FDI in Indian Hospitals

CONSTRAINTS TO FOREIGN DIRECTINVESTMENT IN INDIAN HOSPITALS

RUPA CHANDA

Indian Institute of Management BangaloreBannerghatta Road, Bangalore 560076, India

[email protected]@gmail.com

This paper examines the impact of a liberalised foreign direct investment (FDI) regime in Indianhospitals on FDI inflows. The paper shows that there is hardly any FDI in Indian hospitals dueto domestic constraints such as high initial establishment costs, low health insurance pen-etration, manpower shortages, high cost of medical equipment, and regulatory deficiencies.These constraints also impede domestic investment in hospitals. The paper concludes that aliberal foreign investment regime may not result in increased FDI inflows if regulatory andstructural impediments continue to constrain investment in the host economy. Investment lib-eralisation must thus be supplemented by domestic regulatory reforms to create an environmentthat is conducive to all investors.

Keywords: Foreign direct investment (FDI); hospitals; India; constraints; regulations; reforms.

JEL Classification: F1, F2

1. Introduction

Financing of healthcare is possible from many sources. These include domestic andexternal commercial borrowing, official aid, non-governmental finance, foreign directinvestment (FDI), private equity investment and placements in the domestic or inter-national capital markets, among other sources. Given the growing internationalisationof health services, an understanding of the nature, determinants and implications offoreign financing assumes importance.

Several studies have examined the determinants of FDI in the health sector andthe associated benefits and challenges (Outreville, 2007; Smith, 2004; Chanda, 2001,2002a, 2002b, 2002c; Drager and Vieira, 2002). These studies highlight the growingpotential for global FDI and trade flows in health services due to demographics,technological advancements and liberalisation of this sector. Most of these studieshighlight the importance of governance and regulations, availability of quality inputs,country risk and perception, supporting infrastructure and cultural distance indriving FDI flows in healthcare. Outreville (2007) discusses the relevance of theeclectic or OLI (ownership-specific advantages, location-specific advantages and

Journal of International Commerce, Economics and PolicyVol. 1, No. 1 (2010) 121–143© World Scientific Publishing CompanyDOI: 10.1142/S1793993310000020

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market internationalisation) paradigm of FDI developed by John Dunning (1988) tothe health sector, wherein a firm’s reputation, the host country’s market size, its socialand physical infrastructure levels, trade and investment regulations and the potentialfor scale economies affect FDI incentives in healthcare. In particular, it highlights thesignificance of governance structures and the general business climate for investmentin healthcare, similar to that in other parts of the economy.

The existing literature on FDI in healthcare also suggests that the implications offoreign commercial presence may be mixed, with possible improvements in healthinfrastructure and standards on one hand and higher healthcare costs and greaterdualism and inequities within the sector on the other. An important point made by allthe studies, however, is that this impact is largely shaped by prevailing regulatory andstructural conditions (Blouin et al., 2006; Adlung and Carzaniga, 2002; Chanda,2002a, 2002b, 2002c). Moreover, as Smith (2004) notes, the extent of commerciali-sation may be more important than the nature of the ownership in shaping this impact.

The regulatory environment is thus one of the key factors shaping the location-specific advantage of host countries in attracting FDI in healthcare and in determiningits impact. This would imply that mere liberalisation of the healthcare sector at theborder such as by liberalising the FDI regime and making a binding multilateralcommitment on FDI in the services negotiations under the World Trade Organization(WTO) would not alone translate into increased foreign commercial presence inhealthcare. The business environment at the national level and the operating andregulatory framework within the health sector as well as in related areas have to beconducive to investors, whether foreign or domestic.

This paper explores the nature of this interface between the regulatory frameworkenvironment in the health sector as well as in related areas, and FDI, using a case studyof the hospitals segment in a developing country such as India, where private playershave a growing presence, the foreign investment regime is liberal and foreigninvestment has a potentially important role to play in building the country’s healthinfrastructure. The objective is twofold: (1) to examine the nature and extent of foreigninvestment — FDI as well as other forms of foreign capital inflows — in India’shospitals; and (2) to understand how regulatory and structural conditions within India’shealth system and in related areas have affected foreign investment in India’s hospitals.

Section 2 provides an overview of India’s healthcare system, focusing on the hugeinvestment requirements facing this sector and the growing role of private players indelivering healthcare. Section 3 provides details of the primary study which forms thebasis for this paper. Section 4 on results discusses the status of foreign investment inIndian hospitals and highlights its limited role compared to other forms of foreignfinancing. Section 5 analyses the reasons underlying the main findings, focusingon the explicit and hidden barriers that have constrained FDI in Indian hospitals.The concluding section summarises the key findings and suggests policy measuresto facilitate more investment in Indian hospitals. It highlights the importance of

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regulatory reforms and policy measures in the domestic market to support FDI lib-eralisation and make it meaningful.

2. Background

The Indian healthcare delivery market is estimated at US$35 billion in 2008 or5.2 per cent of GDP and provides employment to 4 million people. It is projectedto grow to US$75 billion by 2012, providing employment to 9 million people(Technopak, 2007a). The sector comprises many segments, including hospitals,medical infrastructure, medical devices, clinical trials, outsourcing, telemedicine andhealth insurance. The industry has grown at about 13 per cent annually in recent yearsand is expected to grow at 15 per cent per year over the medium term, driven by risingincomes, growing propensity to spend on healthcare, a shift to lifestyle-related diseasesand demographics, among other factors (FICCI–Ernst & Young, 2007; and IBEFonline, www.ibef.org).

However, India’s healthcare sector falls well below international benchmarks forphysical infrastructure and manpower, and even below standards in comparabledeveloping countries. The total number of doctors per thousand persons stood at only1.27 in 2006 and 0.5 physicians per thousand persons in India, compared to a worldaverage of 1.5. The number of nurses per thousand persons stood at 0.9 in 2006,compared to a world average of 1.2. The current ratio of beds per thousand persons is amere 1.03, compared to an average ratio of 4.3 for developing countries like China,Korea and Thailand, and in the best of circumstances is projected to reach 1.85 perthousand persons by 2012. An estimated million plus beds have to be added to attainthis 1.85 ratio, requiring a total investment of US$78 billion in health infrastructure.An additional 800,000 physicians are required over the next 10 years (Technopak,2007b). Thus, India’s healthcare sector needs to scale up considerably in terms ofphysical infrastructure and human resources.

2.1. Role of private sector

A striking feature of India’s healthcare system is the significant and growing role of theprivate sector in healthcare delivery and total healthcare expenditures. Public healthexpenditure accounts for less than 1 per cent of GDP while private healthcare accountsfor over 75 per cent of India’s total healthcare spending and is one of the largest in theworld. An estimated 60 per cent of hospitals, 75 per cent of dispensaries and 80 percent of all qualified doctors are in the private sector. However, private healthcaredelivery is highly fragmented with over 90 per cent of private healthcare being servicedby small-scale establishments. Some 2 to 3 per cent of hospitals have over 200 beds,some 6–7 percent are 100–200 bed size to hospitals, and the bulk — 80 per cent — ofprivate sector hospitals are very small, with less than 30 beds (Technopak, 2007).

Studies have shown that a majority of Indians trust private healthcare overgovernment-owned healthcare agencies, despite the former’s higher average cost, thus

Constraints to Foreign Direct Investment in Indian Hospitals 123

reflecting the widespread lack of confidence in the public healthcare system. As dis-cussed in Peters and Muraleedharan (2008), India’s administrative and bureaucraticapproach to regulating health services have not worked well and have failed to assurepublic safety, make service delivery and financing accountable and transparent, andreduce dualism within the sector. As a result, although India’s public health system islarge in size, its market share remains small. The private sector’s role in India’s healthsystem is expected to grow in the future. It is estimated that out of the 1 million beds tobe added by 2012, the private sector will contribute 896,000 beds. Governmentspending on healthcare infrastructure (excluding land) is projected to rise only mar-ginally (FICCI–Ernst & Young, 2007; and IBEF online, www.ibef.org).

2.2. Foreign investment and participation

Given rising demand, the emergence of reputed private players and huge investmentneeds in the healthcare sector, there has been growing interest among foreign playersand non-resident Indians (NRIs) to enter the Indian healthcare market. There is alsointerest among domestic and international financial institutions, private equity funds,venture capitalists and banks to explore investment opportunities across various seg-ments (drugs and pharmaceuticals, medical devices, hospitals, etc.) in the Indianhealthcare sector. In the hospitals and medical devices segment alone, there arereportedly at least 20 international players, mostly entering through joint ventures ortechnology and training collaborations with Indian companies. Some of these venturesinclude the following:

. Singapore’s Pacific Healthcare has made its first foray into the Indian market,opening an international medical centre, which is a joint venture with India’s VitaeHealthcare, in the Indian city of Hyderabad.

. The Singapore-based Parkway Group Healthcare Pte Ltd penetrated into the Indianhealthcare market in 2003 through a joint venture with the Apollo Group to build theApollo Gleneagles Hospital, a 325-bed multi-speciality hospital at a cost of US$29million.

. Columbia Asia Group, a Seattle-based hospital services company, a worldwidedeveloper and operator of community hospitals, has started its first American-stylemedical centre in Hebbal, Bangalore. Columbia Asia is the first hospital to enter theIndian healthcare market through the foreign direct investment route.

. Wockhardt, the international arm of the Harvard Medical School, which also has astrategic association with Harvard Medical International, has set up a new hospital (atertiary service provider) in Bangalore at a cost of around Rs. 200 crores.

. The Parkway Group has entered into a joint venture with a Mumbai-based AsianHeart Institute and research centre to set up specialised centres of medical excellencein Mumbai.

. Max Healthcare and Singapore General Hospital (SGH) have entered into collab-oration for medical practice, research, training and education in healthcare services.

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. Steris, a US$1.1 billion healthcare equipment company, plans to set up a whollyowned arm in India to sell its devices and products in the country’s booming medicaldevice market. Steris plans to make an initial investment of US$1,00,000 to set upthe wholly owned subsidiary.

. Apollo Hospitals Enterprise Ltd has entered into a joint venture with Amcare Labs,an affiliate of Johns Hopkins International of the US, to set up a diagnostic lab-oratory in Hyderabad. An initial amount of US$2.2 million is to be invested and thelaboratory is likely to be operational by mid-2006.

. India’s first geriatric hospital, the Heritage Hospital of Hyderabad, has formed a jointventure with US-based United Church Homes to recruit, train and provide placementto registered Indian nurses in the US.

. The US-based healthcare products major, Proton Healthcare has made an entry intoIndia with its range of digital health monitoring devices and has a strategic tie-upwith the Delhi-based SM Logistics for distributing its products in the Indian market.

India’s FDI regime for hospitals is very liberal. Since January 2000, FDI has beenpermitted up to 100 per cent in hospitals under the automatic route. No governmentapproval is required as long as the Indian company files with the regional office of theReserve Bank of India (Central Bank) within 30 days of receiving inward remittancesand files the required documents within 30 days of issuing shares to the non-residentinvestors. Controlling stake is also permitted in hospitals for foreign investors. (Earlier,FDI was subject to discretionary approval by the Foreign Investment PromotionBoard.) Current regulations also permit other forms of capital mobilisation to betreated as FDI. For instance, Indian companies can raise foreign currency resourcesabroad through special depository receipts under the automatic route, up to 49 per cent,subject to specified conditions. Such investments are also treated as FDI. Private equitystake of over 10 per cent owned by any individual investor also counts as FDI.1

Other forms of foreign funding are also being used by hospitals to expand or set upoperations in India. The regulatory environment for such financing is again quiteliberal. Foreign institutional investors (FIIs) and private equity (PE) funds can indi-vidually purchase up to 10 per cent and collectively up to 24 per cent of the paid-upshare capital of the company, through open offers or private placement, or through thestock exchange. Proprietary funds, foreign individuals and foreign corporates canregister as a sub-account and invest through FIIs, subject to limits of 10 per cent and5 per cent, respectively. Foreign venture capital investments (FVCIs) are also permitted.

Thus, there is considerable scope and interest among foreign players to invest inIndia’s healthcare sector, including in hospitals, through various modes of financing.The question, however, is how much foreign investment has actually flown into Indianhospitals given this liberal framework; what form of financing this foreign investmenthas mostly taken; and what role regulatory and other structural factors within India’s

1See, RBI Note on foreign investments in India (April 1, 2007).


healthcare system as well as in related areas have played in shaping the magnitude andnature of these inflows.

3. Methodology

Primary as well as secondary research was conducted during from April to September2007 to investigate the above questions. The secondary sources consisted of reports onthe health sector by national and international agencies, consulting firms, industryassociations, academics and popular media reports. The latter were used to gatherinformation on India’s health sector and specifically the hospitals segment and relatedareas, the profiles and financials of major hospitals, and the investment scenario inIndian hospitals. The primary research was conducted in two phases using surveys andin-depth discussions and interviews.

3.1. Design and scope of primary study

The first phase of the fieldwork consisted of a survey that was carried out for 19hospitals across six selected cities in India. A structured questionnaire, based on pilotsconducted in Bangalore, was administered to hospital administrators and financepersonnel in these 19 hospitals. Most of the information was collected through face-to-face interviews. The target cities were Delhi, Bangalore, Kolkata, Hyderabad, Mumbaiand Chennai. No quotas were assigned to individual cities and the sample was drawnup depending on the response from the field. The questionnaire aimed at collectinginformation on the key features of hospitals, including their infrastructure, humanresources, healthcare facilities, prices, technology and equipment, and financials. Thecriteria for selecting hospitals were size, i.e., all hospitals had a minimum of 100 beds,and multi-specialty. An initial list of institutions that had been approved for FDI wasobtained from the government department concerned to determine the sampling framefor the survey.

Six large corporate hospitals which were likely to be recipients of foreign funds andalso deemed important for the study were not willing to complete the questionnaire,despite assurances of confidentiality of information. For these hospitals, the studyrelied on a mix of interviews with senior management supplemented by information ontheir financials and other features from secondary sources, thereby increasing thesample size to 25 hospitals.2

The second phase of the fieldwork consisted of 15 semi-structured interviews withvarious stakeholders, including doctors, nurses, owners or managers of hospitals andnursing homes (large and mid-size) health consultants, health insurance companies,diagnostics and medical equipment suppliers and patients. These qualitative discus-sions aimed at supplementing the information obtained from the survey and getting

2Some hospitals were not willing to participate in the survey due to legal reasons, such as going for an IPO. Some werenot willing to participate due to internal administrative reasons.

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varied perspectives. These semi-structured interviews were further supported by 30in-depth discussions with senior management in major corporate hospitals and otherstakeholders such as civil society organisations, industry associations, financiers,doctors and public sector practitioners in Delhi, Bangalore and Kolkata. Although anattempt was made to target as wide a group of stakeholders as possible, in some cases,it proved difficult to get direct inputs and thus views had to be gathered throughsecondary sources and third-party discussions.

As with any survey, there are some limitations. Some hospitals that were deemedimportant for this study did not agree to participate in the quantitative part of thesurvey, although they did agree to qualitative discussions. Even when firms did par-ticipate in the survey, they were often not forthcoming about their financial data, suchas profits, costs and foreign financing. Finally, as the query method was used, therewere potential biases in the responses, although all efforts were made to get the viewsof a diverse group of stakeholders through the qualitative discussions to overcome thisproblem.

4. Results

At present, policies permit foreign financing in Indian hospitals through FDI, foreigninstitutional investment (FII), venture capital (VC) funding, private equity (PE) funds,initial placement offers (IPOs) subscribed to by foreign players, and non-residentIndian (NRI) investment. The following discussion outlines the findings on the currentstate of play regarding foreign funding in Indian hospitals, based on both primary andsecondary information. It makes a distinction between FDI in the traditional sense ofownership of physical assets and organic growth on one hand and private equity andFII funding of hospitals through holdings of shares by individuals or a group of foreigninvestors on the other, given their different implications in terms of return expectations,financial control, time horizons, underlying motivation and incentive structures.

4.1. FDI status and prospects

In order to understand the extent and nature of foreign direct investment in hospitals, alist of all approved FDI projects in hospitals and diagnostic centres during the January2000 to July 2006 period was obtained from the Department for Industrial Policy andPromotion, Government of India. This list consisted of 90 projects, for a total approvedFDI amount of US$53 million covering several source countries such as Australia,Canada, the UK, the US, the UAE, Malaysia and Singapore. However, a closeexamination of this list revealed that the majority of the approved projects werediagnostic centres. Only 21 were hospitals. The main source countries for FDI were theUS, the UAE, Singapore and the UK, although countries such as Mauritius alsofeatured for tax benefit reasons. Non-resident Indians (NRIs) emerged as an importantsource of investment (some projects were explicitly listed as NRI-based). However, alarge number of the approved NRI projects were small-individual, investor hospitals


located in smaller cities, indicating the importance of diaspora contacts and location-specific networks. The amount of investment approved in most cases was quite small,with several having less than US$1million in FDI and the bulk falling in the US$1 toUS$2 million range. The list of approved FDI hospitals is given in Table 1.

There was, however, considerable discrepancy between the above list and thesurvey findings as some of the approved projects had not taken off even several yearsafter their approval. According to several senior health industry experts, there wereonly three hospitals which would qualify as FDI hospitals in India, far less than thenumber approved. The rest, according to experts, had brought in capital under otherroutes following FDI approval and for some there may have been other motives formobilising the funds. There were also some hospitals which, despite receiving FDI,did not view themselves as FDI hospitals as the foreign funds had been routedmainly for tax benefit purposes. Hence, there were distinctions between (a) what hadbeen approved and what had materialised on the ground; and (b) what was classifiedas FDI as per legislation and what practitioners in corporate hospitals viewed as FDIin terms of the investment intent, ownership and control, creation of assets andexpectations.

The discussions did reveal, however, that there are several prospective players in theIndian hospital market. Some are interested in entering on their own, based on earlierlocal experience through joint ventures. Others have plans to expand their existingoperations by setting up around 100 multi-specialty hospitals all over the country.Their interest is driven by factors such as the demand–supply mismatch and hugeinfrastructural requirements, the growing Indian market with rising incomes, increasedwillingness among consumers to pay for quality healthcare and approach institutionalproviders, the comparably lower establishment costs in India, and healthcare packagesoffered by companies. The discussions also suggested the growing prospects for settingup foreign investor hospitals in Special Economic Zones and large-scale health citiesas well as the possibilities for joint ventures and technical collaboration betweenforeign and domestic corporate players.3

4.2. Non-FDI forms of foreign financing in Indian hospitals

The survey found that the bulk of foreign financing in Indian hospitals has been non-FDI in nature. The most prevalent has been private equity funding where PE fundshave taken limited exposure of between 15–26 per cent on various players. This isfollowed by initial public offers (IPOs) (although it proved difficult to get the break-upbetween domestic and foreign investors for these latter investments as hospitals andinvestors refused to divulge details).4 Other forms of foreign financing, though very

3See Dutta (2006), http://www.expresshealthcaremgmt.com/200609/bangalorediscovered01.shtml.4An estimated 20–25 per cent of the financing is provided by private equity funds and venture capitalists in some of thecorporate hospitals, according to one respondent, and independently listed healthcare companies prefer going directly toinvestors.

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Table 1. Approved FDI Hospitals by Department of Industrial Policy and Promotion(DIPP) (January 2000–June 2006)

Sl No. Date Indian company Country offoreign investor

Foreign equity (millions)

Indian Rs. US $

1 April 2002 Fernandez Maternity Australia 0.42 0.01Hospital, Hyderabad

2 December 2002 Sir Edward Dunlop Canada 1,282.25 26.71Hospitals, New Delhi

3 January 2004 Max Healthcare, New Mauritius 316.21 6.63Delhi

4 January 2000 Dr. Ramayya’s UK–NRI 15.00 0.35Pramila HospitalsLtd.,

5 January 2000 HN Hospital, USA–NRI 0.00 0.00Mumbai

6 September 2003 Kalinga Hospital, NRI 54.09 0.11Bhubaneshwar

7 August 2000 Thaqdees Hospitals Saudi Arabia 0.32 0.01Ltd., Thaikkatukkara,Kerala

8 January 1, 2003 Duncan Gleneagles, Singapore 59.24 1.29Kolkata

9 July 2004 Pacific Hospitals, Singapore 5.82 0.13Hyderabad

10 October 2001 Malabar Institute of UAE 133.61 2.97Medical SciencesHospital Ltd., Calicut

11 July 2002 Peoples General UAE 73.32 1.53Hospital Ltd., Bhopal

12 August 2001 Thaqdees Hospitals UK 0.34 0.01Ltd., Ernakulam

13 July 2001 Trichur Heart UK 49.89 1.11Hospital, Thrissur

14 August 2002 Bhimavaram Hospital USA 0.10 0.00Ltd., Bhimavaram

15 December 2002 S&V Loga Hospital USA 3.79 0.08Pvt. Ltd., Peramanur,Salem

16 November 2003 Vikram Hospital, USA 29.65 0.64Mysore


limited, included equity stakes by government investment agencies and venture capitalfrom small investors and FII. There was also evidence of non-FDI financing by NRIinvestors in healthcare. Although the regulatory framework for external commercialborrowing has been relaxed in India in recent years and some hospitals have receivedapproval for ECBs, such financing has remained limited due to foreign currencyexposure risk and associated hedging costs.

An examination of the data on sources of financing for major corporate hospitals inIndia indicated that foreign financing still constitutes a relatively small share withintotal financing. Foreign borrowing constitutes only 1 per cent of all financing and it isdomestic financing, in particular long-term bank borrowing, that predominates (CMIE,2006).5 For other categories of financing which include financial institutional bor-rowings, bonds and debentures, and borrowings from corporate bodies, although theforeign share is not readily apparent, discussions with industry experts suggested thatless than 20 per cent is currently funded through external sources. This corroboratesthe earlier discussion that although the sector offers lots of opportunities to foreigninvestors, the role of foreign investment still remains limited to date. Table 2 shows thecomposition of overall financing (domestic and foreign) by six major corporate hos-pitals in India. Table 3 summarises the main pros and cons associated with the different

5Based on company balance sheets, accessed from Centre for Monitoring of the Indian Economy database (2006).

Table 1. (Continued )

Sl No. Date Indian company Country offoreign investor

Foreign equity (millions)

Indian Rs. US $

17 February 2004 Basappa Memorial USA 22.83 0.50Hospital Pvt. Ltd.,Mysore

18 April 2004 Parekh Hospital Pvt USA 0.50 0.01Ltd., Mumbai

19 July 2004 Columbia Asia USA 0.90 0.02Hospital Pvt. Ltd.,Bangalore

20 August 2004 Add Life Medical USA 326.24 7.07Institute Ltd., SterlingHospital Building,Ahmedabad

21 January 2004 RA Multispeciality British Virginia 0.06 0.00Hospital Pvt. Ltd.,Coimbatore

Source: Department of Industrial Policy and Promotion (2006).

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Table 3. Summary of pros and cons of financing sources for hospitals

Type of investment Pros and cons

Foreign direct Pros: 100 per cent allowedinvestment Cons: Long gestation period, perceived low returns,

localised nature of business, lack of operational control

Foreign institutional Pros: Can opt for short terminvestment Cons: Limited level of investment, 5–10 per cent

External Pros: Lower costs of capital, much less than domestic borrowingcommercial Cons: Stricter regulations, high currency hedging costsborrowing

Long-term bank Pros: Easier to arrange through domestic marketborrowing Cons: Very high costs of 11–14 per cent, prevailing(domestic) interest rate environment can affect cost of borrowing

Private equity (PE) Pros: Access to global fundsfunds Cons: May not always be cheap, lack of transparency, possible

conflict of interest between management and board members

Venture capital Pros: Easy access to funds, especially for start-upsfunds Cons: Lack of control, often priorities do not match

Individual investors Pros: Localised knowledge, easier and cheaper access(non-resident Cons: Priorities may not match, lack of control overIndians) operational aspects of hospitals

Source: Based on discussions and secondary sources.

Table 2. Structure of Borrowings in LeadingCorporate Hospitals in India (2006 figures)

Nature of borrowing Share

Short-term bank borrowings 5%Financial institutional borrowings 13%Fixed deposits 1%Borrowing from corporate bodies 17%Long-term bank borrowings 53%Debentures/bonds 4%Foreign borrowings 1%Group/associate companies 1%Other borrowings 5%

Source: Company balance sheets accessed fromCentre for Monitoring the Indian Economy Prowessdatabase (2006).


sources of financing for hospitals in India, which emerged from the discussions withstakeholders.

Overall, the evidence indicated that there is little FDI presence in Indian hospitals.Industry experts do not foresee a huge amount of FDI flowing into India’s hospitalssegment in the near future. Non-FDI forms of foreign funding have, on the other hand,witnessed higher growth than FDI, suggesting a preference towards short-term, lesslocally rooted forms of foreign investment. These inflows have been mainly to themajor corporate hospitals as reputation and brand value have been critical for accessingoverseas funds. The findings suggest that any discussion on the status of foreigninvestment in hospitals in India cannot be limited to foreign players. It is linked to theoverall corporatisation of the hospitals segment and the growing role of domesticprivate players in healthcare delivery in India.

5. Discussion and Analysis

The survey findings raise several questions. What might explain the untapped potentialin terms of foreign financing, when growth opportunities in the sector are good, whenthere is a clear demand–supply mismatch which foreign investment can help address,and when there is a liberal investment environment? Why is FDI not forthcoming?What might explain the fact that the recent spurt in funds into hospitals has been morethrough the private equity and public placements route, which would suggest thatinvestors are hesitant to make a long-term commitment to the sector? One needs toexamine factors that go beyond the direct regulatory environment for foreign invest-ment and see if there are sector-specific factors as well as regulations in other areas thataffect the hospitals segment and its attractiveness to foreign investors.

The following discussion examines the constraints to foreign investment in hospi-tals, as revealed by the primary survey. A point worth noting is that although the focusis on foreign investment, the discussion takes a generalised approach to investment asthese constraints were not found to be specific to the nature of ownership and were alsofound to affect domestic investors.

5.1. External factors

Although the survey results indicated that it is primarily domestic factors that havelimited the extent of FDI in India’s hospitals and also tilted foreign financing towardsother forms of investment, a few external factors were also deemed responsible. Acommon point that emerged was that this is a sector that is undergoing reform and isfacing many internal problems in developed economies. Moreover, the number ofprivate players who can establish hospitals overseas is limited, given the predominanceof the public healthcare system in many developed countries. Hence, this has tended tolimit FDI in general for all countries.

The localised nature of the hospital business, which requires in-depth knowledge ofa host country’s market conditions, also makes it less attractive for foreign investors.

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Entry as an independent overseas institution is very difficult as the localised nature ofthis investment makes it difficult to have operational control, possibly deterringinvestors from taking a long-term position. While joint ventures may be more suitablein the hospital business, due to problems in maintaining partnerships, given issues offinancial control and differences in expectations and management styles, joint venturesmay not materialise easily.6

There is also the issue of competing destinations. Foreign investors are likely to goto markets that they are more familiar with and where there is clarity about not onlyFDI policies but also the healthcare sector overall. It was noted by several respondentsthat the Indian government does not have a clear roadmap for the healthcare sector, hasnot considered it a core sector, and is perceived to have a non-transparent regulatoryenvironment and corrupt and inefficient procedures for establishing business, all ofwhich could deter potential foreign investors. A quote from one foreign health sectorexpert captures well the perception of India as an investment destination:

“Investors can have two roles. There are those who want to invest inphysical infrastructure and others who see this as a profitable devel-opment opportunity and thus want certainty of returns. Thus mini-mization of risk and a regulatory environment that permits that isimportant. The regulatory environment must permit certainty of rev-enue flows to repay debt. The obvious and immediate attractiveness ofIndia is its population, its GDP growth, its expanding market … Themain factors that make India unattractive is the uncertainty of itsregulatory environment, issues of income flow, license and red tape,difficulties in developing business, and corruption. Investing in serviceindustries is different from that in production industries … There aretwo reasons why investors are waiting and watching. One is the lackof infrastructure and the second is the bureaucracy for setting up.”

Thus, a combination of external factors such as the nature of this segment, the type ofinvestment required, foreign investor perceptions and the state of play in healthcare inoverseas markets have most likely played a role in limiting FDI presence in hospitals inemerging markets such as India.

5.2. Domestic factors

It is primarily domestic factors that have limited the extent of FDI in India’s hospitalsand also tilted foreign financing towards other forms of investment. These factors havealso constrained domestic private investors. They include initial establishment-related

6It was pointed out that large-scale investments to the tune of US$100 million and above can only happen throughinvestments in corporate hospitals (chains). But given the relatively small average size of Indian hospitals (the largestbeing around 2,000 beds in India, compared to 10,000 beds in some developed countries), the opportunities may belimited.


domestic constraints as well as post-establishment operational issues in the domesticmarket, which affect the returns to and incentives for investment.

The single most important constraint is the high cost of setting up hospitals, thelong gestation period and the relatively low returns on investment. Several seniorpersons at leading corporate hospitals stated that hospitals are a very expensivebusiness involving huge, upfront, very capital-intensive investments and very highrunning costs. According to many, it can take four to five years to break even and up toseven to eight years to make reasonable profits.7 The cost per bed is huge at over US$100,000, which works out to over US$200 million for a 200-bed hospital. In addition,rising operating costs further squeeze margins. This combination of low returns, highcapital intensity and long-term commitment is not the most attractive combination forforeign investors. These views are confirmed by various news reports regardinginvestment in Indian hospitals. According to one recent article, hospitals require hugeinitial investments and could take up to a decade to break even.8 According to anotherreport, investment in a tertiary care facility is estimated at an average $120,000–$130,000 per bed and about $40,000–$50,000 for a secondary care hospital, withbreak-even on investment taking four to five years for a 250–300 bed hospital even insecond-rung cities in India.9 Similar evidence is, however, difficult to obtain for othercountries.

Table 4 shows the financials for six selected hospitals, some of which have foreignfunding, mainly through FII and equity sources. The figures summarise the key fea-tures of investment and returns in the hospital business and highlight some of the mainfactors (often interrelated) which affect investment in the hospital segment.

The financials presented in Table 4 reflect several important features aboutinvestment in Indian hospitals.10 The high capital intensity of hospitals is reflected bytheir low ratio of operating income to gross fixed asset, which stands at less than 1 formost of the hospitals, while the desirable benchmark ratio according to industryexperts is around 2. Even as a share of net fixed assets, the asset turnover ratio is belowthis benchmark. Operating income to total assets is less than 1 for all the selectedhospitals. The ratio of profit after tax to operating income is negative or only slightlypositive for all the above hospitals, indicating the relatively low returns to investmentin hospitals in the short to medium run, although some of the hospitals are reputedplayers. The financials also reveal a high depreciation of assets, especially for medical

7This view is confirmed in a recent article. Hospitals require huge initial investments and could take up to a decade tobreak even. See http://www.outlookindia.com/article.aspx?238340. Investment in a tertiary care facility is estimated atan average Rs 60–65 lakh per bed and that for a secondary care hospital, about Rs 20–25 lakh. Break-even on theinvestment can happen within 36 to 48 months. Real estate constitutes about 40 per cent of the cost of a new project inlarge cities. So, many healthcare providers have begun to look at Tier-II and Tier-III cities in a major way. FortisManaging Director Shivinder Mohan Singh said that while it could take four to five years for a 250–300 bed hospital tobreak even in Tier-II or Tier-III cities, his company could make profits much earlier due to operational efficiencies.8See http://www.outlookindia.com/article.aspx?238340.9See http://www.hospitalbuild-me.com/LatestNews-Build07.html.10The numbers cited here are based on the Centre for Monitoring the Indian Economy (2006) Prowess database andCRISIL Research (2007).

134 R. Chanda

equipment, in turn having implications for the required scale of operations, utilisationrates for equipment and overall profitability. The data also highlight the significance ofland and buildings in total assets.

Hence, there are clearly issues of establishment, operating costs, nature of assetsand their depreciation, which affect the viability of hospital projects and their attrac-tiveness to foreign investors. The following discussion examines four issues. Theseare: (1) setup costs and in particular costs of procuring land; (2) costs of medicalequipment and devices; (3) medical manpower constraints; and (4) regulatorydeficiencies in various areas.

Table 4. Summary of key operating and other ratios of major Indian corporate hospitals(March 2006)

Hospital 1 Hospital 2 Hospital 3 Hospital 4 Hospital 5 Hospital 6

Operating 0.17 0.72 0.32 0.80 0.85 0.12income/assets

Operating 0.42 1.36 0.39 0.89 0.86 0.80income/Grossfixed assets

Operating 0.48 2.01 0.47 1.89 1.33 1.02income/Netfixed assets

PAT/Operating �55.0% 1.0% �15.4% 0.5% 2.0% �28.9%income

Land and 19.0% 22.5% 45.1% 16.7% 30.6% 28.1%building/Totalfixed assets

Depreciation/Total 4.0% 5.0% 4.6% 5.2% 5.2% 5.9%fixed assets

Operating 1.66 2.05 0.99 1.74 1.42 2.01income/Otherfixed assets

Sundry 28.9% 12.5% 9.8% 15.9% 18.5% 19.0%debtors/Operatingincome

Cumulative 12.1% 32.2% 18.4% 53.0% 35.4% 21.6%depreciation/Grossfixed assets

Interest 9.9% 11.8% 5.9% 8.9% 4.7% 5.9%expenses/Totalborrowings

Source: Centre for Monitoring the Indian Economy Prowess database and CRISIL (2007).


5.2.1. Initial establishment issues: Land acquisition

The most commonly cited problem was the difficulty in getting land in big cities inIndia and the prohibitive cost. Several experts noted that land costs can play a criticalrole in determining the long-term sustainability of hospital projects, directly influen-cing pricing strategy and margins. The survey suggested that land and construction ofbuildings constitute around 40 to 50 per cent of total project costs. If a hospital spendsa higher share of the investment cost on procuring land, this affects the pricing ofservices, which along with other operational and maintenance costs and technologyupgrading costs, puts further pressure on their margins. A quote from one respondentwell illustrates this point:

“The cost of land is slowing the process. Land prices are too high andso the hospital business is unviable from day one. Availability of landhas become the main challenge. What compounds this problem is thatalthough real estate costs are rising and available land in metros isscarce, it is not possible to easily raise bed prices, thus affectingmargins. Institutional land is not available at a discount for non trustor non society modes of operation.”

It was noted that if land were leased, or if there were a joint venture arrangementwherein one party invested in the real estate, or if there were a public–private part-nership arrangement wherein part of the procurement cost was subsidised by gov-ernment, then the initial costs could be significantly lowered.11 High initialestablishment costs deter the setting up of large-scale hospitals, although scale isrequired to lower costs and improve margins.

In addition to the procurement of land, the discussions also indicated that there aresupporting infrastructure issues (such as getting water supply and electricity). Theprocess of obtaining clearances for buildings (getting legal documents, environmentaland fire clearances) is not always transparent, may involve corruption and suffers fromvarying levels of efficiency and interest on the part of state governments, and vestedinterests, which may delay establishment and drive up initial costs. The entire processof setting up a Greenfield investment could take as long as three to five years, clearlyanother deterrent to foreign and also domestic investors.

5.2.2. Medical equipment and technology

The high cost of procuring medical equipment and devices is another constraint. Thesurvey found that equipment constitutes around 30 per cent of all fixed assets in ahospital, depending on the kind of technology acquired and that some 40 per cent ofrevenues are spent on drugs and supplies. A major issue in this regard is that Indian

11Examples were given of hospitals that have opted for a joint venture-type arrangement where a real estate developerinvests in the land, building and development of surrounding areas, and hospitals that have entered into PPParrangements. Several problems were noted with subsidy-based arrangements.

136 R. Chanda

hospitals import 70 per cent or more of medical devices and equipment, often at highcost, the root cause being the limited domestic manufacturing capacity for medicalequipment in India for the standards required by corporate hospitals. Apart from a fewIndian or joint venture operations in this area, there is little domestic production.Further, the government guidelines on standardisation and quality certification arepoorly enforced. According to industry experts, unless companies establish Indiansubsidiaries or enter into tie-ups with local companies, hospitals will need to continueimporting and these input costs will not come down. To quote one respondent:

“We are facing a crisis because most of the international equipmentmanufacturers have hiked the prices of equipments and althoughcustoms duties have come down significantly, the overall cost ofservice is still very high. There is often no alternative supply ofequipment, and some of these manufacturers are hiking prices at will.Therefore technology transfer in this area would be key in the comingyears, if we want to deliver international quality service at affordableprices.”

The structure of the Indian medical equipment industry also poses problems. Organ-ised equipment manufacturers often engage in opportunistic pricing when selling tohospitals, with prices paid generally exceeding the true manufacturing cost. Therelatively small scale of the corporate hospitals prevents economies of scale in theprocurement of medical equipment and supplies which could otherwise help bringdown purchasing costs.

Rapid technological changes often render obsolete high-cost equipment and devi-ces, requiring fresh investments within a few years to maintain the latest technologyand ensure the best quality of service. The depreciation rate for high-end equipment asper books can be 14 years, but in real terms it is around seven to ten years. Hospitalsoften place the equipment at seven years and stretch it up to ten years if it remainsrelevant technologically (CT machines, X-ray machines). Investment in MRIs and CTmachines may be to the tune of US$ 1 million, but within two to three years, a newmodel may arrive, rendering the earlier investment obsolete. This in turn requires thecorporate hospitals to work their equipment intensively, with utilisation ratios of 60 to65 per cent in the initial two or three years so as to enable fresh investments within ashort time. To quote one practitioner:

“The question is where hospitals should stop investing in the latesttechnologies. How can technical advances be financed? The higher thelevel of technology used, the more that needs to be paid for suchdoctors if they are trained in the use of that technology. It is alsodifficult to anticipate further advancements. The high cost of procur-ing equipment and the cost of manpower trained in its use furtherescalate costs in this business.”


While it is difficult to draw generalised conclusions, as utilisation rates and break-evenloads depend on the kind of equipment, the arrangement under which the equipmenthas been purchased and the accounting and purchase practices, the survey clearlyfound that capital expenditure costs incurred for medical equipment are a majorconstraint on operations and returns.

5.2.3. Manpower availability and quality issues

Another major operating challenge affecting all private players, especially as theyembark on expansion plans, is human resources at all levels — doctors, nurses,paramedics, front- and back-end support staff, managers and administrators. This gapis in terms of quantity and quality. The cost of talent in India’s health sector is rising bysome 20 per cent per year and by 50 to 60 per cent at the junior and middle levels.Poaching and attrition problems are rampant. There is a dearth of qualified and trainedtechnicians who can operate sophisticated healthcare equipments. According to severalrespondents, FDI in healthcare may not be happening due to the dearth of qualifiedmanpower in the country.

An examination of the real source of this manpower constraint revealed factors onthe health education front. The problem is mainly attributable to existing regulationson medical education providers, which create a bottleneck in the supply of doctors andnurses. The guidelines for setting up medical schools, as specified by the MedicalCouncil of India (the main regulatory body governing medical education), allow onlygovernment or trust hospitals to set up such education facilities. Further, theseguidelines specify conditions on the amount of land required, the number of class-rooms and even their size. For instance, there is a restriction of a 500-bed care unit onhospitals for getting permission to set up training colleges. The healthcare educationfacility is required to have a minimum size of 10 acres. The entire approach to creatingmedical education establishments is based on infrastructure rather than on quality andfunctional excellence.

Likewise, the Nursing Council of India’s regulations are also an impediment. TheNursing Council does not allow private players to enter into nursing education unlessthey form trusts. There are requirements on land and infrastructure, such as a 500-seatauditorium, and 25 acres of contiguous land, conditions which are difficult to fulfil infirst-tier cities in India. Corporate hospitals are not allowed to start nursing colleges.There are also quality concerns. The general perception was that there has been amarked deterioration in the nursing and paramedical sciences and the quality ofmedical and nursing students in India, mainly due to regulations that prevent corporatehospitals from providing medical training and education and due to the poor gov-ernance of existing medical and nursing schools and colleges.

Overall, existing training is inadequate, in short supply, often not relevant, notavailable in certain areas (health administration) and of highly variable quality. Thefallout of the manpower shortage has been to raise employee costs for hospitals and

138 R. Chanda

increased investment in employee training. With rising wages, the profitability ofhospitals has been adversely affected.

5.2.4. Health insurance

The in-depth discussions with practitioners and managers in various hospitals indicatedthat FDI in Indian hospitals would remain constrained unless the health insurancemarket is liberalised further and insurance penetration increases. The current policypermits only 26 per cent FDI participation in the insurance sector, through jointventures, with minimum capital requirements imposed on players entering the market.The restrictive investment environment in the health insurance sector is seen as limitingthe consumer base that could afford quality healthcare at corporate hospitals. Currently,only 12 per cent of India’s population has health insurance cover; either voluntary orunder government and community insurance schemes (FICCI–Ernst & Young, 2007).

The low share of insured patients is one of the main reasons that healthcare serviceshave not grown as much as they could in India. A larger paying consumer base wouldhelp hospitals to expand the scale of their operations, bring down costs and thusimprove their profitability. It was noted that without a critical mass of insured patients,at around 20 per cent of the population, foreign players would not enter the Indianhospital market in a big way. Greater insurance penetration and entry by foreigninsurance players would also have positive implications for the medical value travel,pharmaceutical and clinical trial businesses. Limited health insurance penetration hasalso hurt cost recovery by hospitals as the latter have been affected by the non-paymentof bills and lack of reliability in payer sources.

5.2.5. Other regulatory and policy issues

The survey also highlighted other regulatory issues which have adversely affected thefunctioning of private hospitals in India and thus indirectly the attractiveness of thesector to foreign investors. One of these is the issue of standards and accreditation andestablishment-related guidelines.

The Indian government does not have a well-developed framework for the estab-lishment of new hospitals and nursing homes. It has not set benchmarks for servicedelivery, or forced players to comply with basic norms, or done any marked needsassessment before allowing new facilities to register. There has not been any uniformdisclosure policy and sharing of information by hospitals, and governance of medicalestablishments through regular audits has been weak. The lack of a regulatory fra-mework for setting up establishments and monitoring their standards adversely affectsquality, creates unwarranted competition for manpower and results in excess supply ofmedical facilities in some zones, making some players unviable. Many of therespondents noted that it is necessary to have processes to certify the need to set uphospitals in a zone. The fragmentation of the sector and variability in quality ofhealthcare delivery is a deterrent to foreign investment.


There is also a general lack of clarity and priority in the government’s approach tothe healthcare sector that has deterred foreign investment. To quote one respondent:

“Health has never been seen as a core sector so far. The governmenthas given little emphasis on organised health care. It has not been seenas a priority from the privatisation perspective and so its influenceremains peripheral. Government’s core interest is lacking which leadsto hesitation from FIIs to invest in this sector. The roadmap at thedomestic and the global level is unclear. Huge reforms are required butclarity in approach is lacking.”

Hence, lack of transparency and predictability in the policy environment with regardto the government’s prioritisation of healthcare, its expectations from foreign partici-pation and the support it is willing to extend may have also discouraged FDI in Indianhospitals.

6. Conclusion and Policy Suggestions

The main finding presented in this paper is that despite the opening up of hospitals to100 per cent FDI participation without prior approval, there are very few FDI hospitalsin India. Other forms of foreign funding are more prevalent than FDI. This preferencetowards non-FDI forms of financing suggests that there are factors which make it lessattractive to make a long-term investment commitment in Indian hospitals. In par-ticular, the long gestation period of investment in hospitals and the relatively low ratesof return (compared to that in many other high-growth sectors like software) impedeFDI in Indian hospitals. The latter is in turn due to a wide range of explicit and implicitconstraints within healthcare and in related areas of the economy. The findings cor-roborate the discussion in a recent paper on regulations in India’s health sector, whichnotes that when governments have limited regulatory capacity, then their interventionin the private sector is more likely to raise transaction costs than to attain public policyobjectives of efficiency, transparency and equity (Peters and Muraleedharan, 2008).

The survey findings point to several policy measures that could be undertaken bythe government and initiatives that could be undertaken by private players to make thehospitals segment more attractive to both domestic and foreign investors, given theultimate aim of expanding capacity, improving standards and making healthcareaffordable and accessible to a wider segment. Some of the measures include:

. Facilitating land acquisition — subsidization of initial project costs or public–pri-vate partnership (PPP) arrangements with possible cost discounting or cross-sub-sidization arrangements built into the valuation of land to lower upfront costs;

. Considering other forms of obtaining land — through leasing arrangements, jointdevelopment with real estate developers, arrangements with public sector unitsowning land and hospital facilities, and government facilitation of such arrange-ments to lower land procurement costs;

140 R. Chanda

. Freeing up medical education and encouraging private hospitals to enter into medicaleducation and training to expand the supply of medical personnel at all levels;

. Incentivising domestic manufacturing of medical devices and technologies throughincreased investment in this sector and tie-ups with foreign companies and efforts tostandardise output;

. Opening up health insurance further to enable greater scrutiny of processes andstandards of hospitals and introduction of a national- or community-based healthinsurance scheme to increase the paying consumer base;

. Improving the regulatory framework for health insurance by standardising norms forpayouts, coverage, malpractice;

. Establishing a regulatory framework and an independent regulator in the healthcaresector to address issues of standardisation, classification, information disclosure;and,

. Improving regulation and monitoring of mid-and small-size establishments toimprove standards and quality, weed out substandard establishments, and enableconsolidation.

Thus, the regulatory framework and regulatory capacity need to be improved iftransaction costs are to be lowered for investors, foreign or domestic, in the healthsector, and if delivery capacity is to be augmented and made more efficient, accoun-table and socially equitable.

Although this paper is based on a case study of Indian hospitals, many of its broadconclusions apply to other developing countries that are seeking foreign investment todevelop their health infrastructure. Developing countries should not see foreigninvestment as simply a function of the investment regime. As Outreville (2007) pointsout, although many governments have engaged in marketing their country viainvestment promotion agencies, their focus has been mainly on attracting FDI andcomparatively less on the prevailing business environment and the range of regulationsand operating measures that affect the realisation and sustainability of FDI. Even ifinvestors do come, they may face problems due to regulatory impediments within andoutside the sector and ultimately get discouraged.

Hence, governments must recognise that foreign investment and, for that matter, allprivate investment is a function of the overall structural, regulatory, institutional andinfrastructural environment that characterises a sector and its related and supportingareas. They must recognise the many invisible and indirect constraints which influenceinvestor incentives and could undermine any investment liberalisation that is under-taken at the border. In addition, revised models of management and delivery systemsmay be required to achieve the goals of efficiency without compromising social equityin healthcare delivery (McPake, 2002). Thus it is importance to create an overallecosystem that is conducive to foreign investment in healthcare.

The findings also suggest that it may be premature to believe that liberal multilateralcommitments in services under the WTO services negotiations will lead to increased


FDI inflows in their healthcare sectors. A liberal multilateral commitment on FDI willnot necessarily result in a surge of FDI inflows into healthcare unless other structuraland regulatory issues are addressed. Furthermore, there is a need to ensure coherencein the negotiating and domestic policy stance across related services, such as across thehealth and insurance sectors or the health and education sectors, as policies in otherareas have a bearing on the outcome of liberalization in the healthcare sector. A broadview across various services and across cross-cutting regulations is thus required in thecontext of the WTO health services negotiations.

Acknowledgements

This study was funded by the WHO Country Office in India and the Ministry of Healthand Family Welfare, Government of India. The author is grateful to them for theirsupport and guidance. The author also thanks Krishanu Rakshit and Sasidaran Gopalanfor their research assistance and all those who participated in the survey and in-depthdiscussions.

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FDI in Indian Hospitals