Annex 1. The Choice between Public and Private Finance
The choice between public and private finance depends to a large extent on the size and type of returns generated by a project. To analyze this choice, this annex relies on a stylized framework centered around the provider of development-related services; for instance, a school, hospital, or highway. The provider can be a government unit or a market producer outside the government. The provision of the services generates both private and social returns.1 The relative size of these two types of returns is a key factor (but not the only one) to determine whether a project is likely to be private or public.
Projects that generate high private returns are generally financed and implemented by the private sector, whereas the government is usually better positioned to carry out projects with high social returns but low private returns. Three main cases can be distinguished, depending on the relative size of private versus social returns:
Purely private projects. If a project generates high cash flows and high private returns, private providers have incentives to produce the services, even without receiving any public subsidy. Service providers should not face large constraints to raise financing from the private sector, since the elevated private returns generate enough revenue to pay high interest and dividends on their liabilities. Thus, the private sector is likely to produce and finance the services. Risk and responsibilities are within the private sector. When the project requires debt, it is recorded as private debt.
Purely public projects. Some projects have very low (or no) private return and large social returns—a situation described in the literature as a “spillover gap” (Jaffe 1998). Provided that the government has some fiscal space and costs are not too high, the government has strong incentives to produce these services, financed from the budget, by resorting to taxation or by borrowing from the private sector. In some cases, the spillover gap may be so large that public provision becomes the only realistic option.2 These projects are public, since risks and responsibilities are within the public sector. Their financing raises government debt.
Intermediate cases. Some projects lie in between these two extreme cases. The projects are initially not attractive to the private sector (both in terms of provision and financing) but could become attractive if the government provides sufficient financial incentives to bring private returns above the investors’ hurdle rate. Public support, meant to catalyze private participation and financing, can take the form of a direct transfer, a tax break, financing at below-market rates, or a guarantee. Whether these projects are recorded as public or private depends in the end on who carries most risks and has control (see guidance on sectorization in the IMF Government Finance Statistics Manual 2014). It is a qualitative assessment since these arrangements allocate responsibilities and risks between the public and the private sector. In these intermediate cases, financing may impact both public and private debts.
Annex 2. An Analysis of Past Private Investment Surges
To assess the scope for more private finance in SSA, this annex analyzes the evolution of private investment over the past decade in a global sample of 170 countries. Annex Figure 2.1 shows the distribution of the change in the private investment ratio between 2007 and 2017, which is the latest year available in the IMF investment database.1 Over the period, the private investment ratio was, on average, broadly stable in the global sample.
Distribution of the Change in the Private Investment Ratio between 2007 and 2017
(Global sample)
Citation: Departmental Papers 2021, 011; 10.5089/9781513571560.087.A999
Source: IMF staff calculations based on IMF Investment and Capital Stock Dataset, 2019.Note: Orange color represents number of countries with private investment ratio increases above 6 percentage points.
Distribution of the Change in the Private Investment Ratio between 2007 and 2017
(Global sample)
Citation: Departmental Papers 2021, 011; 10.5089/9781513571560.087.A999
Source: IMF staff calculations based on IMF Investment and Capital Stock Dataset, 2019.Note: Orange color represents number of countries with private investment ratio increases above 6 percentage points.Distribution of the Change in the Private Investment Ratio between 2007 and 2017
(Global sample)
Citation: Departmental Papers 2021, 011; 10.5089/9781513571560.087.A999
Source: IMF staff calculations based on IMF Investment and Capital Stock Dataset, 2019.Note: Orange color represents number of countries with private investment ratio increases above 6 percentage points.This annex identifies countries that were able to raise their private investment ratio by at least 6 percent of GDP between 2007 and 2017. The analysis focuses on a single decade, since this is the time horizon of the SDGs (to be achieved by 2030). The 6 percent of GDP threshold is used for two main reasons. The first one is purely qualitative: if the three main stakeholders (governments, international community, and private investors) have to contribute in equal manners to closing the SDG gaps—estimated in Chapter 2 at 19 percent of GDP for the median SSA country—this would imply that the private sector should bear one-third of these costs, which is approximately 6 percent of GDP. The second reason refines further the analysis using the estimates provided in Chapter 2: when the potential from all public sources is summed up (5 percent of GDP for domestic revenue mobilization, 2–3 percent of GDP for government expenditure efficiency reforms, and 4–5 percent of GDP from scaling up official aid), the financing gap, relative to the 19 percent of GDP expenditure needs, would also represent about 6 percent of GDP. Thus, a natural question is whether the private sector could cover all or part of this gap over a decade.
Few countries have succeeded in raising private investment significantly over the past decade. Focusing on “successful” cases, only 15 countries out of 162 raised their private investment ratio by at least 6 percentage points during 2007–17 (Annex Figure 2.2, Annex Table 2.1). The median (resp. simple average) increase in these 15 countries was 9.6 (resp. 10.6) percentage points. And this group of countries accounted for about one-fifth of those that were able to register any positive increase in their private investment ratio. Among the best performers, half were from SSA and two-thirds were LIDCs.2 As shown in Annex Table 2.1, restricting the analysis to developing countries does not change much the results.
Countries with a Private Investment Ratio Surge between 2007 and 2017
(Percentage points of GDP)
Citation: Departmental Papers 2021, 011; 10.5089/9781513571560.087.A999
Source: IMF staff calculations based on IMF Investment and Capital Stock Dataset, 2019.Note: Countries where private investment ratio increased by at least 6 percentage points of GDP over the period. Data labels in the figure is International Organization for Standardization (ISO) country codes.
Countries with a Private Investment Ratio Surge between 2007 and 2017
(Percentage points of GDP)
Citation: Departmental Papers 2021, 011; 10.5089/9781513571560.087.A999
Source: IMF staff calculations based on IMF Investment and Capital Stock Dataset, 2019.Note: Countries where private investment ratio increased by at least 6 percentage points of GDP over the period. Data labels in the figure is International Organization for Standardization (ISO) country codes.Countries with a Private Investment Ratio Surge between 2007 and 2017
(Percentage points of GDP)
Citation: Departmental Papers 2021, 011; 10.5089/9781513571560.087.A999
Source: IMF staff calculations based on IMF Investment and Capital Stock Dataset, 2019.Note: Countries where private investment ratio increased by at least 6 percentage points of GDP over the period. Data labels in the figure is International Organization for Standardization (ISO) country codes.Increase in Private Investment Ratios Over One Decade (2007–17) and Two Decades (1997–2017)
Increase in Private Investment Ratios Over One Decade (2007–17) and Two Decades (1997–2017)
| Full Country Sample | ||||
|---|---|---|---|---|
| One decade | Two decades | |||
| Global sample | Developing countries only | Global sample | Developing countries only | |
| No. of countries | 162 | 125 | 162 | 125 |
| Simple average increase | –0.7 | –0.1 | 1.6 | 2.2 |
| Median increase | –0.9 | –0.3 | 2.0 | 2.4 |
| Subsample of Best Performers | ||||
| One decade | Two decades | |||
| Global sample | Developing countries only | Global sample | Developing countries only | |
| No. of countries | 15 | 15 | 33 | 33 |
| Simple average increase | 10.6 | 10.6 | 11.2 | 11.2 |
| Median increase | 9.6 | 9.6 | 10.0 | 10.0 |
Increase in Private Investment Ratios Over One Decade (2007–17) and Two Decades (1997–2017)
| Full Country Sample | ||||
|---|---|---|---|---|
| One decade | Two decades | |||
| Global sample | Developing countries only | Global sample | Developing countries only | |
| No. of countries | 162 | 125 | 162 | 125 |
| Simple average increase | –0.7 | –0.1 | 1.6 | 2.2 |
| Median increase | –0.9 | –0.3 | 2.0 | 2.4 |
| Subsample of Best Performers | ||||
| One decade | Two decades | |||
| Global sample | Developing countries only | Global sample | Developing countries only | |
| No. of countries | 15 | 15 | 33 | 33 |
| Simple average increase | 10.6 | 10.6 | 11.2 | 11.2 |
| Median increase | 9.6 | 9.6 | 10.0 | 10.0 |
Excluding commodity exporters, even fewer countries achieved a large increase in private investment over the decade. The previous exercise is repeated by excluding commodity exporters, since this group may have experienced investment surges in commodity-related sectors that have ambiguous or even negative impact on economic development. Also, these countries typically experience investment cycles that are linked to the fluctuations of commodity prices, making it more difficult to pursue development goals. Only 10 non-commodity exporters were able to increase private investment by at least 6 percentage points during the period 2007–17. In this subgroup, the median increase was comparable to that of the whole sample (including commodity exporters), at about 10.1 percentage points, with the group being split between LICs (seven countries, five of which are from SSA) and EMEs (three countries).
Scaling up private investment ratio by at least 6 percentage points seems more feasible over a period of two decades. The analysis is now extended to the past two decades, by looking at the evolution between 1997 and 2017 (Annex Table 2.1). Over these two decades, the number of countries that were able to ramp up private investment by at least 6 percentage points of GDP more than doubles to 33, of which 25 were noncommodity exporters. This corresponds to about a quarter of developing countries. In this sample of best performers, the median increase is not much larger than for the single decade analysis. The reason for the similarity of results between the two analyses is twofold: first, the best performers over the past decade recorded on average relatively minor private investment increases in the penultimate decade; second, most of the additional countries identified with the two-decade analysis (relative to the one-decade analysis) had experienced private investment increases only mildly larger than the threshold of 6 percentage points.
Results are robust to changes in the start and end dates of the sample. The previous exercise, carried out between 1997 and 2017, could be sensitive to the choice of the time period. In particular, results could be affected by the fact that the year 1997 marked the end of the credit boom in Asia. Thus, the exercise is repeated using 10-year averages for the start and end dates instead of single years. For the one-decade analysis, the authors compute the change between the average investment ratio during 1998–2007 and the average ratio during 2008–17. For the two-decade analysis, the comparison is between the average 1988–97 and the average 2008–17. Annex Table 2.2 shows that the results are not significantly affected, with still about 10 percent of the countries being “successful” over a one-decade period and a bit more than a quarter over two decades.3
Increase in Private Investment Ratios Over One and Two Decades (Using Averages)
Increase in Private Investment Ratios Over One and Two Decades (Using Averages)
| Full Country Sample | ||||
|---|---|---|---|---|
| One decade | Two decades | |||
| Global sample | Developing countries only | Global sample | Developing countries only | |
| No. of countries | 177 | 140 | 176 | 139 |
| Simple average increase | 1.2 | 1.9 | 1.2 | 3.2 |
| Median increase | 1.1 | 1.7 | 2.0 | 3.0 |
| Subsample of Best Performers | ||||
| One decade | Two decades | |||
| Global sample | Developing countries only | Global sample | Developing countries only | |
| No. of countries | 18 | 18 | 41 | 39 |
| Simple average increase | 8.7 | 8.7 | 10.4 | 10.5 |
| Median increase | 8.1 | 8.1 | 9.0 | 9.2 |
Increase in Private Investment Ratios Over One and Two Decades (Using Averages)
| Full Country Sample | ||||
|---|---|---|---|---|
| One decade | Two decades | |||
| Global sample | Developing countries only | Global sample | Developing countries only | |
| No. of countries | 177 | 140 | 176 | 139 |
| Simple average increase | 1.2 | 1.9 | 1.2 | 3.2 |
| Median increase | 1.1 | 1.7 | 2.0 | 3.0 |
| Subsample of Best Performers | ||||
| One decade | Two decades | |||
| Global sample | Developing countries only | Global sample | Developing countries only | |
| No. of countries | 18 | 18 | 41 | 39 |
| Simple average increase | 8.7 | 8.7 | 10.4 | 10.5 |
| Median increase | 8.1 | 8.1 | 9.0 | 9.2 |
A realistic but still-ambitious target for SSA countries could be to raise their private investment ratio by 3 percentage points over the next decade, which would be more in line with what good performers have achieved in the past. Replicating the analysis underlying Annex Table 2.1 with this lower threshold, we find that a quarter of developing countries (29 out of 125) have lifted their private investment ratio by at least 3 percentage points over the past decade, compared to about 10 percent (15 countries) with a 6-percentage-point threshold.
Annex 3. Orbis Calculations and Data Cleaning
Chapter 3 uses data from the Orbis Bureau van Dijk database, which is a firm-level database of more than 280 million public and private firms globally, covering 1984–2018. The data set includes both listed and unlisted firms. Several filtering and cleaning techniques were applied for the analysis, which covers 2000–17, 90 countries, and more than 1 million observations overall, with 200,000 foreign owned.
To restrict the size of the data set the authors include only firms from emerging market and developing economies (EMDEs), and exclude all firms in Advanced Economies being less comparable to firms in SSA with different business and investment environment. The authors drop government-owned firms; all other ownership types are retained to ensure focus on private ownership and investment. To identify firms with foreign investment, the authors define a dummy to identify when the global ultimate owner (GUO) is different from the domestic ultimate owner (DUO).1 The analysis presented in Chapter 3 is based on foreign-owned firms only.
The data set was cleaned to remove errors and outliers in the data, including firms without total assets information, missing or negative employees, and missing NACE industry codes. Firms with observations of return on equity in the top and bottom 1 percent were also removed. Firms were kept in the sample even if year observations were not consecutive, resulting in an unbalanced panel. Annex Table 3.1 details the observations by industry and region.
Orbis Data, Number of Firms in Database Used for Analysis, 2000–2017
Orbis Data, Number of Firms in Database Used for Analysis, 2000–2017
| Developing Asia | Developing Europe | Latin America and Caribbean | Middle East and North Africa | Sub-Saharan Africa | Total | |
|---|---|---|---|---|---|---|
| Countries | 16 | 10 | 18 | 20 | 26 | 90 |
| All firms | 289,372 | 707,222 | 7,135 | 12,004 | 6,665 | 1,022,398 |
| All with Foreign Ownership | 114,267 | 83,779 | 3,534 | 1,445 | 1,435 | 204,460 |
| Agriculture | 485 | 3,130 | 87 | 17 | 82 | 3,801 |
| Manufacturing | 88,362 | 20,155 | 1,341 | 525 | 706 | 111,089 |
| Mining | 1,885 | 1,343 | 127 | 151 | 63 | 3,569 |
| Services | 21,070 | 52,483 | 1,705 | 630 | 543 | 76,431 |
| SDG-Education | 41 | 370 | 3 | 18 | 15 | 447 |
| SDG-Electricity | 726 | 815 | 98 | 21 | 12 | 1,672 |
| SDG-Health | 84 | 518 | 0 | 17 | 0 | 619 |
| SDG-Infrastructure | 1,001 | 4,563 | 171 | 65 | 3 | 5,803 |
| SDG-Water | 613 | 402 | 2 | 1 | 11 | 1,029 |
Orbis Data, Number of Firms in Database Used for Analysis, 2000–2017
| Developing Asia | Developing Europe | Latin America and Caribbean | Middle East and North Africa | Sub-Saharan Africa | Total | |
|---|---|---|---|---|---|---|
| Countries | 16 | 10 | 18 | 20 | 26 | 90 |
| All firms | 289,372 | 707,222 | 7,135 | 12,004 | 6,665 | 1,022,398 |
| All with Foreign Ownership | 114,267 | 83,779 | 3,534 | 1,445 | 1,435 | 204,460 |
| Agriculture | 485 | 3,130 | 87 | 17 | 82 | 3,801 |
| Manufacturing | 88,362 | 20,155 | 1,341 | 525 | 706 | 111,089 |
| Mining | 1,885 | 1,343 | 127 | 151 | 63 | 3,569 |
| Services | 21,070 | 52,483 | 1,705 | 630 | 543 | 76,431 |
| SDG-Education | 41 | 370 | 3 | 18 | 15 | 447 |
| SDG-Electricity | 726 | 815 | 98 | 21 | 12 | 1,672 |
| SDG-Health | 84 | 518 | 0 | 17 | 0 | 619 |
| SDG-Infrastructure | 1,001 | 4,563 | 171 | 65 | 3 | 5,803 |
| SDG-Water | 613 | 402 | 2 | 1 | 11 | 1,029 |
Annex 4. Sectoral Policies
Transportation1
Since the 1990s, transportation has undergone major transformations in Africa. The sector has been partly deregulated, and transport policies have been modified to permit market-determined decisions, enterprise autonomy, and private participation in the ownership and management of transportation businesses. Most bus and trucking companies have been privatized, and governments have made concessions on railways, ports and harbors, and airports, especially since the 2000s. Various forms of public-private partnerships have been tried for airports, seaports, and railways, and to a lesser extent, roads.
Some policies can support private sector involvement in transportation:
Legal and regulatory restrictions to private sector participation in transport infrastructure need to continue to be lifted.
PPPs are a tool for delivering transport infrastructure that is in the “public interest” through a thorough strategic analysis and project evaluation conducted by the government. If investment decisions are solely devolved to market forces, the delivery of some infrastructure may not be coherent with broader transport programs. Thus, project finance can come only after effective, sector-wide strategic planning has identified the most defensible projects.
The decision to pursue an infrastructure PPP should be supported by a comprehensive project analysis (including value for money analysis, public sector comparator, careful assessment of the risks etc.) showing that, over the duration of the contract, a PPP is truly a better option for the state than traditional project delivery and that the project is viable over the long term.
Screening potential bidders is important in the context of transportation PPPs. Given the generally large size of the projects, private operators should be willing to risk a substantial amount of capital early in the project and have financial strength to overcome expected or unexpected problems.
The government should identify good projects and then subject those to competitive and transparent bidding. Securing competition for the market is achieved through clear and fair bidding and project selection processes with simple and explicit evaluation criteria.
Because roads require significant land, the government will need to be involved to secure land for the road. This can often be politically costly and technically difficult to achieve due to poor land registration. In addition to the time required for procurement, this long lead time can reduce the willingness of the private sector to take on the risk. Sufficient preparation by the government can help alleviate concerns.
Transport infrastructure projects are fraught with risks throughout their life cycle. These risks include permitting and land acquisition risks, risks of cost and time overruns during construction, operation and management, demand and revenue risks, inflation and currency risks, among others. How these risks are allocated between the private sector and the government has important implications for project selection and project performance. Some level of risk should be assumed by the government, although an unbalanced allocation of risks should be avoided (for example, with a general revenue guarantee that would defeat the purpose of using infrastructure PPPs and create large fiscal risks for the government).
A primary risk is that, once infrastructure is built, private operators will not be able to collect tolls for usage. Political resolve is required to support the introduction of tolling and periodic increases if needed.
As in other sectors, the government needs to establish a robust legal framework (property rights, contract obligations, security rights, etc.) and regulatory regime (autonomous, independent). Regulation is needed to ensure that quality of service does not deteriorate (especially when little competition for the infrastructure service exists), and to make sure that the infrastructure remains well maintained throughout the life of the contract (especially toward the end of the concession term). An independent regulatory body, free from the strong lobbying power of industry and with well-defined access to the necessary information, is essential.
Water and Sanitation2
Private investment in the water sector remains limited due to equity considerations (which constrain the ability to apply cost-recovery tariffs for water services since access has to be provided to all households independent of their ability to pay) and high fixed costs coupled with long-term irreversible investments that characterize the sector. Private investors are often reluctant to enter the sector without some level of certainty regarding the utilities’ capacity to implement tariff revisions, collect revenues, and obtain regular funding from public authorities. Nonetheless, some countries have delegated water services to private operators via PPPs and management contracts for efficiency reasons as private operators are incentivized to improve performance to generate profits. In addition, contrary to common perceptions, two-thirds of the financing for water and sanitation in developing countries originates from household sources via tariffs and self-supply (for example, households’ investments in toilets and wells).
Some policies can support private sector involvement in water and sanitation:
Sector regulation can contribute to reinforce accountability and clarify the roles and responsibilities of the different stakeholders. For instance, distinguishing sector oversight from service provision is usually required to better align incentives and provide the necessary autonomy for service providers. Water regulation, which addresses elements such as tariffs, service quality standards, competition, consumer protection, and pro-poor regulation, need to be transparent and applied independently of political interferences.
Introducing and monitoring key performance indicators can be a way to trigger efficiency gains and make utilities more attractive to private investors. There is significant room to improve the technical and financial performance of water utilities in Africa through operational efficiency reforms (reduction of leaks, better enforcement of rates collection, more timely maintenance, use of technology, etc.). Partnerships should be rooted in strong accountability mechanisms through clear and consistent output-based contractual arrangements, monitoring and relations based on information-sharing and on consultation with stakeholders.
To achieve equity objectives and universal access, public subsidies are usually required, such as reduced tariffs and block tariffs structures (that is, highly subsidizing the first few cubic meters to cover basic needs).
Power3
Historically, public utilities in developing countries have generated and distributed electricity and funded their operations and capital investments from end-users, subsidies by the public sector, and development assistance. In recent decades, many African countries have increased private sector participation in the sector, primarily in electricity generation since transmission and distribution networks have natural monopoly characteristics. With recent changes in technology and regulation, decentralized energy solutions, such as mini-grids and off-grids, have enabled new forms of private investments, either from enterprises or households directly. While the objectives of private sector participation in transmission and generation often focus on mobilizing capital for new investments, the main motivation for distribution is generally to improve operational and financial performance of networks already in place.
Some policies can support private sector involvement in the power sector:
New or updated laws may be needed to enable private participation in the energy sector, as it is legally restricted in some cases. Even if independent power producers can enter legally, other barriers such as lack of access to transmission facilities limit their scale and impact.
Private sector participation strategies are preferably implemented in stages. Countries typically begin with private investment in power generation, building the legal, financial, and technical capabilities that are prerequisite to more advanced stages of private participation in transmission, distribution, and retail.
Adopting plans to unbundle the power sector—both vertically (by separating generation, transmission, distribution, and retail functions) and horizontally (by separating functions into multiple competing entities, where possible)—enables potentially competitive segments (generation and retail) to attract private participation.
The financial sustainability of private sector involvement typically requires tariff increases and a credible commitment to future adjustments, since below-cost pricing is widespread in developing countries.
Private investors in power generation can be discouraged by the chronic financial difficulties of potential off-takers (for example, state-owned power distribution firms). Power distribution (and to a smaller extent transmission) is often described as the weakest link in the energy sector due to difficulties in bill collection, theft, and other technical constraints hampering cash flow generation. This calls for stronger governance and more transparency to strengthen the operations of state-owned enterprises.
Private sector participation is often associated with a rationalization of processes in utilities and, in particular, staff reduction. Although this improves productivity and layoffs are small relative to national unemployment, measures to mitigate the effects should be put into place.
Success depends on the willingness of private investors to use the efficiency gains generated to build new capacity, which is not automatic. Experience with PPPs in power distribution suggests that private sector participation is not systematically associated with an increase in investment. One possible option to address this could be to include well designed investment targets into the PPP contracts.
Governments need to support the energy transition. Mechanisms to encourage renewable energy investments include tax incentives and feed-in tariffs (although, as the price difference between technologies decreases and, in some cases, is eliminated, the need for such mechanisms will decline).
Healthcare4
Private healthcare providers (both for-profit and not-for-profit; and formal and informal) play a significant role in developing countries. According to World Bank (2011), more than half of healthcare spending in SSA comes from private parties. In the poorest countries, the private sector is a central provider through traditional practitioners and pharmacists. Engaging existing private providers and increasing private activities can help expand access and coverage, raise the service quality, enhance efficiency, and improve health outcomes. In addition, by providing overall stewardship of health markets, governments can work toward ensuring that the private sector operates in a way that is consistent with the country’s health objectives and public interest.
Some policies can support private sector involvement in healthcare:
Well-performing mixed delivery systems have ongoing, transparent communication (dialogue and information exchange) between government officials involved in health policy and private healthcare providers. This communication leads to better monitoring and better policy design by taking account of private healthcare providers’ perspectives and likely reactions to policy initiatives. For the private health sector, forming credible associations or representative organizations is an essential first step to engage in this dialogue.
Effective health systems with substantial private delivery also rely on a specific framework for regulation of the private health sector, which ensures quality and efficiency of care, while protecting public interest. In developing countries, it is often necessary to simplify existing rules and bring them into alignment with what can be enforced. For instance, there are often burdensome and unnecessary costs to register an organization as well as problems obtaining access to critical inputs.
A clear financing framework needs to be in place for determining the revenues available to the private health sector, such as a health insurance allowing reimbursement for treatment received in a private facility or a system of service contracts between the government and private providers. The financing framework should create incentives for providers to deliver quality services, while minimizing out-of-pocket payments by pooling risks across populations. Public funds need to buy value for money from the best providers—either public or private—that compete on a level playing field (principle of strategic purchasing).
Like in education, an assessment of affordability is critical for all public-private projects in healthcare, since the government is likely to be responsible, at least partially, for payment of services or other types of support to the private sector.
A mechanism should allow low-income citizens to have access to quality services from the private sector, such as targeted payment for these services by the government and specific regulations.
Governments should educate and incentivize patients to demand the most beneficial services. This can increase the supply of high-quality services by private providers and reduce inappropriate provider behavior.
Technological innovations such as medical advice call centers, telemedicine, mobile diagnostic devices, and healthcare kiosks, create new opportunities for the private sector, while increasing efficiency and providing higher quality and more consistent care to hard-to-reach populations.
Education5
The role of the private sector in providing education includes a mix of for profit, nonprofit, and faith-based organizations. In sub-Saharan Africa, provision of education by the private sector has increased markedly over the last 15 years, accounting in 2018 for about 15 percent of primary school enrollment, 20 percent of secondary school enrollment, and 30 percent for tertiary education.6 The main rationale for involving the private sector is to expand access to schooling and improve learning outcomes. Private involvement in education can help increase the level of financial resources committed to the sector and supplement the limited capacity of government institutions to absorb growing demand. While the government must provide stewardship for the whole education system, this does not imply that the state always needs to be the direct provider and financer of all educational services. The private sector can also help to diversify the provision of tertiary education if it is appropriately regulated and to provide quality.
Some policies can support private sector involvement in education:
Countries need to establish strong regulatory policies to ensure high-quality delivery, accountability, and equity, with a view to providing the government with ultimate control over educational outcomes.
Governments should enable a variety of providers to enter the market, as this will increase client power and enable citizens to make informed choices about where to send their children.
An assessment of affordability is essential in public-private education projects since the government is often responsible for funding part of the private schools’ expenses.
Measures could be taken to enhance accountability of private providers, such as making information on the quality of services available to all families and implementing a system of rewards/sanctions based on schools’ admissions policies and learning outcomes.
Protection for vulnerable groups can be achieved through targeted funding strategies (for example, tax subsidies, scholarships, and cash transfers), limiting student fees in private schools that receive some public funding, and regulating school admission practices.
In the tertiary sector, the regulatory framework governing the sector should set out the requirements for the establishment of institutions and programs, the accreditation of degrees and teachers, and the criteria for evaluation to ensure quality provision.
Annex 5. Structure of the General Equilibrium Model
Description of the Model
The model used in the simulations presented in Chapter 5 is a dynamic general equilibrium that includes a continuum of households facing idiosyncratic risk (as is common in the inequality literature) and also multiple sectors with frictions preventing the movement of factors across sectors (as is typical in the structural transformation literature).
The model describes a small open economy with five consumption goods: domestic food, imported food, manufacturing, services, and energy.
There are several predetermined and fixed types of households: (1) rural and urban, (2) private sector and government employees, (3) entrepreneurs (capital holders), and (4) low-skilled and high-skilled workers. There is a continuum of households, equal ex ante, but facing uninsurable idiosyncratic risk. Households solve dynamic optimization problems taking prices and government policies as given.
The model includes five sectors, each characterized by different technologies: agriculture products–domestic and exported (with rural households, employing land and low-skilled labor); manufacturing (with a technology using low-skilled labor, energy and capital, owned by entrepreneurs); services (produced either by urban households in family businesses, with low-skilled labor; or by entrepreneurs in the industrial sector, with high-skilled labor and energy); and energy (with a capital intensive technology). Annex Table 5.1 summarizes the relationships between goods, producers, what is an input, and the use of the different goods in this economy.
Structure of the Economy
Structure of the Economy
| Goods | Producer | Input | Use |
|---|---|---|---|
| Agricultural goods | Agricultural workers | Land, labor, fertilizer | Consumption, and input production of agricultural exports |
| Manufacturing | Entrepreneurs | Private sector labor, capital, and energy | Consumption, investment, exports |
| Services | Private/public sector workers Entrepreneurs | Informal technology Private sector labor, capital and energy | Consumption, investment |
| Electricity | SOE/Private Sector Entrepreneurs | Capital | Consumption, Tradable |
| Agricultural export | Entrepreneurs | Domestic food product, private sector labor | Export |
Structure of the Economy
| Goods | Producer | Input | Use |
|---|---|---|---|
| Agricultural goods | Agricultural workers | Land, labor, fertilizer | Consumption, and input production of agricultural exports |
| Manufacturing | Entrepreneurs | Private sector labor, capital, and energy | Consumption, investment, exports |
| Services | Private/public sector workers Entrepreneurs | Informal technology Private sector labor, capital and energy | Consumption, investment |
| Electricity | SOE/Private Sector Entrepreneurs | Capital | Consumption, Tradable |
| Agricultural export | Entrepreneurs | Domestic food product, private sector labor | Export |
The only financial assets available are one-period bonds, and they are traded among households to allow for risk sharing. The interest rate on these bonds, the wage for public and private employees, the price of domestic food, and the price of services are determined by domestic supply and demand forces in equilibrium.
The price of energy is exogenously given (can be thought as a policy variable), and a wedge is introduced between the price perceived for energy use and the income per unit obtained by producers. This wedge implements rationing in the model as the higher total cost per unit of energy for users reduces the quantity demanded. The size of the wedge is determined in equilibrium, such that, given the price, the quantity demanded equals the quantity produced.
Different scenarios are analyzed by comparing the baseline versus the steady state of the model under the parameters of the scenario under consideration (holding all other parameters fixed). Hence, the numbers reported should be interpreted as medium-term effects (in simulations not reported here, the model reaches values close to steady state in about seven years).
Functional Specification for Preferences and Production
Each type of household maximizes expected utility
in which
And (f ) stands for food, energy, and other goods. In turn, food is a combination of domestically produced food (a) and imports (*), while (o) is a similar composite of traded and non-traded goods.
Production technologies are assumed to be Cobb-Douglas in the different inputs used. For example, the entrepreneur technology for non-tradeable goods (super index n), which requires electricity (e), capital (k), and labor (h) with total factor productivity (z) is given by:
Calibration of the Model
The analysis is based on an illustrative economy, considered to be similar in features to a representative African economy (non-agricultural commodity exporters). Alternative illustrative groups were considered, finding similar results (agricultural commodity exporters or economies with a larger urban presence). Non-agricultural commodity exporters have 50 percent of their labor force in rural areas, and non-agricultural commodities constitute 15 percent of GDP.
Some of the key parameters of the model are exogenously defined (using data of the illustrative group, and other standard values in the literature—for example, discount rates, risk aversion, and capital shares) and are listed in Annex Table 5.2.
Calibration of Parameters
Calibration of Parameters
| Variables | Parameters | Value |
|---|---|---|
| Preferences | ||
| Discount Rate | β | 0.96 |
| Risk-Aversion | σ | 1 |
| Elasticity of Substitution Between Domestic and Imported Food | ρf | 0.01 |
| Elasticity of Substitution Between Tradables and Non-Tradables | ρo | 0.01 |
| Technology | ||
| Land Share in Agriculture Production | αla | 0.49 |
| Intermediary Share in Agriculture Production | αma | 0.4 |
| Land Relative Size | l¹/l² | 5 |
| Intermediary Share in Commodity Exporter Sector | αr | 0.75 |
| Capital Share in Tradables Production | αx | 0.44 |
| Physical Capital Share | αe | 0.36 |
| Capital Share in Non-tradables Production | αn | 0.33 |
| Capital Share in Energy Production | αy | 0.33 |
| Depreciation Rate | δ | 0.06 |
| Population Share | ||
| Skilled Urban Population Share | μurb,s | 0.31 |
| Unskilled Urban Population Share | μurb,u | 0.19 |
| Rural Population Share | μrur | 0.37 |
| Government Workers Share | μgov | 0.06 |
| Entrepreneur Share | μent | 0.05 |
Calibration of Parameters
| Variables | Parameters | Value |
|---|---|---|
| Preferences | ||
| Discount Rate | β | 0.96 |
| Risk-Aversion | σ | 1 |
| Elasticity of Substitution Between Domestic and Imported Food | ρf | 0.01 |
| Elasticity of Substitution Between Tradables and Non-Tradables | ρo | 0.01 |
| Technology | ||
| Land Share in Agriculture Production | αla | 0.49 |
| Intermediary Share in Agriculture Production | αma | 0.4 |
| Land Relative Size | l¹/l² | 5 |
| Intermediary Share in Commodity Exporter Sector | αr | 0.75 |
| Capital Share in Tradables Production | αx | 0.44 |
| Physical Capital Share | αe | 0.36 |
| Capital Share in Non-tradables Production | αn | 0.33 |
| Capital Share in Energy Production | αy | 0.33 |
| Depreciation Rate | δ | 0.06 |
| Population Share | ||
| Skilled Urban Population Share | μurb,s | 0.31 |
| Unskilled Urban Population Share | μurb,u | 0.19 |
| Rural Population Share | μrur | 0.37 |
| Government Workers Share | μgov | 0.06 |
| Entrepreneur Share | μent | 0.05 |
Other parameters are set so that the steady state of the model satisfies the following. Consumption to GDP represents 68 percent. In turn, services account for 62 percent of consumption, energy 4 percent, and the rest going to traded goods. Investment accounts for 8 percent of GDP. The Gini is 52 in equilibrium, with higher urban inequality (a Gini of 54). In terms of shares of gross output, agriculture accounts for 41 percent, manufacturing for 12 percent, services 40 percent, and the reminder 7 percent is attributed to electricity production. Finally, total government revenues are about 25 percent of GDP, of which 11 percentage points are obtained from value-added tax. Effective income tax rates are 12 percent on average.
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