Health Investment & Finance

Archive of InDepth

   

 

InDepth

Font Size: AAA


Private Sector in Development

In this InDepth analysis, Judith G Hazlewood, discusses the important role of the private sector in health care in the Africa region (published in The Business of Health in Africa).


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

Contact details

Therese Fergo

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

Office: 1 (202) 669-9414
Office: 1 (212) 348_1866
Cell: 1 (202) 669-9414
Fax: 1 (212) 348-2866
Email: tfergo@healthinvestment.com
web: www.healthinvestment.com



Related Material

Full Report ...

  January 01, 2008  


MAIN MENU


Journal


Debate


Analysis