50 percent of Sub-Saharan Africa’s total health expenditure is financed by out-of-pocket payments from its largely impoverished population. In addition, the region lacks the infrastructure, facilities, and trained personnel necessary to provide and deliver even minimal levels of health services and goods.

This study, conducted by IFC with assistance from McKinsey & Company, estimates that over the next decade, $25–$30 billion in new investment will be needed in health care assets, including hospitals, clinics, and distribution warehouses, to meet the growing health care demands of Sub- Saharan Africa.

The IFC report highlights the critical role the private sector can play in meeting the need for more and higher-quality health care in Sub- Saharan Africa.

It also identifies policy changes that governments and international donors can make to enable the private sector to take on an ever more meaningful role in closing Africa’s health care gap.

It is important to acknowledge at the outset that many in the public health community oppose in principle a role for the private sector in health care. Indeed, there are legitimate concerns about the role of private providers.

The private sector in Sub-Saharan Africa is diverse and fragmented, and as a result, quality can be inconsistent. Moreover, the lack of regulatory and accreditation frameworks combined with a largely uninformed patient population can sometimes allow an unscrupulous minority to prevail over responsible providers—to the detriment of the reputation of all.

The truth is, however, that for-profit companies, non-profit organizations, and social enterprises, along with insurers, providers, and manufacturers, already play an important role in providing health care to the region. They account for as much as 50 percent of health care provision, and their role is growing.

The Widening Gap Sub-Saharan

Africa accounts for 11 percent of the world’s population, yet bears 24 percent of the global disease burden and commands less than one percent of global health expenditure.2

Increased attention from outside donors has resulted in some remarkable initiatives, funneling billions of dollars to help combat HIV/AIDS, tuberculosis (TB), and malaria the worst health scourges of the region.

But most of the area lacks the infrastructure and facilities necessary to provide and deliver minimal levels of health services and products. It also faces a severe shortage of trained medical personnel, with just three percent of the world’s health workers deployed in Sub-Saharan Africa.3

Furthermore, Sub-Saharan Africa’s improving economic performance means that the demand among all sectors of society for health care is poised to increase still further.

This study estimates that the market for health care will more than double by 2016, going up to $35 billion.

The Potential for Complementary Solutions

Although the importance of the private sector varies by country, it is surprisingly large and constitutes an important, diverse component of the region’s health care systems.

Of total health expenditure of $16.7 billion in 2005,4 roughly 60 percent5—predominantly out-of-pocket payments by individuals—was financed by private parties, and about 50 percent6 was captured by private providers.7

The formal element of the private sector consists of non-public entities that include for-profit commercial companies, non-profit organizations, and social enterprises.

Individual public sector health workers also provide private sector services, both formally and informally, and an informal health sector of healers, midwives, and individual medicine sellers also provides care.

The private sector is often perceived as serving only the rich, but often the opposite is the case. In fact, private sector providers, including for-profit and social enterprises, fill an important medical need for poor and rural populations underserved by the public sector.

In addition, the private sector frequently provides services or products that might not otherwise be available, such as advanced medical equipment and procedures.  In many cases the private sector can also provide higher-quality services.

Together, these benefits are likely to lead to improved health outcomes across the region.

What Can Be Done to Further Leverage the Private Sector?

From interviews with all segments of Sub-Saharan Africa’s health care community, five main imperatives emerged that together create an agenda that can mobilize the responsible development of private sector health care in the region.

Develop and enforce quality standards.  Initial efforts at enhanced regulation could have large and immediate benefits. Financial and technical support is needed to strengthen the ability of public and private regulatory bodies to develop and enforce transparent and effective quality standards.

Foster risk pooling programs.  Risk pooling arrangements— such as government-funded national payment schemes,8 commercial insurance, or community non-profit mutuelles—have enormous potential to improve the financing of health care in the region, thereby encouraging the development of higher-quality, more organized private sector providers.

Mobilize public and donor money to the private sector. Donors can help build health care capacity by earmarking some aid to fund private sector entities directly while also assisting local governments to expand their procurement capabilities and manage contracts with the private sector. Employers can foster the development of the local private health care sector by outsourcing provision of health care for their employees.

Modify local policies and regulations to foster the role of the private sector.  Opportunities exist to reform the regulations that inadvertantly impede the development of the private health sector.  The primary areas of focus should be streamlining bureaucratic processes that limit market entry, liberalizing human resource regulations that perversely reduce the number of active health care workers, and reducing tariffs and other import barriers that impede access to or raise the cost of health supplies.

Improve access to capital. Entrepreneurs and business enterprises in Sub-Saharan Africa have trouble securing financing from established institutions. 

Three initiatives could tackle this issue:

(i) educating local banks about the true risk profile of the health care sector;
(ii) using international financial backing to encourage local financial institutions to lend to health care enterprises, including small and medium-sized enterprises (SMEs); and
(iii) developing equity-focused financing vehicles for health care enterprises.

The Case for Investing in Health Care

The weak investment climate in Sub-Saharan Africa has long posed a daunting challenge to entrepreneurs and their potential backers alike, but signs of positive change abound. Political stability has improved, reflecting a steep decline in the incidence armed conflict.

Economic growth in most of the continent has been strong for the past half decade, and inflation is down.

Reform is also beginning to take hold. In 2007, according to the World Bank’s Doing Business report, Africa ranked third in the world (behind the Eastern Europe- Central Asia group and the OECD countries) in the pace of economic reform.

Investment Opportunities in Health Care

The expected improvement in Africa’s macroeconomic climate over the next decade will expand the health care gap, as higher incomes will create new demand.

The biggest individual investment opportunities will be in building and improving the sector’s physical assets. Around 550,000–650,000 additional hospital beds will need to be added to the existing base. An additional 90,000 physicians, about 500,000 nurses, and 300,000 community health workers will be required over and above the numbers that will graduate from existing medical colleges and training institutions.

Demand for better distribution and retail systems and for pharmaceutical and medical supply production facilities will also be strong. An estimated $25–$30 billion in new investments will be needed to meet demand between now and 2016—of which $11–$20 billion is likely to come from the private sector.

A broad range of investment opportunities exist across all components of the health care industry in the region (as described in detail in the annexes to this report). These opportunities can deliver compelling financial returns and have an enormous potential development impact.

Health care provision accounts for roughly half the investment opportunity, with the remainder split across distribution and retail, pharmaceutical and medical product manufacturing, insurance, and medical education.

These investments will fund capacity expansion, new businesses, and renovation of existing assets. About half of these investments are expected to be made by for-profit entities, the remaining portion of private sector investment being equally spread between social enterprises and nongovernmental organizations (NGOs).

The vast majority of the investment opportunities in the near term will be in the SME sector. Only a quarter of the opportunities are expected to have a project size larger than $3 million. 

The IFC report also highlights the availability of investment opportunities in social enterprises that, while delivering lower financial returns, can have a tremendous role in the positive development of Sub-Saharan Africa.

Different Types of Investors

The vast range of financial and developmental opportunities that the health industry presents in Sub-Saharan Africa will require significant involvement by all segments of the investor community.

Financially driven private investors will find sustained industry growth combined with opportunities for consolidation.

Angel investors can engage with innovative social enterprises to deliver great returns while addressing some of the most pressing health care challenges facing the region.

Double-bottom line investors, such as development finance institutions and foundations, can collaborate to provide “patient capital” to achieve financial returns over the longer term while delivering significant developmental impact.

Donors can play a key role by financing those enterprises that are not financially viable, but have the promise to play a crucial role in the development of high-quality private sector health care.

In conclusion, the private sector, including both for-profit and social enterprises, already plays and will continue to play a pivotal role in improving the health of the people of Sub-Saharan Africa.

Donors, governments, and the investment community each face a unique and important set of opportunities in developing a responsible, sustainable, and vibrant private health care sector in the region.

Ultimately, however, the vigor of the private health sector in Sub-Saharan Africa will rely on the commitment, creativity, and integrity of the people of Africa. 

Notes

1. WHO, “Spending on health: A global overview” Fact sheet
2. WHO, 2006 World Health Report
3. WHO, 2006 World Health Report
4. WHO, 2005 World Health Report
5. WHO, 2006 World Health Report
6. NHA reports from most recent year available between 1995–2002 for Ethiopia, Kenya, Malawi, Namibia, Nigeria, Rwanda, Tanzania, Uganda, Zambia, Zimbabwe; other sources for all other countries
7. The term providers is used broadly throughout this document in reference to any type of health care practitioner, facility, or retail outlet
8. Note: National payment schemes include both state-funded systems and social insurance funds

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2007 Full of Surprises

This Review looks at the performance of the global economy and markets in 2007 and implications for the health sector.


Long queues of anxious savers waiting to withdraw their cash in a first run on British banks since the last century formed one of the defining images of 2007, contrasting the optimistic outlook at the beginning of the year.

The sub-prime mortgage meltdown which occurred in the US in August and continued weakness in the dollar took a slice out of the US economy in 2007. Does this unprecedented crisis in credit markets threaten to derail the five-year long bull run for equities?

For the time being the answer seems to be no. Despite near paralysis in lending during the second half of the year, equity markets everywhere managed to register respectable gains in 2007.  But investors would be wise to approach 2008 with caution.

Economic Performance

Three factors defined overall economic performance in 2007:

 

  • A global credit crisis with its roots in US subprime lending;
  • Growth in emerging markets; and
  • Strength in commodities – driven in large part by strong demand from China

 

Before the sub-prime debacle, the global economy had been expanding vigorously, with growth running above 5 percent in the first half of 2007.

This growth was largely due to a few high performing developing countries. China's economy gained further momentum, growing 11½ percent. India continued to grow at more than 9 percent and Russia grew by almost 8 percent. These three countries alone had accounted for one-half of global growth over the past year.

Robust expansions also continued in other emerging market and developing economies, including low-income countries in Africa.

Rapid growth in the emerging markets counterbalanced continued moderate growth of about 2¼ percent in the United States in the first half of 2007 and slowing in growth in the euro area and Japan. 

IMF Projections

Developed Markets

In the US, Europe and UK, the credit crunch resulted in sharp falls in equity markets August. Once the Federal Reserve responded to the credit crisis and started to loosen monetary policy, equities rallied strongly as investors took comfort from the fact that interest rate cuts have usually proved a strong a buy signal for stock markets.

Overall, the US equity market gained 4.1 percent this year and the UK rose 5.4 percent.

Erosion in investor confidence was most spectacular in Ireland where stocks dropped 17.9 percent and persistent deflationary pressures in Japan drove stocks down 5.9 percent.

Emerging Markets

More spectacular, emerging markets reached a record high in late October 2007, massively outperforming their developed market counterparts. The FTSE All World emerging markets index gained 36.7 per cent this year, while the equivalent index for developed markets rose just 7.6 per cent

Brazil spearheaded the way with a gain of 76.2 per cent, closely followed by India up 74.1 percent, Turkey up 68.2 percent and China up 61.3 percent.

China’s capital markets overtook both New York and London in the amount of capital raised from inital public offerings, a major milestone for developing country markets.

At the end of the year, widespread paralysis affecting money markets and inter-bank lending threatened to turn the US credit crunch into a global economic downturn which could affect developing markets as well

Sectors

Some sectors performed very well in 2007.

General

China's rapid growth has led to a significant increase in demand for basic resources such as metals and energy. This resulted in a rise in commodity prices in both developed and emerging markets. It also put oil prices within striking distance of the $100 level, reaching $99.29 in late November.

Geo-political tensions helped push gold to a high of $843.20 a troy ounce, within striking distance of its record of $850 which was reached in January 1980. Other base metals came under pressure from rising stocks and deterioration in the outlook for the global economy. Both nickel and lead prices registered sharp corrections although copper ended the year 7 percent higher.

Competing requirements for food for human consumption, animal feed and rising bio-fuel consumption drove up agricultural commodities such as wheat, corn and soybean prices.

HealthCare

Despite the credit-market woes, equities led by the high-tech industry did well in 2007. Pharmaceuticals and biotech stocks did well in 2007, outperforming the S&P 500. Health care and medical supplies did less well.

There are 10 sub-industry indexes in the S&P Health Care Index (12.2% of the S&P 500 index), with Pharmaceuticals being the largest at 53.4% of the sector's market value. The Health Care Index was in a long-term uptrend until 2007 when it started drifting sideways.

In 2007, the market-weighted Health Care Index registered a 5 percent gain compared with a 5.8 percent gain in 2006. Although, the Index has traced out a lower high than in the past, it has not registered a lower low.

During the same time, the S&P 500 Index did poorly, gaining only 1.6 percent in 2007 compared with its 13.6 percent gain in 2006.

As a result, although the Health Care Index remains in a long-term downtrend, it broke out to the upside of the S&P 500 Index during 2007 because of the weaker relative strength of the latter.

This out-performance by the Health Care Index compared with the S&P 500 Index had more to do with the defensive characteristics of the health care industry where prices have not dropped as much as the overall market.

Towards the end of the year, prices were sitting between the 17-week and 43-week exponential. The weekly momentum, which was neutral towards the end of the year, did not give any clues about the future direction of the sector.

Instruments

It is evident that conditions in money markets remain a long way from normality. Many investors anticipate further easing in monetary policy on both sides of the Atlantic in 2008 but rising inflationary pressures could constrain policymakers room for manouvre. The threat from inflation, slower economic growth, downward revisions in profits forecast and a widespread lack of confidence pose severe challenges for equity investors at the start of 2008.

The massive losses which occurred in structured credit markets overshadowed developments in government bond markets. Total returns from the JP Morgan global government bond index reached 10.9 per cent in 2007 compared to a return of 12.7 per cent on the FTSE All World global equities index.

In emerging markets, spreads over US Treasuries sank to historic lows. The JP Morgan EMBI+ stripped sovereign spread fell to 148.6 basis points in June and had only widened to 239.3 basis points by the end of the year, reflecting the improvment in economic fundamentals across many emerging markets.

Contact details

Alexander S. Preker

President/CEO
Health Investment & Financing
14 Wall Street, 20th Floor
New York, NY
10005
United States of America

Office: 1 (212) 348-1866
Cell: 1 (202) 667-8286
Fax: 1 (212) 348-2866
Email: apreker@healthinvestment.com
web: http://hifcorporation.com/bio/10



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Outlook

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Mixed Outlook for 2008

This Outlook presents the IMF forecast for the global economy which is expected to continue growing in 2008 despite recent turmoil in the credit markets.


The health sector recently traded at a price-to-earnings (p-e) ratio on estimated 2008 earnings per share (EPS) of 15.1 times compared with 13.9 times for the overall market. Its p-e to projected five-year EPS growth rate (PEG ratio) of 1.2 times is above the market's PEG of 1.1 times.

The continued ageing of the population and consumer demand for quality-of-life enhancing interventions will continue to provide a positive stimulus for some parts of the sector that respond to chronic illness (medications for non infectious diseases, rehabilitation and long term care)

Furthermore, cost containment measures and introduction of universal health-care coverage will stimulate certain service delivery organizations that have specialized in cost effective interventions and managed care.

Despite such positive signals, many investors worry about how resilient the health sector will be in a weakening economy, particularly in light of several downwards pressures on the health care market such as the: 

· weak new product pipeline in the pharmaceutical industry;

· overall impact of cost containment measure introduced by Medicare and Medicaid; and

· political intervention by governments in the case of markedly expanded or near universal health-care coverage

IMF Economic Forecast 

The IMF expects the global economy to continue expanding in 2008 despite recent turmoil in the credit markets (see Table).

Although, global growth will slow from 5.2 percent in 2007 to 4.8 percent in 2008, sound underlying fundamentals should keep the global economy on course.

Emerging market economies will be the main engine for this growth, with growth in China (10.0), India (8.4) and Africa (6.5) outpacing weak performance in the US (1.9 percent), Euro zone (2.1 percent) and Japan (1.7 percent).

IMF Projections

Downside Market Risks

There a number of factors other than the recent turbulent credit markets that could have a negative influence on overall economic performance and markets in 2008:

· credit availability may remain tight as lenders tighten standards despite other measure to ease such pressures;

· housing market values may end up with a sharper downturn than expected despite recent optimistic valuations;

· turbulence in global financial markets could disrupt capital flows to emerging markets and trigger problems in domestic markets;

· several inflationary pressures loom on the horizon including rising;

· dwindling spare capacity, continuing high oil prices, and still strong foreign exchange inflows;

· supply shocks and continued geopolitical turmoil could lead to further oil price spikes;

· persistent and large global current account imbalances also create worrisome downside risks (deficit in the US and large surplus in China);

· a disorderly depreciation of the U.S. dollar would have severe repercussions throughout global financial markets; and

· sustained trade imbalances could prompt rising protectionist pressures.

Contact details

Alexander S. Preker

President/CEO
Health Investment & Financing
14 Wall Street, 20th Floor
New York, NY
10005
United States of America

Office: 1 (212) 348-1866
Cell: 1 (202) 667-8286
Fax: 1 (212) 348-2866
Email: apreker@healthinvestment.com
web: http://hifcorporation.com/bio/10



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Profiles


Understanding investment opportunities in emerging markets requires a full understanding of three elements related to corporate governance: the people who run the business; the private companies who produce goods and services; and the market environment in which trading takes place.

 

Health Investment & Finance provides a profile of the leadership characteristics of some of the health industry's top CEOs and senior management, an analysis of some of the best performing companies and leading stock exchanges.

 

Leadership Forum

Leadership and vision from the top drive corporate strategies.

 

People such as Lars H. Thunell, Executive Vice President and CEO of the International Finance Corporation (IFC), make a difference.

 

More ...

 


Company Profile

The International Finance Corporation (IFC) is the largest multilateral source of loan and equity financing for private sector projects in the developing world.

IFC's net worth is around $10 billion.

More...

Feature Stock Exchange

An American Depositary Receipt (ADR) represents ownership in the shares of a foreign company trading on US financial markets.

ADRs enable US investors to buy shares in foreign companies without undertaking cross-border transactions.

They carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies.


More ...










Sub-Saharan Africa has about 11 percent of the world’s people, but it carries 24 percent of the global disease burden in human and financial costs. Almost half of the world’s deaths of children under five take place in Africa.

This challenge is significant but not insurmountable. There is a tremendous opportunity to leverage the private sector in ways that improve access and increase the financing and quality of health care goods and services throughout Africa In a region where public resources are limited, the private sector is already a significant player.

Around 60 percent of health care financing in Africa comes from private sources, and about 50 percent of total health expenditure goes to private providers. Just as important, the vast majority of the region’s poor people, both urban and rural, rely on private health care. A poor woman with a sick child is more likely to go to a private hospital or clinic than to a public facility.

The IFC provides opportunities for developing, engaging, and supporting a well managed and effectively regulated private sector to improve the region’s health. We hope that governments, donors, investors, nongovernmental organizations, and health care providers find our support complementary to traditional public sector approaches. We look forward to exploring partnerships with African companies, banks, and investors, as well as policy experts and other stakeholders in health care.

Despite the scope of Africa’s health challenge, I am optimistic about what can be achieved in the next few years.

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There are plenty of profitable and liquid opportunities available else where for investors in a position to invest in international markets.

An example is the American Depository Receipts (ADRs) of Chinese and Indian companies traded on New York stock exchange in particular, and ADRs of emerging markets in general.

The ADRs represent shares of these companies and represent all the benefits in addition to the fact that the investor does not have to worry about currency conversion, delivery, custody, collection of dividends, etc.

There are at least 15 such ADRs that have gained 40% or more in the past three months in US dollar terms.

A quick look at their performance is enough to make one wonder how to access such opportunities.

Company Name 3 months gain (%)

BAIDU.COM 83.7
CNOOC LTD 76.9
CHINA MOBILE 75.6
PETRO CHINA 66.8
CHINA LIFE INS. 53.3
HDFC BANK 50.6
ICICI BANK 49.8
CHINA TECH FAITH 47.8
FOCUS MEDIA 47.4
SUNTECH POWER 46.3
CHINA TELECO 46.2
CHINA PETROLEUM 43.0
ALUMINUM CORP 41.8
CHINA MEDICAL TECH 41.2
KONG ZHONG 41.1 |

These are not some dot com stocks. They include some of the biggest and well known Chinese and Indian companies.

For example, CNOOC (symbol: CEO) is China’s largest offshore oil producer with a total market capitalisation of $91 billion. Its sales increased from $6.7 billion in 2004 to $11.1 in 2006 and net profit from $1.9 billion to $3.9 billion with an average return on equity of 34%. It shares traded an average volume of $81 million a day during the past three months.

China Mobile (symbol CHL)– a Chinese company - is the world’s largest mobile telephone company by users. It controls about 67 percent of China’s mobile market and has a total of about 350 million users. In September alone, it gained 61 million customers. It is rapidly expanding into rural China – world’s largest market. Its daily trading volume some times exceeds the total volume on Karachi stock exchange.

HDFC (symbol HDB) is one of the largest banks in India and the largest mortgage lender. Its net profit has increased from $110 million in 2004 to $250 million in 2007. Its shares have gained 73 percent this year and it continues to grow due to strong demand in an economy where wages are forecast to grow by 15 percent this year, the fastest in Asia.

These examples show that by investing in strong and large companies that are reporting solid growth in revenues and earnings, it is possible to generate good returns without worrying about rumours and noise created by the markets.

Note: Gains based on prices at close of business on October 30, 2007

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  January 01, 2008  


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