In 2002, I was part of a small team that wrote the World Bank Group’s Private Sector Development (PSD) Strategy.

We had an interesting definition of PSD.

To us, private sector development was about supporting a particular way of doing things.

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What did we mean by that?

The characteristics of the private sector

We were referring to some special characteristics about the way the private sector goes about doing its business.

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These characteristics make the private sector an important asset for a country. What are those characteristics?

First, the private sector is very opportunistic.

It sees opportunities in the marketplace and swiftly grabs them.

It may discern a demand for certain goods and services.

Often the demand is explicit but sometimes it is latent.

Most of us can detect explicit demand.

The private sector can one step further and detect latent demand.

Second, the private sector is good at mobilizing resources.

Whether the demand is explicit or latent, private businesses mobilize the resources needed to respond to that demand.

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They mobilize capital, labor, and other resources to produce the goods or services demanded. This is not an easy task and often requires much ingenuity.

Then there is the task of making the goods and services demanded by consumers and making these available to them.

In doing all this, the private sector also has to deal with the government, in particular its regulatory apparatus.

All this requires a great deal of organization and coordination.

The private sector is good at organization and coordination.

Third, the private sector is fast, agile, and nimble. Businesses must act fast to grab the opportunities they see.

This is particularly true if the market is competitive.

They must do so because things may change very fast in both output and input markets.

The private sector must be agile to note this and act fast before things become adverse.

Fourth, the private sector is experimental and innovative, and willing to change course when needed.

Businesses are good at carrying out experiments and taking the risk of doing so.

They are also willing to do course correction when needed.

The ability and willingness to be innovative and experimental is an important strength of the private sector.

Finally, the private sector is result-oriented. It is driven by the bottom line.

Profit is the main driver for private sector activity.

The role of public policy and the importance of competition

Many people are uneasy about profits being the main driver of private sector activity.

This is where public policy comes in.

The role of public policy, which includes tools such as regulations, is to steer the private sector in directions that are good for society while recognizing that the main driver will always be profits.

This requires creative thinking on the part of the government.

One of the goals of public policy should be to promote competition in the economy.

The private sector characteristics that we mentioned above are strengthened if there is competition.

Lack of competition dilutes these characteristics and then the private sector does not remain as important an asset as it could be.

If profits are the main driver, can the private sector play a role in activities which are not profit-making?

Many activities that are good for society may not be profitable from a commercial sense.

This is particularly true for goods and services that are consumed by poor people who may not have the ability to pay the price which the private provider requires to earn reasonable profits.

What should be the approach here?

It is important to recognize that, because of the characteristics mentioned above, the private sector may often be the most efficient supplier of such goods and services.

So, it is likely that the cost of providing the goods or services will be lower, and the quality superior, if the private sector provides it.

But how do you deal with the incentive problem since they can’t make profits on such activities?

The solution here is to subsidize that activity, i.e., the government provides a subsidy to make up for the profit shortfall.

In other words, we are combining public financing with private provision.

There are many ways this can be done.

The subsidy may be given to the consumers so that they can afford to pay the full price of the good or service.

Let us assume that Tk200 is the price at which it is profitable for the private sector and the poor consumer can only pay Tk170.

The government may then provide Tk30 as subsidy to the consumer who is then able to pay the full price.

Alternatively, the subsidy may be given to the private company.

The choice depends on many factors.

For example, it may be administratively easier to give it to the private provider but there is a risk that they may pocket the subsidy and not provide the good or service to the poor people.

Nowadays with the spread of digital money transfers the administrative hassles of providing the subsidy to poor people has come down.

Another model, particularly relevant when the government is bidding out an infrastructure or utility project that is socially beneficial but not necessarily commercially viable (such as supplying water or electricity to low-income households), is to award the contract based on the lowest subsidy requirement.

In other words, the government stipulates that the service should go to low-income households and should be of a minimum quality and then ask who can provide this with the least subsidy.

This type of arrangement opens many possibilities.

With such arrangements, one can leverage the efficiency of the private sector to serve social goals.

In other words, activities which are considered useful from the social point of view but are not commercially viable need not be served only by the government or NGOs.

These may be provided by the private sector.

Since governments and NGOs are often resource-starved, such arrangements may be more sustainable in the long run.

In Bangladesh, as in many other countries, we tend to think that certain activities can only be done by the government, and certain things only by NGOs.

It is time to broaden our horizons about what the private sector can do beyond what they are doing now.

The unleashing of the entrepreneurial spirit is one of the best things to have happened to Bangladesh since its independence.

Let us think creatively about how we can make the most of it.

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