Why Is Privatization Seen As An Attractive Option For The Delivery Of Public Services?

Abstract

This paper elaborates the introduction of surveillance that gave the Imf broader responsibilities with respect to oversight of its members' policies than existed under the par value system. The IMF's purview has been broadened under the new system but, by the same token, its members are no longer obliged to seek its concurrence in changes in exchange rates. The standing volatility of substitution rates, and their prolonged divergence from levels that appear to be sustainable over time, take been matters of growing concern.

Samuel Paul

In most countries, public or commonage goods and services, such as national defense, law and order, and street lighting, accept ever been fabricated available by the state. Goods and services that cannot be denied to ane individual without denying them to all must be supplied collectively, for a private entrepreneur supplying them could not forcefulness the community equally a whole to pay him, nor could he prevent anyone who did not pay him from consuming his products.

In all countries, governments have gone beyond the provision of public goods and services. They take invested in and promoted the production and distribution of a variety of private goods, through the allocation of public resource and the creation of organizations under public auspices. Private goods are those such as food, clothing, or medical intendance whose consumption by one person precludes consumption of the same unit of measurement by another. When such goods are supplied by the land, it is considering it is believed that their quality or quantity of supply would not be acceptable if it were left to the individual sector. Amongst the reasons for this belief are the rudimentary country of the private sector, where entrepreneurs are few and most businesses small-scale and unsophisticated, the inability of the individual sector to heighten plenty resources for investment, a wish to promote a item distribution of consumption or income, and the urge of governments to control the "commanding heights" of the economy. Sociopolitical considerations, such equally the fright that key activities will be dominated by expatriates or by a local ethnic group, are often decisive. In some cases, likewise, the public sector has been swollen past politicians and bureaucrats in search of ability and prestige.

Large investments in infrastructure past governments, fabricated possible in part by college domestic savings rates and foreign aid, were a major force backside the developing countries' marked acceleration in economical growth rates since Earth War Two. But despite considerable support by many political leaders and development planners, feel with the public provision of goods and services over the by three decades has generally been disappointing. In country after country, unbridled state expansion has led to:

• economic inefficiency in the production activities of the public sector, with high costs of product, disability to innovate, and costly delays in delivery of the goods produced;

• ineffectiveness in the provision of appurtenances and services, such as failure to meet intended objectives, diversion of benefits to elite groups, and political interference in the direction of enterprises; and

• rapid expansion of the bureaucracy, severely straining the public budget, causing issues in labor relations within the public sector, inefficiency in authorities, and adverse effects on the whole economic system. These issues have led many governments to undertake programs of public sector reform and, pushed by a demand to curb public expenditure, to re-evaluate the possibilities for shifting publicly managed activities into the private sector.

Types of goods, production modes

Of the different types of goods and services a society requires, reference has already been made to collective goods and private goods. In betwixt are toll appurtenances and common pool goods. Toll goods can be produced through the individual market, only with some collective activity. Electrical power and water are examples of cost goods that can be produced in the individual sector merely may need to be regulated since they are usually produced by monopolies and since governments want to ensure universal admission. (This is because the size of the investments needed, especially in local distribution, makes information technology uneconomic to have several competitors supplying these goods in the aforementioned area.) Common puddle goods and services are those whose continued supply will not be assured through the private market, as individuals will tend to squander them. Examples are underground water resources, oil or mineral deposits, wild animals, and lunch programs for school children or the underprivileged. Collective or cooperative action is needed for orderly exploitation or preservation of such goods.

Different types of goods and services can be provided under unlike types of institutional arrangements, listed here in descending order of government involvement:

i. Production and delivery by government.

2. Intergovernmental agreements for production and delivery (contracts to local government by primal authorities).

three. Regime contracts to private parties for the supply of goods and services.

four. Government franchise to private parties to produce and sell appurtenances and services.

5. Government grants/vouchers to consumers to buy goods and services.

6. Joint ventures (government investing jointly with private parties).

7. Voluntary service.

8. Market (private entrepreneurs supplying goods and services).

Combining these alternative institutional arrangements with unlike types of appurtenances yields a broad gear up of possibilities which is set out, with examples, in the accompanying box below.

Recent evidence shows that fifty-fifty in those types of goods whose provision requires stiff collective activity, private enterprise can play a role in at least some phases of product or delivery. In most developing countries, nonetheless, irrespective of the type of goods, government production and delivery play a large if non ascendant role. Where such an overextension of the land exists, it is useful to consider the following two questions: What are the alternative routes to privatization available to governments? Nether what conditions will privatization yield desirable outcomes?

Options for privatization

The burden on the public sector can be reduced in 3 different ways. First is divestiture, which entails the sale or closure of state-owned industrial enterprises. People's republic of bangladesh, Republic of chile, Jamaica, Pakistan, the Philippines, and Sudan, amid developing countries, offer examples. In the South korea the government pioneered the establishment of bones industries such as oil refining, steel, and machine tools, and so sold them to the private sector in one case their profitability was established, using the funds raised to pioneer other industries. Notwithstanding, governments rarely desire to sell their turn a profit-making industries, while private parties are reluctant to buy those that are making a loss, and the political risks of closing state enterprises are high. Hence, divestiture is likely to be the least palatable of the three methods to LDC governments. An alternative probable to be more bonny is the leasing of land-endemic enterprises or the utilise of private management contracts to strengthen unsuccessful enterprises whose turnaround seems feasible.

Second, governments may contract out services they have planned and specified to other organizations that produce and deliver them. Franchising—authorizing the delivery of certain services in designated geographical areas—is common in utilities and urban transport. Contracting is mutual in public works, defense, and many specialized services. Grants and vouchers may be given to consumers to subsidize items such as food, health intendance, and education when these are offered by the individual sector. Where suppliers compete for contracts and there is no loss of economies of scale, contracting is efficient. But there is scope for corruption in contracting, and long-term contracts tend to encourage monopolistic behavior past the private supplier. Contracts for road construction and maintenance are common in countries such as Brazil, Colombia, India, and Republic of kenya. In agriculture and urban development in the Philippines and in water supply in the Ivory coast, private contracts have played an important part (come across box above).

Types of goods and modes of production/commitment

Types of goods and modes of production/commitment

Type of good	Feasible mode	Examples
Private	Marketplace, voluntary service, grant/voucher, joint venture	ane) Food, vesture, housing, privately produced and sold. 2) Consumers produce ain nutrient, clothing, housing. 3) Food stamps used to subsidize the poor. iv) Nutrient, clothing, housing produced jointly by government and private sector.
Toll	Franchise, contract, articulation venture, market	i) Electricity, water, phone, and highway services Supplied privately or under contract to government. 2) Electricity, water, or communication services delivered jointly by authorities and private sector. 3) Market produces these goods subject to government regulation if natural monopolies sally.
Common pool	Contract, grant/voucher, authorities production	1) Underground water and mineral deposits exploited on a contract footing. ii) Medical care provided through a grant/voucher system. These are in the nature of transfer payments, but they avoid the need for the government to supply the services straight. three) Government produces and sells medical services or water.
Collective	Contract, voluntary service, intergovernmental agreements, government production	1) Government produces and delivers defense service, street lighting. 2) One level of government contracts another for educational, urban, or hearth services. iii) Customs or voluntary group provides, e.g., street cleaning, rural h2o supply maintenance, or family planning services. four) Government contracts out road maintenance, research and development, or sanitation to private sector.

Third, governments could withdraw from the provision of many appurtenances and services, leaving them wholly or partly to the individual sector. Sometimes the introduction of contest acts every bit a forcefulness for efficiency and innovation. Voluntary organizations significantly augment the work of the land in instruction and wellness services in many countries. Individual entrepreneurs supply urban and rural route transport in many countries, whether exclusively or to supplement public services. Farmer cooperatives successfully evangelize services in Argentina, Chile, Bharat, and Zimbabwe, and private tubewell irrigation has been successful in India and Pakistan. A major problem in LDCs, however, is getting private suppliers to provide services to remote rural areas, where many of the poor live, and to take a long-term view of customer needs, rather than maximizing short-term gains.

Private provision of drinking h2o

• In Santo Domingo, Dominican Republic, ten private companies provide drinking water to the public, subject to checks on quality by the Ministry of Wellness and controls on prices fix by the Ministry building of Public Works. The companies obtain water from individual sources, purify information technology, and distribute it by truck.

• A district of Santiago, Chile, has obtained all its water and sewerage services from a private company since 1943. The company currently has 43,000 connections and covers all residents. Tariffs are approved past the Authorities.

• Abidjan, Ivory Coast, obtains its h2o from a private firm originally established every bit a wholly owned subsidiary of a French house, and now jointly endemic by the latter, individual investors, and the Authorities. Since 1973, this firm has been responsible for water supply throughout the country. H2o supply in the Ivory Declension maintains i of the highest standards in Westward Africa. The institutional separation of investments from operations, tariffs that reflect costs fully, careful public scrutiny of costs, and the autonomy of the company are amongst the major reasons for its good functioning.

Even if they do not divest, governments can reduce the brunt on revenue enhancement revenues by imposing user charges for services provided by the public sector. User charges are public prices for public products; they are applicable to those services with readily identifiable users who benefit substantially more from the service than nonusers, and from whose benefits nonusers can exist readily excluded. For urban services such equally water, power, telephone, or refuse collection, user charges are more efficient than full general taxation. When services are provided out of general taxes, depression-income groups may subsidize loftier-income groups if both groups pay general taxes and the rich have greater access to the services. When user charges are enforced, citizens tin be offered different levels and qualities of service, co-ordinate to what they can pay for. Moreover, overcrowding and excess demand for services occur when users do not direct pay for them; user charges encourage more toll-effective behavior. Poorer groups in the customs tin still exist assisted through reduced user charges or the use of vouchers or subsidies.

Planning privatization

Having considered the options for privatization just discussed, governments may wish to mountain a plan for shedding the burden on the country where the public would be amend served by the market, while ensuring that they retain the capacity to monitor the performance of the individual sector in providing these goods and services. Such a plan is best formulated on the basis of a series of reviews.

To begin with, a review of the private appurtenances being provided by the public sector volition shed lite on the possibilities for divestiture. Historical factors, such as foreign domination, a nationalist upsurge at the time of independence, and lack of private capital and entrepreneurship may have led the public sector to accept on more than information technology could manage efficiently. If atmospheric condition have changed, it may be time for authorities to divest itself of some of its production activities or to seek management contracts for them from the individual sector. Factors such every bit the emergence of new technologies tin also trigger such a review. In more advanced developing countries the computer revolution, and the resurgence of the minor firm in the arena of high technology and computerized planning, manufacturing, and control systems, are forces that call for an unusually high degree of innovation, internal flexibility, and adjustability that conventional state control and incentive systems are unlikely to sustain.

A review of the mutual puddle goods and toll goods produced in the public sector will usually suggest some whose production could be franchised or opened upward for joint investment or leasing past individual entrepreneurs, subject to authorities regulation. If these activities must remain in the public sector, governments can consider cartoon more of the necessary funding from user charges.

A review of the product of public appurtenances may suggest possibilities for subcontracting to private parties. Some public services could be delivered through local governments or nongovernmental agencies on a contract ground. Possibly some services could be produced through cooperative activeness by the customs.

The interests of the poor need to be protected in the process of reform (see box). Doing so may require innovative thinking by planners. Often the lack of admission to a public service is a worse trouble for the poor than its toll. In agricultural credit programs, for example, small and marginal farmers often fail to obtain the adequate and timely loans they need to cultivate their land. To them, access to credit is more important than the subsidies they might receive on interest cost; they are willing to pay the market price provided they can obtain the loan on fourth dimension.

Conditions for success

If privatization is to succeed, in the sense of raising efficiency or effectiveness in the production or delivery of goods and services, certain conditions must be met.

Starting time, privatization cannot be sustained unless the political leadership is committed to it, and unless it reflects a shift in the preferences of the public arising out of dissatisfaction with the performance of other alternatives. Privatization has in the past worked best when a government was strongly committed to a modify, or when a new government vowed to contrary the actions of its predecessors, as has happened in Chile and the United Kingdom. More than recently, some governments that accept faced severe economic crises, with massive monetary deficits, have turned to privatization and divestiture as a function of their aligning strategy.

Second, whatsoever alternative institutional arrangements chosen should not stifle competition among suppliers. Replacement of a government monopoly by a individual monopoly may not increase public welfare—there must exist a multiplicity of private suppliers. This tin can be a difficult problem where there are few competent suppliers. Though government may wish to contract out a service, if there are only ane or two qualified contractors, the benefits of competition are unlikely to follow.

In this context, almost developing countries' systems of regulation demand major review and reform. Overregulation of industry discourages private initiative; overregulation of urban land apply and building construction retards urban evolution; and unduly low ceilings on the prices of industrial products and utilities, such every bit bus send and electricity, inflate demand and depress the incentives for product.

The third, related, status is freedom of entry to provide goods and services. Long-term contracts and franchises limit competition and consumers' choice. In some services that are capital intensive, freedom of entry is difficult to achieve. But in others, such equally reject drove or health services, the public will be better served by several private suppliers competing than by one agency monopolizing the market place through a long-term contract.

Privatization and the poor

One of the fears virtually privatization is that it will hurt the interests of the poor. In societies with an extremely uneven income distribution, information technology is unlikely that the poor can successfully compete in the market place for goods and services in curt supply. What can be done to protect the interests of the poor when a program of privatization is implemented?

• The poor may exist willing to pay the market price for individual goods and services—for case, agricultural credit or rural wellness services—provided they have access to them. In most cases, supply at official prices is limited and the poor pay much more than the market cost. To improve the access of the poor to such goods and services may crave institutional reforms, dissemination of information to the poor, and strengthening of advocacy groups such as nongovernmental organizations.

• Differential pricing may exist necessary to enable the poor to consume certain goods. Water taps tin can exist installed in slum areas for the poor to get drinking water gratuitous or at a nominal charge, while economic rates are charged for water consumed by high- or middle-income households. Coarse grains consumed largely by the poor can be subsidized, while grains used by higher-income groups are sold at marketplace prices. Cross-subsidization could exist used to finance such schemes. In these cases differential pricing need not encourage a diversion of benefits from the poor to the rich. Differential pricing is less likely to work effectively in the sale of agronomical inputs such as fertilizer or seeds.

• If there is an farthermost shortage of essential goods such as food or wearable, it may be necessary to provide special coupons or ration cards to the poor to enable them to purchase these items at subsidized rates from shops, and for authorities to reimburse the private suppliers to the extent of the subsidy. Broadcasting of data to the beneficiaries, steps to minimize the diversion of benefits to ineligible citizens, and surveillance of the shops past proper government are prerequisites for the success of such schemes, which are usually difficult to sustain over extended periods.

Fourth, public services to be provided by the private sector must exist specific or have a measurable issue. Physical construction or utility services, for example, can be measured, but nigh educational services and police protection are non like shooting fish in a barrel to quantify, fifty-fifty though their inputs tin can be measured. Lack of specificity makes it more difficult to control services provided by the private sector, specially if the public served is illiterate, unorganized, and unassertive. Service delivery by nongovernmental organizations or local governments may be more appropriate under these atmospheric condition.

Fifth, consumers should be able to link the benefits they receive from a service to the costs they pay for it, since they will then store more wisely for different services. User charges are i manner of establishing this link. The importance of educating consumers and disseminating information to the public cannot exist overemphasized here.

Sixth, privately provided services should exist less susceptible to fraud than government services if they are to be effective. Services provided through commonage or cooperative action at the community level are probably the least susceptible to fraud.

Seventh, equity is an important consideration in the delivery of public services. Broadly speaking, the benefits of privatization tin accumulate to the capital owner who supplies the service; to the consumer, who receives a more efficient service; and to the public at large, through a reduction in the public sector deficit, and hence in taxes or the rate of inflation, or both. Privatization will be counterproductive if the ability of the public to pay, determined by the prevailing income distribution, becomes the sole guide for the delivery of services. And, if the benefits of privatization are probable to be reaped solely by local elites, expatriate groups, or multinational corporations, political resistance to reform is likely to increase.

Determination

The foregoing discussion shows that privatization implies much more for the regime than just a shrinkage in the public sector. If privatization is to succeed, regime must redefine its role to:

• search for ways to increase competition in the supply of public services;

• disseminate information and then that consumers tin can become more than rational and discriminating;

• monitor and evaluate the public services being delivered.

Even later some public enterprises take been sold or dismantled, and many services have been contracted out, the public sector's function in developing countries is probable to remain large. If people take to depend on the government for some services, it is important that they be able to do command, directly or indirectly, over the efficiency and effectiveness of the institutional arrangements for such services.

Teaching for Development

An Assay of Investment Choices

by George Psacharopoulos and Maureen Woodhall

The authors—who draw upon multidisciplinary resources and the experience of the Globe Bank and other organizations in lending for educational activity—comprehend in depth the many wide policy bug implicit in the assessment, evaluation, and analysis of investment choices for education in developing countries.

Issues discussed include:

• the contribution of education to economical and human development

• criteria for educational investment

• cost-do good analysis and the demand for educated manpower

• educational finance

• the internal efficiency and quality of education

• equity considerations and the links between investment in didactics and investment in other sectors

Published by Oxford Academy Press for the World Depository financial institution

Essential reading for educators, planners, and policymakers .

Source: https://www.elibrary.imf.org/view/journals/022/0022/004/article-A010-en.xml

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