GCC Brief - Gulfbase

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May 22, 2011 - follows: • Jahra HMO: Covers Jahra governorate and ... Kabeer governorates where a hospital of 340 beds
GCC Brief 22 May 2011 Commentary

Stock market data: 105

GCC S&P stock market index, 2010-11

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Kuwait Health Assurance Company: a step forward for privatization in Kuwait

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Kuwait Health Assurance Company (KHAC) is a PPP project envisioned in Kuwait’s current 5-year development plan, and aims to privatize expatriate health insurance and its associated medical care. The project also includes building and operating 3 new hospitals and 15 health clinics.

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The company could be the largest of its kind in the Middle East, with an expected capital base of KD 318 million and almost 8,400 full time employees.



Successful start could help speed up other PPPs and projects under the development plan and have a positive effect on confidence and the economy.

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

by Wajih Boustany, Economist, +965 2259 5356 [email protected]

Oil market data: 130

Crude oil prices, 2010-2011, USD pb

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WTI OPEC

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Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

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IEA 2011 forecasts (mbd): World oil dd = 89.2 (+1.5%) Non-OPEC supply = 53.7 (+1.5%) Latest GCC monetary data: (18st May unless otherwise stated)

Bahrain:

M3 9.8 %y/y (Mar) Repo rate 2.25% $1=BHD 0.377

Kuwait:

M2 5.3 %y/y (Mar) Disc. rate 2.50% $1=KWD 0.276

Oman:

M2 5.4 %y/y (Mar) Repo rate 2.00% $1=OMR 0.385

Qatar:

Saudi Arabia:

UAE:

M2 11.8 %y/y (Mar) Lend. rate 5.00% $1=QAR 3.642 M3 13.8 %y/y (Mar) Repo rate 2.00% $1=SAR 3.750 M2 11.6 %y/y (Mar) Repo rate 1.00% $1=AED 3.673

Chart

Focus on…GCC oil output 16.0 15.8 15.6 15.4 15.2 15.0 14.8 14.6 14.4 14.2 14.0

GCC crude oil output (million barrels per day)

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

16.0 15.8 15.6 15.4 15.2 15.0 14.8 14.6 14.4 14.2 14.0

GCC crude oil output has jumped by around 7% in recent months, in response to both higher oil prices and the need to replace lost Libyan output. Further rises seem likely this year.

Source: OPEC / national sources

Data

Financial and economic data NBK Economic Research Al Shuhada Street, P.O Box 95, Safat 13001, Kuwait City, Kuwait Tel: +965 2259 5500 Fax: +965 2224 6973 www.nbk.com

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GCC Brief | 22 May 2011

Kuwait Health Assurance Company: a step forward for privatization in Kuwait In a new privatization initiative, the government will be launching a public private partnership (PPP) company in the coming months. The Kuwait Health Assurance Company (KHAC), already envisioned in Kuwait’s 5-year development plan, aims at privatizing expatriate health insurance and the associated medical care. The company will be the first of several such PPPs to be formed under the current 5–year plan. The government is currently seeking a strategic investor for a 26% share of the company. The government will retain a 24% share and offer the remaining 50% stake to Kuwaiti nationals in a public offering.

Chart 1: Expatriate population in Kuwait 3.0

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0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 million, LHS

%y/y, RHS

Sources: Public Authority for Civil Information.

When fully operational, KHAC’s core activity will be to provide health care coverage to most expatriates employed in the private sector, an activity currently undertaken by the government through its public hospitals and clinics. KHAC is expected to provide primary and secondary health care through three hospitals and 15 private clinics (PHCs) that should all be operational by 2015. KHAC will deliver health care services at predefined prices, similar to health maintenance organizations (HMOs in the US, these deliver both insurance policies and medical services). The company could be the largest of its kind in the Middle East, with an expected capital base of KD 318 million – 60% or KD 192 million will be initially paid-in – and almost 8,400 full time employees.

KHAC will have a guaranteed client base from its first day of operation comprising around 62% of the expatriate population, according to estimates provided by the official auction document issued by the Kuwait Investment Authority, and that amounts to almost 1.6 million expatriates. This core customer base will exclude expats who work in the public sector, the stateless, dependents of Kuwaiti nationals, domestic workers, and those employed in agriculture and fisheries. These groups will continue to be covered by the MoH. However, the company has the option to extend its market beyond the core group, providing services to all residents and nationals who would choose KHAC over other insurers.

The company will be sole provider of insurance to around 60% of expatriates Kuwait’s expatriate population has been growing at a fast pace and constitutes around 68% of the total population. (See chart 1). Growth in the expatriate population going forward is expected to remain moderate, though slightly off recent highs.

Services will also extend to health care KHAC will directly provide primary and secondary health care services to its clients. For tertiary care, which is specialized care following referral from primary or secondary health care personnel, KHAC will direct its customers to the MoH, for which MoH receives a flat percentage of the yearly collected premium (5%) to be paid by KHAC.

In order to receive a residence permit, expatriates currently pay a fee to obtain health coverage from the Ministry of Health (MoH). By 2015, KHAC will take over this activity for most expatriates working in the private sector. In essence, the government will be privatizing this process in line with the objective of Kuwait’s development plan to increase the private sector’s involvement in the economy .

According to the auction document, KHAC will establish a network of 15 primary care centers and three secondary care hospitals in three regions as follows: •

Jahra HMO: Covers Jahra governorate and select areas of the Capital where a hospital of 240 bed and 3 PHCs will be built.

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GCC Brief | 22 May 2011 •

Farwania HMO: Covers Farwania, Hawalli, and remainder of Capital governorates where a hospital of 712 beds and 9 PHCs will be built.



Ahmadi HMO: Covers Ahmadi and Mubarak Al Kabeer governorates where a hospital of 340 beds and 3 PHCs will be built.

Despite conservative assumptions, project promises strong returns According to its official auction document, the company promises to generate an equity IRR ranging between 16% and 25% under various scenarios and a project IRR of 15% to 23%. A key model assumption is that 70% to 80% of the target population will subscribe to KHAC’s insurance schemes. This is a conservative assumption given that KHAC will be the sole provider of government mandated insurance for the core group and, as a consequence, the number of subscriptions is likely to be higher. Moreover, if the company can offer a better service than currently offered by other insurers and health care providers, KHAC can even attract customers from beyond its core target population. The scenarios also assume expatriate population growth between 2.5% and 3% per annum in the first 10 years of the project. This is conservative compared to the 6% growth of the past 10 years. MoH has preapproved the annual premiums and visit copayments that KHAC can charge for the first 10 years of operations. (See table 1). This will replace the KD 50 annual fee that the MoH currently charges expatriates when obtaining a residence permit, implying a notable increase in the cost of health coverage for the targeted segment. KHAC will be able to increase premiums and copayments if officially released inflation rates exceed 6%. Table 1: Premiums and copayment 2015-24, KD Annual Premium Years Premium

2015/16 130

2017/18 2019/20 150

170

2021/22 2023/24 180

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Annual Copayment Rates, Per Visit Years Primary Care Emergency

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2019/22

2023/24

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Sources: Official Auction Document.

Timeline In seeking a strategic investor, the government has launched the bidding process, but has yet to finalize a date for the winning bid or the initial public offering. The building phase is estimated to start in 2012 and the company hopes to be operational by 2015. Project has a lot to offer not only to expatriates but also to economy The project promises to offer a good return on investment, and is expected to attract great interest from the private sector. Successful implementation of this project should help speed up other projects under the development plan. The project also intends to provide better health care services to its target population. If the company can attract customers outside its core population and away from current providers, it would, through increased competition, help improve the quality of the health care sector. The project should also have a positive effect on the economy. The project promises to create around 8,400 new jobs once completed. This includes jobs for health care providers as well as administrative workers. Moreover, the participation of the private sector in the heath care sector would rise. According to the company’s auction documents, participation is expected to rise from 5% to 50% within the coming 20 years, largely due to KHAC. The project is not without challenges There are some concerns and challenges that should be taken into consideration, some of which could be specific to KHAC’s case. The company will have a fixed schedule of premiums that it cannot deviate from. However, costs in the future are not certain and may come well above estimates. For one, if KHAC indeed does succeed in providing better health care services than currently available, this will undoubtedly lead to greater demand, and in some cases, excessive demand for medical services. If it leads to utilization above current estimates, then the predefined premiums may not cover the cost that the company has to bear. This would lead to either operating losses, or a decline in service quality. Another concern could be the disregard for market forces in the proposed scheme. Although privatizing this area of health care services is a step in the

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GCC Brief | 22 May 2011 right direction, services offered would still be limited largely to a single provider. This prevents competition in both pricing and service quality. While company investors might find this to their benefit, it could prevent clients from obtaining lowest prices or best service. There is also a risk that KHAC will have an unfair competitive advantage over current private health insurers and hospitals. An alternative solution would have been to allow a number of companies to operate in this field, thus promoting greater competition and efficiency. Finally, the company is required to operate according to Islamic Shari’a law, which limits its funding sources by locking out conventional banks and institutions from doing business with KHAC. As a result, KHAC might not always have access to the cheapest funds available, thus perhaps increasing its funding costs. Nonetheless, at this juncture, the company will be looked at as a key first attempt at a large PPP in Kuwait. The degree of business interest will be carefully scrutinized, as will the degree of success, once operations and delivery of service begin. □

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GCC Brief | 22 May 2011 Weekly GCC financial market data Bahrain USD/BHD EUR/BHD 3-month BHIBOR 1-year BHIBOR Repo Rate SW Deposit Rate Stock Exchange Index Kuwait USD/KWD EUR/KWD 3-month KIBOR 1-year KIBOR Discount Rate Repo Rate Stock Exchange Index Oman USD/OMR EUR/OMR 3-month OMIBOR 1-year OMIBOR 1-month CBO CD Repo Rate Stock Exchange Index Qatar USD/QAR EUR/QAR Qatari 3-month Repo Rate Qatari 1-year Repo Rate Repo Rate Deposit Facility Lending Facility Stock Exchange Index Saudi Arabia USD/SAR EUR/SAR 3-month SAIBOR 1-year SAIBOR Repo Rate Reverse Repo Rate Stock Exchange Index UAE USD/AED EUR/AED 3-month AEIBOR 1-year AEIBOR Repo Rate Stock Exchange Index

Unit

Current

1-Week Ago

1-Month Ago

3-Month Ago

6-Month Ago

1-Year Ago

1$ = BHD 1€ = BHD % % % % Index

0.377 0.54 1.28 1.98 2.25 0.50 107

0.377 0.561 1.32 2.03 2.25 0.50 107

0.377 0.541 1.32 2.03 2.25 0.50 107

0.377 0.516 1.26 2.02 2.25 0.50 107

0.377 0.516 1.25 2.00 2.25 0.50 107

0.377 0.469 1.32 2.09 2.25 0.50 112

1$ = KWD 1€ = KWD % % % % Index

0.276 0.393 1.06 1.56 2.50 1.50 129

0.274 0.409 1.06 1.56 2.50 1.50 129

0.278 0.398 1.06 1.63 2.50 1.50 129

0.281 0.385 1.13 1.63 2.50 1.50 129

0.281 0.385 1.13 1.63 2.50 1.50 132

0.292 0.363 1.13 1.63 2.50 1.50 117

1$ = OMR 1€ = OMR % % % % Index

0.385 0.550 N/A N/A 0.10 2.00 308

0.385 0.574 N/A N/A 0.09 2.00 308

0.385 0.553 N/A N/A 0.07 2.00 308

0.385 0.527 N/A N/A 0.04 2.00 308

0.385 0.527 N/A N/A 0.05 2.00 305

0.385 0.479 N/A N/A 0.06 2.00 295

1$ = QAR 1€ = QAR % % % % % Index

3.642 5.194 0.50 1.00 5.00 1.00 5.00 134

3.641 5.421 0.70 1.25 5.55 1.50 5.50 134

3.646 5.228 1.10 1.60 5.55 1.50 5.50 134

3.642 4.989 1.10 1.60 5.55 1.50 5.50 134

3.642 4.985 1.90 2.15 5.55 1.50 5.50 133

3.644 4.529 1.20 1.33 5.55 2.00 5.50 116

1$ = SAR 1€ = SAR % % % % Index

3.750 5.349 0.73 1.03 2.00 0.25 289

3.750 5.584 0.75 1.05 2.00 0.25 289

3.751 5.379 0.75 1.05 2.00 0.25 289

3.751 5.138 0.75 1.05 2.00 0.25 289

3.751 5.134 0.75 1.03 2.00 0.25 294

3.751 4.662 0.73 1.01 2.00 0.25 291

1$ = AED 1€ = AED % % % Index

3.673 5.239 1.90 2.34 1.00 71

3.673 5.469 1.98 2.39 1.00 71

3.674 5.268 2.06 2.49 1.00 71

3.673 5.032 2.13 2.58 1.00 71

3.673 5.028 2.18 2.61 1.00 71

3.674 4.567 2.30 2.68 1.00 72

Weekly international financial market data WTI Crude Oil Spot Price OPEC Crude Oil Basket (1-day Av.) EUR/USD USD/JPY GBP/USD 3-Month USD LIBOR 3-Month EUR LIBOR 3-Month GBP LIBOR US Fed Fund Rate US Discount Rate US Prime Rate GB Prime Rate ECB Refinancing Rate MSCI GCC Stock Market S&P 500 Index

Unit

Current

1-Week Ago

1-Month Ago

3-Month Ago

6-Month Ago

1-Year Ago

US $ p/b US $ p/b 1€ = $ 1$ = ¥ 1₤=$ % % % % % % % % Index Index

100.1 106.6 1.426 81.670 1.616 0.26 1.38 0.82 0.25 0.75 3.25 0.50 1.25 95.79 1340.68

79.2 118.8 1.488 80.270 1.653 0.27 1.37 0.82 0.25 0.75 3.25 0.50 1.00 95.79 1347.32

79.2 116.0 1.434 82.600 1.632 0.27 1.29 0.82 0.25 0.75 3.25 0.50 1.00 95.79 1312.62

79.2 99.1 1.370 83.080 1.625 0.31 1.03 0.80 0.25 0.75 3.25 0.50 1.00 95.79 1343.01

79.2 81.4 1.369 83.480 1.599 0.28 0.98 0.74 0.25 0.75 3.25 0.50 1.00 97.18 1199.73

79.2 70.6 1.243 91.680 1.445 0.48 0.64 0.70 0.25 0.75 3.25 0.50 1.00 93.09 1115.05

Economic data (period average) Unit

2008

Unit

2008

2009

2010e

22.9 17.2 2.0 0.0

Qatar GDP GDP CPI Current account

USD bns %y/y %y/y USD bns

110.8 37.1 15.2 14.2

98.3 -11.2 -4.8 8.4

128.6 30.8 -2.4 18.0

109.5 -21.2 4.0 25.8

129.8 18.1 4.0 36.8

Saudi Arabia GDP GDP CPI Current account

USD bns %y/y %y/y USD bns

476.3 23.8 9.9 132.3

372.6 -21.8 5.1 22.8

434.7 16.6 5.3 27.2

46.8 -22.3 3.5 -2.1

56.0 19.7 3.3 3.4

UAE GDP GDP CPI Current account

USD bns %y/y %y/y USD bns

314.8 22.0 12.3 22.3

270.4 -14.1 1.5 7.8

299.1 10.6 0.9 28.5

2009

Bahrain GDP GDP CPI Current account

USD bns %y/y %y/y USD bns

22.1 19.9 3.5 2.3

19.5 -11.6 2.8 0.6

Kuwait GDP GDP CPI Current account

USD bns %y/y %y/y USD bns

148.8 22.7 10.6 60.2

Oman GDP GDP CPI Current account

USD bns %y/y %y/y USD bns

60.2 43.9 12.5 5.0

2010e

Source: ThomsonReuters Ecowin, official sources, and NBK Economic Research

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GCC Brief | 22 May 2011

Head Office

International Network

Kuwait National Bank of Kuwait SAK Abdullah Al-Ahmed Street P.O. Box 95, Safat 13001 Kuwait City, Kuwait Tel: +965 2242 2011 Fax: +965 2243 1888 Telex: 22043-22451 NATBANK www.nbk.com

Bahrain National Bank of Kuwait SAK Bahrain Branch Seef Tower, Al-Seef District 428 P.O. Box 5290, Manama Bahrain Tel: +973 17 583 333 Fax: +973 17 587 111

United States of America National Bank of Kuwait SAK New York Branch 299 Park Avenue New York, NY 10171 USA Tel: +1 212 303 9800 Fax: +1 212 319 8269

National Bank of Kuwait Bahrain Branch (H.O) GB Corp Tower Block 346, Road 4626 Building 1411 P.O.Box 5290, Manama Kingdom of Bahrain Tel: +973 17 155 555 Fax: +973 17 104 860

United Kingdom National Bank of Kuwait (International) Plc Head Office 13 George Street London W1U 3QJ, UK Tel: +44 20 7224 2277 Fax: +44 20 7224 2101

United Arab Emirates National Bank of Kuwait SAK Dubai Branch Sheikh Rashed Road, Port Saeed Area, ACICO Business Park P.O. Box 88867, Dubai, UAE Tel: +971 4 2929 222 Fax: +971 4 2943 337 Jordan National Bank of Kuwait SAK Amman Branch Shareef Abdul Hamid Sharaf St P.O. Box 941297 Shmeisani, Amman 11194 Jordan Tel: +962 6 560 8800 Fax: +962 6 560 8811 © Copyright Notice. GCC Brief is a publication of National Bank of Kuwait. No part of this publication may be reproduced or duplicated without the prior consent of NBK. While every care has been taken in preparing this publication, National Bank of Kuwait accepts no liability whatsoever for any direct or consequential losses arising from its use. GCC Brief is distributed on a complimentary and discretionary basis to NBK clients and associates. This report and other NBK research can be found in the “Reports” section of the National Bank of Kuwait’s web site. Please visit our web site, www.nbk.com, for other bank publications. For further information please contact: NBK Economic Research Tel: (965) 2259 5500 Fax: (965) 2224 6973 Email: [email protected]

Saudi Arabia National Bank of Kuwait SAK Jeddah Branch Al-Andalus Street, Red Sea Plaza P.O. Box 15385 Jeddah 21444, Saudi Arabia Tel: +966 2 653 8600 Fax: +966 2 653 8653 Lebanon National Bank of Kuwait (Lebanon) SAL Sanayeh Head Office BAC Building, Justinien Street, PO Box 11-5727, Raid El-Sol 1107 2200 Beirut Tel: +961 1 759 700 Fax: +961 1 747 866 Iraq Credit Bank of Iraq Street 9, Building 178 Saloon Street, District 102 P.O. Box 3420 Baghdad, Iraq Tel: +964 1 7182198/7191944 +964 1 7188406/7171673 Fax: +964 1 7170156

NBK Capital

National Bank of Kuwait (International) Plc Portman Square Branch 7 Portman Square London W1H 6NA, UK Tel: +44 20 7224 2277 Fax: +44 20 7486 3877 France National Bank of Kuwait (International) Plc Paris Branch 90 Avenue des Champs-Elysees 75008 Paris, France Tel: +33 1 5659 8600 Fax: +33 1 5659 8623 Singapore National Bank of Kuwait SAK Singapore Branch 9 Raffles Place #51-01/02 Republic Plaza Singapore 048619 Tel: +65 6222 5348 Fax: +65 6224 5438

Kuwait Watani Investment Company KSC (c) 38th Floor, Arraya II Building Shuhada’a street, Sharq, Kuwait PO Box 4950, Safat, 13050 Tel: +965 2224 6900 Fax: +965 2224 6904 United Arab Emirates NBK Capital Limited Precinct Building 3, Office 404 Dubai International Financial Center P.O. Box 506506, Dubai United Arab Emirates Tel: +971 4 365 2800 Fax: +971 4 365 2805 Turkey NBK Capital Arastima ve Musavirlik AS SUN Plaza, 30th Floor Dereboyu Sk. No.24 Maslak 34398, Istanbul, Turkey Tel: +90 212 276 5400 Fax: +90 212 276 5401

Associates Qatar International Bank of Qatar (QSC) Suhaim bin Hamad Street P.O. Box 2001 Doha, Qatar Tel: +974 4447 3700 Fax: +974 4447 3710 Turkey Turkish Bank Valikonagl CAD. 7 Nisantasi 34371 Istanbul, Turkey Tel: +90 212 3736373 Fax: +90 212 225 0353

Vietnam National Bank of Kuwait SAK Vietnam Representative Office Room 2006, Sun Wah Tower 115 Nguyen Hue Blvd, District 1 Ho Chi Minh City Vietnam Tel: +84 8 3827 8008 Fax: +84 8 3827 8009 China National Bank of Kuwait SAK Shanghai Representative Office Suite 1003, 10th Floor, Azia Center 133 Yin Cheng Bei Road, Lujiazui Shanghai 200120 China Tel: +86 21 6888 1092 Fax: +86 21 5047 1011

Egypt Al Was any Bank of Egypt 13 Al The mar Street Gameat Al Dowal AlArabia Fouad Mohie El Din Square Mohandessin, Giza, Egypt Tel: +20 2 33388816/33388817 Fax: +20 2 33379302

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