Enabling the poor to benefit from advances in productivity and providing them with better service options are key development objectives. The private sector plays an important role in the lives of the poor and is essential in achieving these objectives. This World Bank discussion paper looks at a number of issues surrounding the role of Private Sector Development (PSD) in developing countries. It is followed by a report on dialogues with governments, the private sector, NGOs and trade unions.
Realistically, the only way to achieve basic services for the poor in developing countries is through the private sector. At the moment, the private sector provides social services that are, for the most part, superior to services that the state could provide, and also provides services that the state is unable to provide. In fact, the poor receive most of their services, (such as energy, water and communication), from private providers and, when given the option, choose private services over public ones, (typically for health and education).
The World Bank Group (WBG) have taken this on board. PSD is being promoted across the group and its PSD operations have increased significantly in recent years. However, a balance needs to be maintained between the role of the public and the private sectors. A key question is: What should this balance be, especially in countries with weak governance environments?
PSD can contribute to poverty reduction, both directly and indirectly, in a number of ways. The key findings were that:
- The scope for entreprenuerial activity and the availability of jobs was the most important factor in determining the fate of poor people
- Traditional aid in some sectors and low-income countries has been associated with poor performance by state-owned providers
- Privatisation has fared well compared to ‘realistic’ alternatives. Without the introduction of market forces it would have been difficult to raise living standards in poor countries, and, despite some abuses of the privatisation processes, it has lead to greater service delivery
- The private sector is better at assuming performance and market risks than the public sector. Shifting risks to the private sector will also help reduce taxpayers’ future debt obligations
- The introduction of competition has proved to be an effective ‘check’ on the state
- The ‘special’ nature of the WBG and its relationship with governments may allow the WBG to invest in projects that the private sector is not willing to pursue.
There is no ‘cook-book model’ for applying PSD approaches to particular types of countries: Case-by-case discretion is required. Key recommendations were that:
- There needs to be a balance between the role of the public and private sectors in service provision. The public sector should focus on improving its regulatory framework and building institutional capacity. Shifting risks will allow for this
- Creating a sound investment climate is essential for promoting opportunities for entrepreneurs. This requires macroeconomic stability, good governance, sound infrastructure and healthy individuals
- Weak government implementation capability does not mean that the public provision of services is the best option. Small-scale and non-profit providers are a good alternative in this case
- When the private sector provides health and education services that the poor cannot afford, subsidy schemes can be used
- PSD strategy also has broad implications for WBG strategy. Activities that are best carried out by the private sector should be considered by the WBG as legitimate activities for themselves
- When the WBG is involved in shifting risks, it is often desirable to ‘unbundle’ some of its products.
