Government management offsets the benefits

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When policy makers rely on Private sector?

  1. The inefficiencies of govt might becum substantial enough tht evn with higher quality, the cost of government management offsets the benefits. As Stiglitz (1989) has noted, "public management" is itself a public good, and one that is often hard for voters to easily observe. Wolf (1988) reviews a large number of studies on the comparative efficiency of the public and private sector, noting that most -- but by no means all -- of them conclude the private sector is able to operate at lower (in some cases very much lower) costs.
  2. The more the govt. becums plagued with corryption, the more it becums less attractive for the management of services. Corruption may be one reason why govt is inefficient but it is also likely to effect the quality of services provided as well as the extent to which the government meets public goals about access and equity in the provision of services.
  3. The govt may also be ineffective in providing high quality services. Poor management and inefficiencies in the public sector may be related to low quality services, and in that case the price/quality tradeoff is an inaccurate description; lower prices and higher quality may become complements rather than substitutes. For example, if Govt pays it's worker less than the market, or has poor management, the quality of services provided by Govt. may be very low.
  4. Govt is unable to provide high quality products or mor unbiased services bcause of poor management. But there may be another reason for that: it may also be due to erosion in factors which have conventionally allowed Govt to provide higher quality services. For eg if the level of trust of public in Govt decreases, and now less people believe that Govt provide higher quality services then government may not be able to bring out a more caring response among its employees than the private sector. Alternatively, if the market power that government had in the labour market erodes, as discriminatory obstacles in the private sector decline, then the government may be less able to hire high quality workers at lower wages. These things have happened in recent years, and is thus one reason for the increased interest in greater private provision of social services.
  5. Competition exists in both government and private markets, but the competition in markets is more civil and fair. Economists often take it as obvious that competition will improve the market, and indeed there is substantial evidence that greater competition in markets does reduce inefficiencies.
  6. Businesses struggle continuously to provide different products to appeal to a wide variety of customers. Different businesses try to provide to different market segments, resulting in wide consumer choice. Government provision of a product or service is more towards "one size fits all".
  7. Individuals have more knowledge about market choices than about their Govt choices. The reason is that a consumer gets to make decisions for him- or herself. With government, a citizen just gets to "weigh in" with a vote,or a contribution. A citizen's influence on political outcomes is highly weaken and may be regarded as nil, diminishing citizen incentive to become informed. Moral responsibility is always improved by a close connection between actions and consequences; the political process weakens this connection.


Govt and private sector co-operate in various ways which includes contracting for services and facilities management, co-ownership or co-financing of projects, build-operate- transfer arrangements, informal and voluntary cooperation between government and the private sector, passive government financing of the private provision of services, and Privatization.

Contracting with Private Companies

Outsourcing for the provision of services and infrastructure to private sector is widely used all around the world by the govts of advanced as well as developing economies. It is the most common method used by govts to involve pivate sector in providing public services and infrastructure. Contracting for infrastructure and services allows governments to arrange with private companies to provide services or facilities that meet government specifications. Usually private companies provide services through contracting in 3 ways:

  1. Service contracts: In this arrangement, govt contracts with a pvt sector to provide specific service for a specific time period. . In the United States, federal, state and local governments contract with private organizations to help provide infrastructure and services that public agencies cannot offer efficiently or effectively on their own.
  2. Canada and most European countries also use private companies as "public service" providers, and an increasing number of developing countries are turning to private sector service contracts as well.

  3. Management Contracts: Management contracts are mainly used by govts to provide services more efficiently while mainting ownership control. In this type, the contract has the responsibility of operation and maintenance of a service for a specified time period, the contractor has the freedom to take routine management decisions. In Cambodia, 4-year management contracts with nongovernment organizations were put in place in primary health care facilities in 12 districts.
  4. Lease Contracts: Under a lease contract, the private partner is responsible for the service in its entirety and undertakes obligations relating to quality and service standards. Except for new and replacement investments, which remain the responsibility of the public authority, the operator provides the service at his expense and risk. Lease contracts are used for public services as well as for commercial operations. In Asia, lease contracts are usually used in operating airport terminals or seaport container terminals. Both India and Thailand have ongoing lease contracts to operate container terminals at the seaports of Bangkok and Cochin, Kerala State.

Public-Private Joint ventures

In many countries Privatization policies are such that it allows the Govt to retain sone part of ownership in the form of stocks thus making these arrangemnts as joint ventures. For Example, China has used joint ventures between foreign investors and state enterprises to acquire foreign technology and capital, learn foreign management and marketing techniques, increase foreign exchange-generating capacity, and promote joint research and development projects.The Chinese government also used joint ventures between SOEs and private foreign companies to make new investments in infrastructure and manufacturing facilities. The expansion of telecommunications equipment facilities in the Shanghai area, for example, was financed through joint ventures.

Build-Operate-Transfer Agreements.and Similar Agreements.

BOT and similar arrangements are arrangements in which a private firm or consortium finances and develops a new infrastructure project or a major component according to performance specifications set by the government.

In 2001, the Netherlands developed a BOT with a consortium led by Siemens Corporation to design, build, finance and maintain the superstructure of a high-speed rail system that will run from Amsterdam into Belgium.

Passive-Public Investment

Govts use this arrangement when take make loans, grants, equity investments to encourage private sector to participate in offering services, goods or construct infrastructure that are in the public interest.

In India, many federal and state government agencies have encouraged private companies to become involved in land development and low-cost housing construction. In Ahmedabad, for example, a private construction and housing finance company played an active role in providing low-cost housing.

Delegating Responsibility for Services or Infrastructure to the Private Sector

In some countries, govts have increased the participation of private sector by giving them responsibility of some services and infrastructure or simply leaving them to private enterprise. This is primarily done by regulatory requirements, by using merchant facilities, and by requiring developers to financially support the services and infrastructure related to residential, commercial or industrial construction projects.

In the United States federal and state governments have often used regulations to shift responsibility to the private sector for providing services and infrastructure if their operations lead to health, safety, or security hazards for the public.

Voluntary or Informal Public-Private Cooperation

Voluntary co-operation among private corporations, international organizations, and national and local govts resulting from globalization, expansion of operations of multi-national companies addresses important social issues and also provide social services.

Rotary International with partnership with Coca-Cola helps the government of India immunize its population against polio. Coca-Cola uses its extensive distribution network in India to provide resources and expertise in marketing and community mobilization, and makes employee volunteers available to support Rotary International's immunization drive.