Basic services are essential to reducing poverty and improving quality of life. Should these services be provided by the state, or the private sector? This paper, based on a UNDP project on privatisation and poverty reduction, examines the impact of market-oriented reform policies on the delivery of basic services in developing countries. It argues that reliance on private sector provision will not address the central challenges of public sector delivery. Market-led policies also fail to contribute to the MDGs and often reduce the likelihood of achieving them. The debate over public service reform must be focused on poverty reduction, and the state has to assume central responsibility for the provision of essential public services.
Market-based reforms consist of commercialisation or privatisation. Commercialisation is the process of transforming a transaction into a commercial activity in which goods or services acquire a monetary value. Privatisation means a private company taking over some or all operational responsibilities, compensated either through user fees or a fee-for-service paid by the government.
The 1990s saw increased popularity of privatisation and commercialisation to overcome the perceived deficiencies of the state sector in the delivery of public services. However, the difficulties with market-based reforms are increasingly apparent. Market-based reforms often do not make services more accountable and efficient, nor do they address issues of equity and social justice. The process of privatisation creates an incentive framework that undermines the accountability and capacity of the state. Furthermore:
- Market-based approaches have suffered from lack of investor interest and increased risk-bearing by developing country governments/ consumers. There is also a lack of sufficient information and effective institutions for state regulation. In many developing countries, privatisation does not result in competition.
- Two-tiered services tend to lead to a reduction in accountability, as middle class and commercial users opt out of state provision.
- Persistent derogatory depictions of the public sector negatively impact on the credibility of the state, and hence its capacity.
- Full cost recovery policies can threaten the achievement of the MDGs. User fees can negatively impact on poverty reduction; the removal of user fees has resulted in significant poverty reduction.
- The World Bank has promoted market-oriented reforms yet has not financed private projects in water, sewerage and energy sectors. Private investment in infrastructure in these areas is crucial.
Limitations to private provision are increasingly apparent, but weaknesses in state delivery systems must also be addressed.
- Achieving poverty reduction goals requires an explicit government commitment, and corresponding resources, to provide a minimum level of public services for all citizens.
- Civil society participation in the delivery and regulation of public services is essential. Governance reforms can strengthen the voice of marginalised groups. These include transparency, inclusive processes and capacity building.
- Major political commitments from governments are needed to choose the most effective and equitable options for increasing financial resources for basic services. These will vary by country, for example middle-income countries can raise capital in both foreign and local financial markets. Very poor countries cannot rely on user fees in the short term but need higher levels of foreign aid.
- Impoverished people can demand accountability as organised citizens rather than as atomised consumers. Non-partisan organisations must be created and sustained to professionally represent citizens’ interests in accessing affordable services.
