PUBLIC INTERVENTION TO PROMOTE PRIVATE SECTOR

Free Market Economy

 No Economic Intervention and Regulation by the State :

 Means of production is private, not state control
 Government plays a neutral role
 Other forms- controlled market, mixed economy

 Quantity of goods and services produced and purchased are determined by

supply and demand

 Efficient Market: When all parties to a transaction have equal information about
the goods or services on offer

 When market does not function efficientlyMarket Failure

Note: Market where all pertinent information is available to all participants at the
same time, and where prices respond immediately to available information. Stock
markets are considered the best examples of efficient markets.

Market Failure
 Allocation of goods and services by a free market is not efficient.
 Causes of market failure :
• Market may not be structured properly- impairing competition
• Participants in the market may be unaware of true costs +benefits
• In case of monopoly, cartel etc
• Asymmetric Information: imperfect information
 One party has different information to another
• E.g. when selling a car owner has more information than buyer
 Asymmetric Information leads to:
• Moral Hazard: Reckless driving
• Adverse Selection: e.g. Insurance

 Often cited as a justification for government intervention!!!

Rationale for Public Intervention

1. Some goods and services have specific characteristics; competitive market will not
deliver an efficient outcome
• Public goods- goods where one person’s consumption doesn’t prevent other
from using it (non-rival) and it is impossible to prevent people not paying for
the provision from using or benefits from good/service (non-excludable)
free rider problem
In case of Public Goods, it is impossible or too costly to exclude those who don’t pay
for the services created; Such sector is not lucrative for private sector
 Public Intervention Necessary
 Recovery of costs- Users fees/taxation
 e.g. national defense

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2. In sectors where investment requirements high-private sector’s capacity to mobilize

financial resources. E.g. Building of roads
3. Correction of Market Failures
• If market imperfections are present, the prices of goods or services will not
reflect their true values
• Public intervention necessary to develop environment for efficient market
functioning
• In form of direct spending like bailouts, change in policies, import-export
restriction etc
4. In case of goods and services where externalities are involved
• when an individual or firm undertakes an activity effecting third parties-result
in externality
• Positive Externality
 Positive externality exists when an individual or firm making a decision
does not receive the full benefit of the decision
 Benefit transferred or a positive “spill-over” to a party that was not a
part of the original transaction or decision making process
 Private firms cannot retain profits for services provided to everyone-
results under investment- intervention required
 e.g. Immunization

• Negative Externality
 When activity results in external cost to others
 Firms don’t bear full costs
 e.g. Pollution

Resolving Positive Externality

 Enforcing Patents & Copyrights
 Subsidize research to encourage extra investment/finance the research
 Through merger of parties involved so that the merged entity internalizes the
externality

Resolving Negative Externality

 Intervention in form of higher taxation
 Regulation of inputs, production methods by setting standards to be met
 Encouraging innovation and the use of best practice in environment solutions
through support for research
 Subsidizing those alternative inputs or production methods which has lesser
impacts

Rationale for public Intervention

5. In case of sectors with Information problems
 Asymmetric information- where one party in an economic transaction has
better information than the other
 Party with greater information likely to benefit more
 Credit Information Bureau in Nepal- Public intervention to equip banks
with better information about the borrowers.

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6. Coordinating large events/disaster

7. Intervention for Social Considerations
1. Improve the distribution of market outcomes between rich and poor
e.g. Deprived sector lending
2. Ensure people in similar circumstances are treated equally, have equal
access to services
e.g. To address discrimination issues
Seat reservation for females, marginalized groups
3. Consider the needs and outcomes for future generations, for example
ensure that future generations are not made worse off by the activities of the
present generations.
e.g. policies relating to address global warming

Forms of Public Intervention

 Import/Export restrictions: resource on the free market flow of products and services
between countries
 Government ownership
 Subsidies
 Taxation
 Direct spending on public goods
 Price control: direct control of wholesale/retail prices

Risks of Public Intervention

1. Greater financial burden to general public
2. Substitution Effect- where a price reduction for one particular good encourages
consumers to buy more of that particular good and substitute others
3. Displacement/crowding out problem- Investment by public sector in different sectors
may cause the private sector players to crowd out/get displaced.
• E.g.- Gov’t agencies giving free trainings and workshops may effect many
private players in similar fields
4. If the private sector does not respond to the intervention in the way the public sector
thought it would- situation aggravated
5. Political and administrative interests overriding the public interest

Government Failure
 Occurs when government intervention in the market to improve market failure
worsens the situation
 Increases market distortions and reduces welfare and economic efficiency instead of
otherwise

Considerations before the design of interventions

 Even if the market is not perfect, can the market still solve the problems?
 Which type of intervention might alleviate the market failure?
 Does the intervention eliminate the cause of failure or just prevent the
consequences?
 Would the benefits of the intervention outweigh the costs?

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PPP (Public Private Partnership)

 Structure that brings public and private sectors together in long term partnership for
mutual benefit
• Generally the public sector maintains an oversight and quality assessment
role while the private sector is more closely involved in actually delivery of the
service or project.
• PPP as a concept, may be defined as a contractual agreement by and
between central and local governments and/or private sector, non-
governmental organizations and community based organizations to secure
common interests.
• Goal : Combine best capabilities of the public and private sectors for mutual
benefit

Benefits of PPP for Gov’t and Taxpayers

 Improved service delivery by allowing both parties to do the best
• Gov’t core competency: Policy making
• Private Sector’s core competency: Technical, Operational Issues, Better
access to technologies. Specialized labor
• Segregation of duties according to what each party does the best resulting in
improved delivery
• Avoid bureaucratic problems that plague public sector
 Improved cost-effectiveness
• Gov’t sole participation- risks of corruption, lack of responsibility, least effort in
cost minimization
• Gov’t can benefit from private sector’s efficiency, innovation and experience
 Reduce public sector risk
• After contractual agreement, much of responsibility transfers to private sector
followed by transfer of risks
• Risks relating to labor shortage etc.
 Deliver capital projects faster
• Time bound projects for private sectors, pressure for project completion on
time
• Taster execution means more time for other projects
 Improved budget certainty
• Services are provided at a predictable cost, as set forth in contract
agreements

Methods of PPPs
1. Contracting with Private Companies
a) Service contracts
• a government agency contracts with a private firm to provide a specific
service for a specified period of time
• e.g. solid waste collection
• blood transfusion services with Nepal Red Cross Society
b) Management contracts

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• the private player takes over responsibility for operation and maintenance
of facility for a specified period of time
• ownership control retained by the gov’t
• private sector with the freedom to make routine management decisions
• e.g Lamjung district hospital with NGO
2. Lease :
e.g. pharmacy services in various hospitals
3. BOT (Build-Operate-Transfer)
• private partner builds a facility to the specifications agreed to by the public
agency
• operates the facility for a specified time period, and then transfers the facility
to the gov’t at the end of the specified period of time
• length of contract must be sufficient to enable the private partner to realize a
reasonable return on its investment through user charges
 e.g Trishuli hospital
4. Design-Build-Finance-Operate:
Responsibilities for designing, building, financing, and operating the
infrastructure fall in the hands of the private sector, but ownership remains
public.
5. Build-Own-Operate-Transfer :
The design, development, financing, building, operation and maintenance of
an infrastructure fall completely under the responsibility of the private sector
and this for the duration of the concession, which is dominantly long term (e.g
50 yrs). Public sector involvement is limited to the general regulatory
framework and assuring compliance to the terms of the contract.
e.g maternity hospital thapathali by paropakar ngo

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