Foreign Aid & Civil Society

The Role of the Public Sector

I just received a refresher course in the difference between the public and private sectors. This, during a visit to the Horticulture Crop Development Authority (HCDA). For background, the HCDA is a government institution that provides services such as pre- and post-harvest training to horticultural producers, and creates market linkages for exporters. The most interesting aspect, for me, is that HCDA also provides logistics – maintaining a fleet of trucks as well as cooling facilities to transport horticultural produce around Kenya.

The facilities were never used. The trucks remain parked at the HCDA offices near the airport, and the basketball-stadium sized cooling facility lies unused. The dejected manager that showed us around had accepted this failure long ago. The project was conceived in the 1970s, when most producers did not have their own facilities. By the 90s, when it was implemented, all the large private players had already realized the importance of cooling infrastructure, and built there own. The HCDA remained, however, as a relic and reminder to public sector forays into the private sector.

Back at the office, discussion began on another project on entrepreneurship, and revolved around extending a credit facility to upcoming microentrepreneurs. But then, should we – as the UN or government – extend loans directly? Or should we, as was wisely mentioned, use our money as a guarantee fund for a commercial bank. The commercial bank can then extend its own loans – either directly or in coordination with an MFI. And there too, one must work with more than one bank, in order to ensure competition and diversification.

The HCDA failure is easy to criticize, but I’m not sure if the same applies to the HCDA. We may never use their trucks, for being too expensive. But they are so because they are of good quality – and much better than anything the private sector has. Besides, the manager we met was immensely knowledgable. If the HCDA was indeed useless we wouldn’t have gone there – would we?

The private sector is all about incentives, and these incentives are usually better enforced through the private sector – which is why working through banks on the credit facility makes sense. Clearly, the public sector’s primary job is not service provisioning, particularly of private goods. But in almost every country, the distinction between private and public goods can be hard to discern. In almost every developing country, business development services (BDS) are provided free of cost to small entrepreneurs – because those countries recognize the need to galvanize the small and/or informal sector.

For small enterprises that cannot afford their own cooling facilities, the HCDA facilities are therefore an essential public good. So, the government is, essentially providing a business service – in return for taxes paid. Seen in that light, the facilities are still a relic of bad design, but perhaps not so overwhelmingly disastrous.