Article: How to attract investment to the health-care?

How to attract investment to the health-care?

Published on kursiv.kz
Alzhan Stamkulov, partner of Synergy Partners

We will not address this question from the position of the government. We will review this question from the position of the polyclinics. Our company has a great deal of experience of interactions with investors and some health clinics. In this article we would like to review the main problems and questions that the clinics will have to face in the process of attracting private investments.

 Polyclinics are already wondering – why do they need investments and what for? Probably, for solving long-standing problems. For example, building an additional modern building for the clinic, purchasing medical equipment, expanding the range of services provided. In general, for improving the performance of the clinic.

But investor will not offer this clinic a loan or will not buy its shares for nothing, without making sure of the investments repayment. For example, an investor is planning to invest $20 million in the polyclinic. Usually, the investment frontier is about 5-7 years, which means that in 5-7 years the investor should get the $20 million back and receive profits.

Where is the guarantee of the polyclinic’s profitability? Where is the guarantee of the investments repayment? This means that if he is a shareholder of this clinic, his investments in the clinic should give about $3 million of dividends each year. The second option for the investor is leaving the business, meaning after 5 years he sells his share in the clinic to other investors for $30 million. In this case his profit will be about $2 million a year, without taking the return on investment of $20 million into consideration. These are the best scenarios for the investor. But the investor knows that receiving such profits is difficult, except if the polyclinic is very popular, effective and profitable. All in all, loosing investments is very easy. There are a lot of factors that cause non-payment of the investments. That is why the investor will have a lot of questions to the clinic. He will think about how justified this risk is, how difficult it will be for him to work with other shareholders of the clinic very carefully.

In this situation the clinic has to convince the investor that it can generate high profits, it has a strong client base, it offers high-quality medical services, it has other competitive advantages over the rest of the clinics. Directors and owners of medical clinics should not be naïve and presumptuous. The clinic should show its profitability and, importantly, long-term sustainability of the business. Of course, the clinic might have to turn to consultants in order to show its operational and organizational effectivity, sales channels, define the strategy and improve the long-term sustainability.

Foreign investors are interested in clinics that have 300-500 bed spaces, meaning big clinics in large cities. So far Kazakhstan has only one megapolis and two rapidly growing cities – Shymkent and Astana. Karaganda is a part of Astana’s metre-zone. However, it is still possible that there might be investors interested in purchasing a regional polyclinic with 100-150 bed spaces.

Government health clinic will not be able to attract investors because the government has no right to sell the clinic’s shares to an investor. Nevertheless, government polyclinics can develop through the projects of public-private partnership (PPP). According to our information, some clinics have already made about 30 contracts on PPP projects, which include contracts for the renovation of expensive medical equipment.

This leads us to the fact that there is no point in talking about investments until the government health clinic is private. The privatization program should give polyclinics an opportunity to become private companies. In Kazakhstan, privatization of government hospitals and clinics campaign has already started in the concept of Yellow Pages, meaning a maximal reduction of the government’s share in the economy and development of competition. However, this process will take a very long time. Some clinics exist as a RSE (Republican State Enterprise), which means that their legal entity type does not imply issuing shares. Thereby, in order to sell a clinic, it is necessary to transform RSE into JSC first, and then organize the privatization of the JSC through selling a full stock of shares to private individuals.

After the privatization, these clinics receive the possibilities for accelerated growth and development on the account of attracting investments. They can create joint ventures, invite new shareholders through additional shares issue, receive loans that are converted to the clinic’s shares on the maturity date.

However, the system of compulsory social health insurance (CSHI) brings new rules to the game. We suppose that the competition between the clinics will only increase. According to the CSHI system, the patient chooses the clinic he wants to be diagnosed or treated at himself. The money for the patient will be sent to the clinic after the service is received by the social health insurance Fund (SHIF). For example, the new assigned system allows future patient to attach to any clinic, choose any clinic, even it is not in your district. Before the population was assigned only to the closest hospital, without taking into consideration if you like to be treated there or not.

The question of attracting investments is as important as the question of attracting more patients. On the one hand, practically all of the large and leading health clinics are government clinics. On the other hands, government clinics have a lot of patients not because of the service quality, but thanks to the First Aid Team’s old assigned system. Since this system is no longer going to exist, government clinics are becoming vulnerable in loosing patients, even though it is still not evident for them.

There are a lot of risks. Judge for yourself, government health clinics complain on public procurement, because it makes it impossible to renovate the buildings or do effective purchases. Public procurement inspectors systematically intimidate the directory of the clinics. According to a scientist and a director Kennet Alibek’s words, he started to fear this type of bureaucracy. In the majority of cases, top management (board of directors) of health clinics consists mostly of government official, who are not professional managers with a great experience in corporate sphere. In fact, the doctors themselves are actually managing the clinics, and they do not have enough skills to work in a competitive area. As a consequence, there are long queues in polyclinics, not effective treatment, not effective expenditures, that end up discouraging and scaring off the patients. But the clinics do not see it because of the fast migration of rural population to the cities and a recent population growth since 2007. So far, the demand exceeds the supply.

Private clinics have learnt a lot during the last decade. This includes their services marketing, decent competition with the government clinics, effective business processes, right budget policies, renovation and expansion of the chain. But the private clinics as well should not let their guard down, because soon a lot of government health clinics will become private. This is why the question will be who will make themselves attractive for investments and patients faster.
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