Project Finance in African Healthcare Sector: A New Investment Opportunity?

History has it that healthcare sector within African continent is highly deteriorating and unfavorable amongst the rest of the world. African nations remains the countries with the highest rates of maternal death, death under 5 years old, deaths from trauma & injury and deaths from infectious disease are nearly all in Africa.

Following an implementation of large projects or to fund and expanding an idea within the terrain of infrastructures, healthcare, modernization of engineering and industrial projects, and other infrastructural projects, Project Finance is the most commonly an applied solution.

Putting in consideration the capital-intensive nature of healthcare projects in Africa, most startups find it nearly impossible to fund projects entirely on their own.

The above mentioned connotes an application of Project Finance. In most countries of Africa, providing long-term debt finance in the form of a restricted or non-recourse financial package arranged against the project’s forecasted cash flow, with only the project assets held as collateral.

In this case, Project Finance typically requires the formation of a ‘Special Purpose Vehicle’ (SPV) by the investor. SPVs are economic entities that are set up to design, build, and manage the financials of a specific project, thereby assuring lenders of its sound financial health. It is a tried-and-tested method of funding large, risky, and complex industrial projects.

Benefits of Project Finance in African Healthcare Sector

Project Finance for African Healthcare sector enables investors to distribute investment risks among SPV stakeholders who are financially capable of absorbing the risks.

Furthermore, because the equity commitment is less than the estimated project budget, a significant portion of the risk is transferred to the creditor.

Off-Balance Sheet or Restricted Recourse: Project financing helps debts to be disbursed off the balance sheet. The cash flow generated by the project earnings is used solely to repay capital and interest. As a result, if the borrower defaults on repayment, the lender can only claim the assets of the responsible SPV and nothing else, even if they fall short in value versus the amount owed.

Superior Tax Treatment: The moment Project Finance is settled, borrower’s can retain the favorable stance of preferential tax treatment. This tax preferential treatment the most pronounce option for funding long-term projects.

Impact of Sponsor Credit on a Project: This kind of financing structure not only optimizes project leverage, but also ensures that the sponsor’s creditworthiness has no negative impact on the project.

Stages of Project Finance for African Healthcare Sector

Pre-Finance Stage: This involves creating a project plan based on business needs and market trends, followed by a thorough examination of the risks involved and determining whether the project is technically, politically, economically, and environmentally viable.

Financing Stage: This is stage where the project finance sponsor, who is acting as an SPV, obtains equity and loans from financial institutions and comes to a mutually documented agreement on payment terms and loan amount, which is then injected into the SPV to fund the project. The payment is made with a combination of debt and equity, with a typical debt-to-equity ratio of 70:30 (may vary from case to case). After the project’s financing is completed, it moves on to the financial close stage.

Post-Financing Stage: Once the project has been fully funded, the project cycle and its milestones are closely monitored and pushed to completion ahead of the established deadline. After the project is completed, the loans are repaid with project earnings.

What Project Finance for Healthcare Sector in Africa will look like

Ultimately, it comes down to resources. Especially as the price of healthcare globally continues to increase. Jon Guber, a Professor of Economics at MIT describes how in 1950, the American government spent 5% of GDP on healthcare. In 2012, it spent almost 20% of GDP on healthcare. By 2075, its projected to be 40%. That means 40 cents out of every $1 generated in America will go to healthcare!

Africa makes up 16% of the world population and carries 23% of the global disease burden, yet it accounted for just 1% of total global health expenditures in 2015.

Africa has a population of 1.3bn people and an economy smaller than California’s (population 40m), this level of poverty magnifies the need for healthcare whilst simultaneously decreasing the capacity to pay for it.

Be it as it may, a lot of healthcare sectors within the African continents have witness a successful completions. Other projects such as roadways, airports, power plants, and mines through Project Finance. With ample support from African governments, the implementation of large-scale projects, particularly those related to urban development, is expected to increase by approximately 65% in the years leading up to 2030

Offshore financing have also paved way to more financing options to African banks. A sharp increase in demand for Project Financing can thus be predicted, pointing to an economic boom.

In South Africa and Mauritius, for example, the healthcare Procurement agency has defined the project finance market in recent years, having successfully closed three rounds of projects on a project financing basis, facilitating over US$10 billion in investment. Apart from that, there is an implementation of REIPP projects, certain large infrastructure projects, such as the Gautrain light rail project, certain liquid fuel and liquid petroleum gas (LPG) import terminals, and mining-derived projects, have also been closed on a project financing basis.

In furtherance of the above, project finance activities are expected to focus on additional healthcare projects (subject to policy planning), power/energy projects procured on a similar basis, including both coal and liquefied natural gas (LNG), as well as water projects, as creditworthy off-takers increasingly look to private sector solutions for services traditionally provided by the public sector.

Another potential focus of the project finance market is investment in gas-fired power, off-grid power, oil and gas infrastructure (such as pipelines and refineries), and transportation infrastructure projects (such as toll roads and ports.

Project finance is an ideal tool for the development of African Healthcare projects

1. It is independent of a balance sheet of an existing company, therefore can be used to develop projects quickly
2. The children’s hospital in Dublin cost nearly $3bn in capex alone. That level of healthcare infrastructure spend in Africa would be unthinkable. But it is possible to deliver quality healthcare infrastructure at a fraction of that cost. However, even that level of capex cost would be difficult to achieve for many African governments. Spreading payments over time help countries to manage their fiscal space making it possible to do more with less.
3. Increases healthcare budget: Healthcare spending in Africa is extremely low. The type of offtake agreements such as minimum patient number guarantees that make these type of infrastructure projects bankable also increase the amount of money available for healthcare to citizens whilst protecting the government off-takers against healthcare inflation.

4. Economies of scale: Large scale healthcare projects provide economies of scale by reducing fragmentation. This provides more efficiency and cheaper costs per patient. It also increases quality. Bulk purchases of equipment and drugs can be made by these large scale healthcare projects further reducing the cost of care. I explain this further in my article on the world’s cheapest hospital.

Large scale centralised hospitals in India allow operations to be done at 1- 10% of the prices of American hospitals, but because of the large volumes, the procedures are profitable and clinical outcomes (quality) are the same, sometimes even better,

The New Frontier of African Healthcare: What to Expect?

African Healthcare sector is making waves especially in southern Africa. But that is only formidable with the support from the right investors.

Havelet Finance Limited, a Channel Island loan and project finance company is available to take you through large project with a 100% financing on all infrastructure especially in the healthcare sector.

Our Service includes;

• Long-term loans for up to 20 years.
• Organization of project finance (PF) schemes.
• Operations with letters of credit or bank guarantees.
• Financial modeling and consulting.
• Investment engineering.

Website: https://www.havelet-finance.com
Email: credit@havelet-finance.com