NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Tuesday, July 7, 2015

When the UN financing for development conference begins in the Ethiopian capital Addis Ababa, there’s likely to be a big elephant in the room: the private sector.

Some commentators have warned of the possible implications of pursuing “ultra-free market” ideologies that see private companies as key providers of basic public services. Ignoring the private sector rather than working with it would seem like the most morally defensible approach when faced with the prospect of large corporations “selling” health and education services with the sole objective of turning a profit.

Sometimes, though – whether we like it or not – the private sector might be our only option. Take fragile and conflict-affected states: the World Bank estimates that more than 1.2 billion people live in countries affected by widespread conflict and political unrest. The UK Department for International Development and other donors haveflagged these countries as a “priority category”.

Given their vulnerability, fragile and conflict-affected states simply do not have access to the large amounts of state expenditure needed to provide widespread coverage of basic services. World Health Organisation data from 2013shows that in Afghanistan, government expenditure on health amounted to just 21% of total health expenditure (compared with 84% in the UK).

Donors are also unlikely to commit to long-term aid funding where they can’t easily link this expenditure to immediate, tangible outcomes – an unrealistic expectation in fragile states where, by definition, the focus needs to be on long-term systemic change.

In these contexts, it is hardly surprising that privately run services step in to plug the gap. In Somalia, despite the population having one of the lowest rates of GDP per capita in the world, the private sector delivers more than 60% of the country’s healthcare services. In these situations, where the private sector is already a fixture, the question is not how to prevent companies from filling the gap left by ineffective state structures, but rather how to work with these companies to ensure the gap-filling is good enough to promote positive, lasting impact.

There are some fundamental areas that need addressing.