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Indian healthcare PPP opportunity has arrived

Written by Liz Jenkins and Sahina Jada

First published in Infrastructure Journal on 19 April 2012 as Part I of a two part series.

Foreign investment policy is extremely liberal in the hospital sector in India. Since 2000, 100 per cent foreign direct investment (FDI) is permitted under the automatic route (i.e. without the need for approval of the Foreign Investment Promotion Board)[1].

Furthermore, with the growing affordability of the middle class, rising incomes and changing lifestyles, more and more Indians are willing to pay for quality healthcare. Penetration in to the market of private health insurance is also increasing and it is only a matter of time before health insurance is offered to all employees as a matter of course. Yet despite the liberal regulatory environment and the huge (largely untapped) market opportunity, FDI presence in Indian hospitals is very limited.

So what’s stopping foreign investors from capitalising on this untapped potential when growth opportunities in this sector are good? Although we are witnessing the emergence of healthcare on the political agenda and the promotion of public private partnerships (PPP) by the Government, there is still no clear road map or regulatory framework or body, resulting in lack of transparency and inefficient procedures.

There is also the perception that the hospital business requires localised and in depth knowledge of local market and laws and the view that the process of obtaining clearances and approvals is long and costly which may delay establishment and drive up costs.

Furthermore, with the limited domestic manufacturing capacity for medical equipment, most medical devices have to be imported at high costs having a major impact on operations and returns. Another major operating challenge is the lack of quality manpower resulting from inappropriate regulations on medical education suppliers and inadequacies in medical education.

However, the Union Budget came out last month and although it was not expansive, it did highlight some important initiatives taken by the Government to try to address some of these constraints.

The Finance Minister proposed an exemption of customs duty on certain medical devices and extended concessional basic customs duty of 5 per cent with full exemption from excise duty / CVD to six specified life-saving drugs/vaccines. He also proposed to reduce basic customs duty on soya protein concentrate, on isolated soya protein, iodine and on probiotics.

The government has increased weighted deduction of capital expenditure for businesses setting up hospitals from 100 per cent to 150 per cent. The Budget doubled infusion into the National Skill Development Corporation (NSDF) to INR10 billion (US$191.04 million), raising the corpus of the fund to INR25 billion. It is hoped that this will spur some increase in semi-skilled healthcare workers for healthcare services.

The finance minister also provided tax benefits to manufacturers for costs incurred in talent development and exempted vocational training institutions from service tax. And has set a target of imparting skills training to 500 million people by 2022. To further tackle shortage of skilled manpower in the manufacturing sector, the Budget has proposed to provide weighted deduction of 150 per cent of expenditure incurred on skills development in manufacturing.

The Government also announced an increase in the allocations for the National Rural Health Mission (NRHM) to INR208.22 billion for 2012-13, around 15 per cent more than INR181.15 billion for 2011-12, coupled with the launch of the National Urban Health Mission for encompassing the primary healthcare needs of people in urban areas. The programme was launched in 2005 and aims to provide quality healthcare to villagers. Initiatives have been taken by NRHM to undertake PPPs to meet the growing needs for health services in rural areas.

There is still a lot more the Government needs to do to make the healthcare sector more attractive to foreign investors. At a macro level, there needs to be a comprehensive and strong policy on PPPs for use by Central and State Governments in the healthcare sector together with better regulatory framework and an independent regulatory body.

The Government needs to assist in the promotion of health insurance for a larger percentage of the population by perhaps making it mandatory for employers to provide health insurance. The facilitation of land acquisition, quick regulatory approvals, reduced duties on imported equipment and of course higher spend on healthcare by the Government are also a few other measures which could be adopted to incentivise private investment in to this sector.

However it’s not just the Government who has a role to play. We think the time has come for the private sector to take a serious look at the healthcare sector, and considering the changing dynamics of the healthcare market in India, to bring innovative models to this sector and take advantage of the opportunities and enabling conditions.

Recently the Indian Deputy Chairman of the Planning Commission acknowledged that the Indian healthcare sector needs new models of PPP if the goal of universal healthcare is to be realised. Entrepreneurship and innovation in healthcare delivery models will be a great catalyst for the growth and transformation of the Indian healthcare sector, and we are not far from that happening.

[1] Master Circular on Foreign Investment in India (RBI/2011-12/15 Master Circular No. 15/2011-12)