Core and Non-core Functions of the Government

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Core and Non-core Functions of the Government of Mongolia

Core and Non-core Functions of the Government of Mongolia- A Critical Appraisal

___________________________________________________________________

Prof. Tarun Das1, Ph.D.

ADB Capacity Building ProjectOn Governance ReformsGovernment of Mongolia

Ministry of FinanceUlaanbaatar, Mongolia

February 2008

___________________________________________________________________

1Glocoms inc. (USA) Strategic Planning Expert. Formerly Economic Adviser, Ministry ofFinance and the Planning Commission, Government of India, and Professor (Public Policy),Institute of Integrated Learning in Management, New Delhi, India. For any clarifications

[email protected].

Ministry of Finance Glocoms Inc. (USA)

1
mailto:[email protected]:[email protected]:[email protected]


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Contents

1. Introduction and Scope

2. Economic Reforms and New Role of the Government2.1 Second generation reforms in Mongolia2.2 Need for re-orientation of public policies2.3 Need for redefining the role of government

3. Basic Functions of a Government in an Emerging Economy3.1 To repair market failures3.2 Government intervention

(a) Existence of externalities(b) No provision of public goods(c) Existence of market imperfections(d) Existence of inequity

3.3 Privatization and public-private-partnership

4. Government Failures

4 .1 Factors responsible for government failures(a) Problems of incentives:(b) Problems of information(c) Problems of distribution(d) Bureaucratic inefficiency(e) Long Time lags(f) Frequent shifts in government policy(g) Vicious circle of government intervention

4.2 Breaks between Government Spending and Outcomes(1) Spending on the Wrong Goods or the Wrong People(2) The Composition of Spending May Not Be Appropriate(3) Money May Not Reach the Service Provider(4) Service Provider May Not Have the Required Capability(5) Incentives to Provide the Service May be Weak(6) People May Not Take Advantage of Government Services(7) There could be significant leakage


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5. Core Functions of the Government

5.1 Desirable Roles and Functions of the Government(1) Allocative role(2) Regulatory role

(3) Supportive role(4) Stabilisation role(5) Distributive role

5.2 Production and Purchase Arrangements(1) Purchaser/ Beneficiary Arrangements(2) Output delivery (Quantity, Quality and Price)(3) Organizational Arrangements(4) Ownership Arrangements

6. Public Sector in Mongolia

6.1 Share of public sector in GDP by industrial composition

7. Programs in Selected Ministries7.1 Programs in MOECS7.2 Programs in MOSWL

8. Concluding observations

(a)Private Investment in Utilities(b)Fiscal and Other Incentives for Private Investment(c) Low Demand and Small Market(d) Rate of Return(e)Financing Infrastructure Investment(f) Asian Investment Funds(g) Pensions, Insurance and Provident Funds(h)Public-Private Partnership (PPP)(i) Future Agenda

Selected References


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1. Introduction and Scope

As per the Terms of Reference of the ADB Capacity Building Project on GovernanceReforms, the International Strategic Planning Expert is required to make:

A Review of core and non-core functions of the government of Mongolia

(i) Based on any earlier assessments of the core versus non-core functions ofministries and budgetary agencies, critically review the functions of the key line

portfolio ministries to segregate the core from non-core functions. The functionalreview will include all agencies that come under the structure of the ministriesincluded.

(ii)Formulate recommendations based on the above review, to streamline the corefunctions of the ministries concerned.

(iii) Assess the administrative expenditures of Ministry of Finance (MOF), Ministryof Health (MOH), Ministry of Education, Culture, and Science (MOECS), andMinistry of Social Welfare and Labour (MSWL) and if necessary redefine and

set ceilings on such expenditures.

(iv) Formulate recommendations on alternative arrangements for carrying outnon-core functions.

(v) Prepare a report deriving lessons for the whole of the Government from theseassessments.

Shortly after joining the ADB Capacity Building Project on Governance Reforms,Ministry of Finance, Government of Mongolia, the international consultant wasinformed that the World Bank ECTAC Project is also working on the similar issues.

Accordingly, the international consultant along with National Consultant E. Sandagdorjheld discussion on Monday, 11 June 2007 with the World Bank ECTAC Project Team(comprising Mr. Darrell Freund, Functional Review Adviser; Mr. Clive Parry,International Public Administration Consultant and Ms. D. Khangal, NationalFunctional Review Consultant) dealing with Civil Service Reforms in the Ministry ofHealth. They indicated that they are working on the criteria to identify core and non-core functions, and it is not advisable for the ADB Project Team to duplicate the works


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which may lead to unnecessary confusion. In consultation with the ADB Project co-coordinator Ms. Enkhtuul it was decided to await the report of the World Bank Projectteam. It was understood that the said report would be ready in January 2008. TheADB Project Team would then give our views and comments on the report.

However, ADB Project Team worked on item (iii) of the TOR i.e. to examine theadministrative expenditures of MOF, MOH, MOECS, and MSWL and if necessaryredefine and set ceilings on such expenditures. The following detailed reports havebeen produced on benchmarks for output costing and output budgeting includingbenchmarks for administrative expenditure:

(1) Benchmarks Setting and Best Practices For Output Costing and OutputBudgeting- Part-1: Basic Concepts and Methodology, pp.1-31, December2007.

(2) Benchmarks Setting and Best Practices For Output Costing and OutputBudgeting- Part-2: Practical Applications for the Government of Mongolia, pp.1-36,December 2007.

These reports have been translated in Mongolia by the national consultant Mr. E,Sandagdorj and with the approval of Mr. Batjargal, DG, DFP&C, MOF have beencirculated among the major line ministries.

We waited for the World Bank ECTAC Project Report on Core and non-coreFunctions until the end of January 2008. We have not yet received a copy of theirreport. Without waiting further we have decided to give our views on the criteria to

determine core and core functions of the government of Mongolia and their majorline ministries.

2. Economic Reforms and New Role of the Government

2.1 Second Generation Reforms in Mongolia

It is well known that the government of Mongolia started economic reforms in 1991 toadopt an open door policy for investment, production and trade of goods. Itsdomestic economy and external sectors are much more liberalised today than theywere before 1990s. During last five years Mongolia has also progressed significantlyin the spheres of privatization, public sector reforms and governance reforms.

Mongolia is now passing through a phase of second generation reforms to improveefficiency and productivity in both private and public sectors and to impart dynamismto the overall growth process. The Strategic Business Plans (SBPs) for the lineministries have to be integrated fully with these structural and governance reformsand capacity building. But, the SBPs need to adopt a gradual, step by step,evolutionary and cumulative approach towards reforms, and should avoid thetemptation of adopting the so-called big bang, shock therapy or revolutionaryapproach adopted by some developed nations in Latin America and Europe. As

Mongolia is a low-income country with significant incidence of poverty, the reformsand SBPs need to have adequate safety nets for the vulnerable and weaker sections


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of the society so that they are adversely affected by structural changes and thewaves of the so-called LPG (liberalisation, privatisation and globalisation).

In a multi-party democracy as in Mongolia, there is a need for general political

consensus for acceptability of reforms, and the government must own the reforms.There is also a need for emphasis on human face or pro-poor developmentpolicies. If every Mongolian is skilled and healthy and lives longer, then they canparticipate fully, contribute more and benefit more from the development process.

2.2 Need for Reorientation of Public Policies

We have already indicated in our report on the preparation of Strategic BusinessPlans (Das and Sandagdorj, September 2007) that there is need for re-orientationof public policies. SBPs should put emphasis on creating an enabling environmentfor public-private partnership (PPP), linking fiscal incentives to productivity and

efficiency, streamlining public investment programs, repairing market failures, anddeveloping and strengthening structures and institutions. SBPs should focus onconsultations with stakeholders, flexibility, decentralization, selectivity, outputs andoutcome, implementation, evaluation, monitoring, co-ordination of policies andprograms.

There is need for putting emphasis on Public-Private Partnership (PPP) andinvolvement of sub-national governments (Aimags, Soums, City Councils) and NGOsand other civil societies for delivery of public goods and service, so that theassociated risks, costs and benefits of reforms are shared by both private and publiceconomic agents and by all stakeholders in development process. There is also aneed for decentralization of both financial and administrative powers for execution ofprograms, as the local governments would be more efficient in implementing projectsat the grass-root and micro and meso levels.

2.3 Redefining the role of government

Under economic reforms, there is a distinct change of the role of the governmentfrom a controller to an enabler, from a supplier to a facilitator, from an operator to apolicy maker, and from a regulator to a trustee of social equity and environmentalsustainability.

Both well governed state and well functioning markets are essential for high growthand poverty reduction. Government and free markets should supplement andcomplement each other. Government should withdraw from sectors where privateparticipation and management, including foreign investment, are more productiveand more efficient. But, the scope of government will remain large in thedevelopment of social sectors (viz. health, education and physical infrastructure.

3. Basic Functions of a Government


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3.1 To Repair Market Failures

One of the basic functions of the government is to repair market failures. Market

failure occurs when the free market fails to allocate resources in an optimal andefficient manner. There are four main sources of market failures viz. (a)existence of externalities, (b) no provision of public goods, (c) existence ofimperfect competition and (d) existence of inequity. According to theories inwelfare economics, allocative efficiency in these situations can happen whenmarginal social benefit (MSB) equals marginal social cost (MSC), which cannot beachieved without appropriate government interventions.

(a) Externalities

Externalitiesoccur when some of the costs or benefits associated with production or

consumption of goods and services spill over onto third parties. There could bepositive or negative externalities depending on the nature of the impact on thesociety. Positive externalities occur when society benefits from the consumption orproduction of a commodity or service such as basic education, basic health care,sanitation, vaccination, public parks, public libraries etc. Negative externalitiesoccur when costs are imposed on society from the consumption or production of acommodity or service such as air and water pollution, road congestion, accidents,smoking, spreading of communicable diseases, smuggling, terrorism, illegal trade,and immoral traffic, over-exploitation of natural resources and degradation ofenvironment in general.Positive externalities are highly correlated with the so-called merit goods,which thesociety values most, and judges that everyone should have, for example, basichealthcare, basic education, public libraries, sanitation, national defence, internalsecurity, individual safety and protection of environment. Consumption of such goodsleads to an increase in social welfare as the Marginal Social Benefit (MSB) exceedsthe Marginal Private Benefit (MPB) (MSB > MPB). However, there might be under-consumption of these goods and services due to existence of imperfect knowledgeand information which makes individuals unaware of the long-term benefits andpositive externalities of merit goods.

On the other hand, negative externalities are highly associated with the so-calleddemerit goods, which the society values least, and judges to be bad for individuals.For example, consumption of alcohol, cigarettes, prohibited drugs, addiction togambling, money laundering, terrorism, smuggling, illegal trade, immoral traffickingetc. Consumption of such goods leads to a fall in social welfare as the MarginalPrivate Benefit (MPB) exceeds the Marginal Social Benefit (MSB), (MPB > MSB).There may be over-consumption of these goods and services due to existence ofimperfect knowledge and information, which makes individuals unaware of long-termdetriments and negative externalities of demerit goods. Government needs todevelop and strengthen appropriate legal and institutional set up to prohibit theseactivities.


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(b) No provision of public goods

A public good is a good or service which is non-rivalrous, non-excludable and

non-contestable. Examples of public goods include national defence, street lights,internal security and policing, basic health and basic education, national highways,rural roads, rural electrification, public transport infrastructure, public parks andpublic libraries etc. A private good is one that is both rivalrous, excludable andcontestable such as private transport and automobiles, clothing, food etc.

1. Non-rivalrous its benefits are not depleted by an additional user. Thesupply of public goods has no marginal cost. Thus, for allocative efficiency,price equals zero marginal cost (i.e. P = MC = 0), and public goods have to beprovided at no charge.

2. Non-excludable impossible (or difficult) to exclude people from itsconsumption or benefits. Public good is a free rider. There is a problem forcollecting user charges as no one will pay for what he can get free. Theprivate firms will not provide public goods as they are unable to charge theconsumers. So the public goods have to be exclusively provided by thegovernment.

3. Non-contestable- A market may be described as perfectly contestable if nobarriers to entry or exit exist (Baumol, Panzar and Willig 1982).Consequently, contestability can act as a surrogate for competition in marketsdominated by a monopoly, duopoly or an oligopoly firms. However, therecould be circumstances when contestability cannot exist. For example, theprivate sector may not be willing to develop basic infrastructure such as rail,roads, sea-ports and air-ports in the initial stage of development of anemerging economy like Mongolia because of low or negative financial return,high risk, long gestation period, high incremental capital/output ratio (ICOR)and lumpiness of huge capital etc. So the provision of basic infrastructurebecomes non-contestable and the government has to take the fullresponsibility for the development of basic infrastructure, both physical andhuman capital formation, at the initial stage of development.

Another case of non-contestability arises when there is no general trust thatthe organisation producing the good will not engage in 'opportunism' orillegible activities (Vining and Weimer 1991, p. 6/7). Best examples ofpublic goods where "trust" is very essential and justices continued publicproduction are production of critical defence products and cadres of armedforces.

(c) Existence of imperfect competition

Perfect competition exists only when (a) there is a large number of buyers andsellers, (b) commodities or services being produced and sold are more or less

homogeneous, (c) there is no barriers for entry and exit into the market, and (d) thereis perfect knowledge and information about the market structure. But, the real


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markets are neither competitive nor perfect due to existence of various marketbarriers such as lack of free entry, existence of licenses, and heterogeneity in thequality of goods and services. In most of the cases, free market forces do not exist.In the extreme situation, there may be a monopoly where there is only one seller but

many buyers. The monopolists output is not allocatively efficient as it produces at apoint where marker price exceeds marginal cost (P > MC) creating a loss of bothconsumer and producer surplus.

(d) Existence of inequity

The problem of inequity is distinct from that of inequality. Equality is a mathematicaland statistical term which means that everybody in the society posses the same levelof income. On the contrary, equity is a term of justice and jurisprudence and refers toan income distribution that is considered to be fair and just as judged by certainnorms and standards. An equal income distribution is not an equitable distribution,

because it provides equal income to everyone, irrespective of considerations ofones age and sex, qualifications and experiences, which cannot be justified by anynorm. Therefore, some degree of income inequality is justifiable and desirable toprovide incentives for hard work or to compensate for higher skill and experiences.However, there is tolerable limit on equality. Welfare economist Pareto on the basisof income distribution data in many countries during 1930s argued that an incomeinequality, as measured by the Gini-Lorenz ratio, up to 0.5 can be acceptable for asociety. If Gini ratio exceeds 0.5, there will be civil unrest leading to social revolution.The socialist economist Lange did not agree with Pareto and argued that Pareto lawis based on incomes of feudal landed property which cannot be acceptable forsocialist countries and tolerable level of income inequality will be much less than 0.5.

3.2 Government Interventions

Government needs to intervene in these situations to ensure social justice and socialequity. Table-1 below describes various kinds of governments interventions andtheir relative merits and demerits to tackle these situations. These interventionsbasically include the following;

(a) Direct provision of public goods/ merit goods at low prices or free of charge;(b) Enacting laws and regulations, imposing environment tax, and organizing

education campaigns/ advertisements in the case of negative externalities;

(c) Providing subsidies to producers or consumers for positive externalities;(d) To tackle imperfect market conditions, government interventions includeiimposition of tax or price controls on a monopolist, enacting antitrust laws,and ensuring competition through deregulation, delicensing and decontrol ofinvestment, production and trade;

(e) To reduce inequalities, measures include imposition of wealth tax andinheritance tax; to make the tax system progressive; to provide cash or in-kindbenefits to poor; unemployment benefits, State pensions, child benefits, anduniversal basic healthcare and basic education.

(f) Nationalisation of private enterprises engaged in unfair production and tradepractices (for example natural monopolies supplying public utilities).


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Table-1B: Government Interventions

Problem Intervention Evaluation

Positiveexternalities

Financial intervention: subsidiespaid to the producer or consumer

Advantages

Considered the most effective wayof solving under-consumption andit can be easily implemented

Disadvantages

Like taxes, the valuation ofexternal benefit is difficult

High government expenditure isrequired and it may put pressureson government resources.

Okuns leaky bucket: each dollartransferred from a richer to apoorer individual, results in less

than a dollar increase in income forthe recipient. Leaks arise due tohigh administrative costs, changesin work efforts, attitudes etc. as aresult of redistribution

Legislation include regulationsuch as seatbelt usage,compulsory education etc.

Enforcement requires constantchecking which may translate tohigh costs.

Imperfectmarkets

Imposition of a lump-sum taxon a monopolist (shifts ACupwards), and supernormal

profits are taken as tax.

Governments may also regulateMC/AC pricing for monopoliesthrough price controls.

Government may imposeregulations to control monopolypower, unfair production. tradeand business practices:1. Forbidding the formation of

monopolies (e.g., antitrustlaws)

2. Forbidding monopolisticbehaviour (like predatorypricing)

3. Ensuring standards ofprovision.

4. Ensuring competition exists(e.g., deregulation,delicensing, decontrol)

Advantages

Ensures fair price for consumers.

Disadvantages

Determination of fair price andmonopoly profits is difficult.

Monopolies will transfer taxes tothe consumers who might actuallypay higher prices.

Price controls need to be avoidedin a free market economy. It maybe better to remove any barriers toentry of new firms.


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Table-1C: Government Interventions

Problem Intervention Evaluation

Inequity andinequality

The tax system can be used toreduce inequalities in income andwealth.

Progressive taxes: peopleearning higher incomes aretaxed a higher percentageof their income

Direct tax imposition onwealth (inheritance taxes)

Monetary provision: moneyraised through the tax system ispaid to low-income groups to

increase their disposable income Means-tested benefits

paid to those that fit certaincriteria

-- Unemployment benefits

Universal benefits arepaid out to everyone incertain categoriesregardless of theirincome/wealth

--- State pensions, childbenefitsDirect provision of goods/

services financed through the taxsystem. Free provision means thatif services are used equally by all,lower income groups gain morebenefits leading to reduction ofincome inequality.(a) Universal basic healthcare

and basic education.

Advantages

Ensures social justice by reducingincome differentials.

Disadvantages

May create disincentives towork efforts with excessiveprogressivity.

Unemployment benefits arenot always claimed by thosefor whom they are designed.

Expensive to administer. Low take-up of unemployment

benefits due to bureaucracy

and social stigma. Universal benefits may be veryexpensive for the govt due topolitical reasons, and mayimply paying out money tothose who do not need it.

Unfair tradeandproductionpractices

NationalisationNationalisation refers to thepublic (government) ownership ofcertain firms to provide goods andservices sold in the market i.e.corporations engaged incommercial activities. Governmentoften take over natural monopoliesengaged in production anddistribution of public utilities(power, water, gas and sanitation)to prevent monopoly power.

Advantages

Consumers are protected from

high prices.Ensures social cots and benefits

to be taken into account whenproduction decisions are made.

Disadvantages

Cross inefficiency may arise.

No profit motive may lead tonationalized enterprises beingallocatively inefficient.


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3.3 Privatisation and Public-Private Partnership

Government should review its own activities and functions and withdraw from thoseactivities where private participation and private management will be more

productive and more efficient. Privatization refers to a change in ownership of anactivity from the public to the private sector. State owned companies having lostmoney may also privatize to give new owners the responsibility of restructuring theenterprise. Table-2 presents the merits and demerits of privatization. It may beobserved from the table that, in the absence of strong regulatory bodies with the taskof enforcing adequate anti-trust laws and regulations to control unfair production andtrade practices, privatization may lead to higher prices and loss of both consumerand social welfare.

(a) Different Forms of Privatization

There are various definitions of privatization. In the narrow sense, privatizationmeans outright sale or denationalization of a public enterprise. In a wider sense,privatization means an increase in the private participation including public-privatepartnership in economic activities. As Holden and Rajapatirana (1995) explicitlystate, The goal of privatisation, stated simply is to increase the role of the privatesector in the economy, thereby promoting the more efficient use of resources.Alternatively, privatisation can be viewed as putting more resources at the disposalof the private sector, thereby promoting efficiency and growth (p.75).

Different forms of privatization are described briefly in the following paragraphs:

1. Denationalization and outright sale: Privatization of ownership sales ofgovernment assets or shares. The government may retain some shares (the so-called golden shares) in the enterprise, and acts as a regulator to ensure thatpublic interest is protected.

2. Disinvestment: Sale of government equity by parts and become minority shareholder over time. Franchising: Gives the private sector a right to operate aparticular service/activity for a given length of time. May be exclusive orcompetitive

3. Privatization of production: Government buys goods and services instead ofproducing them.

4. Privatization of financing: Government relies on user charges (directly orthrough cross-subsidisation) rather than tax revenues to subsidize operations.(e.g., independent school fees, water and electricity charges).

5. Deregulation: Liberalization of regulation to promote competition through theremoval of barriers to entry (creation of contestable markets) in the case oftelecommunications, financial industry, airlines (US open skies policy) etc.


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Table-2 Evaluation of Privatization

For Against

Revenue for the government reducespublic-sector borrowing requirement.Allows the government to make tax cutswithout reducing spending. Revenue mayincrease due to higher corporate taxreceipts from the privatized companies.

Long term revenue loss future profitsfrom industries are lost by the state.Natural monopolies are best left to thepublic sector as duplication of services isunnecessary, wasteful and inefficient andnot in the best interests of consumers.

Increased competition due to creationof contestable markets and profit motiveswhich translates to consumers benefitsinthe form of lower prices, wider choicesand better qualities.

Competition may not increase as apublic-sector monopoly may be replacedby a private-sector monopoly leading tomore inefficiency and inequity.

Increased efficiency and flexibility asprivate companies are normally moresuccessful in raising capital, loweringprices and reducing wastage. Littlegovernmental interference allows thecompany to respond to market forcesand make commercially sensibledecisions and investments.

Market forces may not ensure greaterefficiency as privatization may lead toemergence private-sector monopolies,duopolies or oligopolies and cartelisation,which are likely to earn supernormalprofits even if they are inefficient. Largefirm size also prevents firms from beingtaken over.

Wider share ownership increasesaccountability to the public.

Private-sector firms may not act inpublic interest as they do not take intoaccount negative externalities (likeresultant unemployment) and are unlikelyto base their decisions on output andpricing on social justice and equity.

Cost-push inflation is reduced. Privatefirms are less willing to accept inefficientworking practices. Wage increases haveto be justified by higher productivity.

Private-sector firms may earn supernormal profits in the absence ofadequate anti-trust laws and regulationsto control unfair trade practices.

6. Management-employee buyouts

Management-employee buyouts involve the transfer of ownership to existingmanagement and employees. These are considered to be more appropriate formedium- and smaller-scale enterprises, relatively fast and easy to implement andranked high in terms of corporate governance, efficiency, reward for efforts. Theywere widely used in Croatia, Poland, Romania and Slovenia, where employees andtheir families used vouchers and cash to buy major stakes in their own firms.However, this method generates little revenue to the government because it cannotcharge high prices to insiders. Insiders may generally be regarded as being unableto introduce new skills and capital and could be resistant to outside interference.


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7. Equal access voucher privatisation

Privatisation by vouchers involves the creation and distribution of vouchers as a form

of equity. The vouchers may be share certificates or alternatively they may award themeans of acquiring share certificates in exchange for the vouchers, with or withoutcash support. This interesting scheme, whereby vouchers are distributed across thepopulation on an even basis, is regarded as highly effective in terms of speed ofimplementation and equity. However, such distributions may not raise revenue forgovernment and may not improve corporate governance. Mongolia, Lithuania andthe former Czechoslovakia were the first to implement this form of privatisation. Avariation on the giveaway option is that low-priced vouchers are sold, and thesecan be used to purchase shares in companies. This could generate or enhancedomestic capital.

(b) Trade-offs among major alternative privatization routes

Table-3 below indicates the trade-offs among major alternative routes forprivatization. As per the evaluation made by the World Bank, although the selectedprivatization route in Mongolia (i.e. distribution of vouchers) was fast and fair, it didnot generate enough revenues for the government and its impact on the bettercorporate governance and accessibility to capital and skill upgradation is doubtful.

Table-3: Trade-offs among major alternative privatization routes

Methods ofprivatization

Objectives of privatization

Bettercorporate

governance

Speed andfeasibility

Betteraccess to

capital andskill

Moregovernment

revenue

Greaterfairness

Sale tooutside

owners

+ _ + + _

Management-employee

buyout

_ + _ _ _

Equal-accessvoucherprivatisation

? + ? _ +

SpontaneousPrivatisation

(Outrightsale)

? ? _ _ _

Source: World Development Report, 1996, World Bank, p.52


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4. Government failures

Another important function of the government, which is not discussed in classicaleconomics, is to deal with its own imperfections and to ensure good governance. As

there are market failures and market imperfections, there could also be governmentfailures and government imperfections. Government failure arises whengovernment intervention in the market to repair market failures worsens the marketconditions or increases market distortions and leads to reduction of social welfareand economic efficiency.

4.1 Factors responsible for government failures

Government failures arise due to many factors such as the following:

(a) Problems of incentives:

Undesirable incentives may create inefficiencies High progressivity may distort incentives and create disincentives to work efforts. Politicians motivated by political power rather than economic rationale may

design policies to retain power rather than maximize efficiency, and may avoidtaxes that reduce externalities but are unpopular;

Political pressures may dominate societal welfare, Politicians may provide inappropriate incentives to public enterprises to maintain

their vested interests.

(b) Problems of information

Problems of information may also arise for the government just as the markets lackinformation. The government may not know the full costs and benefits of policieseven though it wishes to work to the interests of all stakeholders.

With imperfect information about the true value of a negative externality, it isdifficult to trace the source of a negative externality, and to formulateappropriate taxation policies.

With imperfect information about the level of consumer demand, public goodsprovided may not be needed by the consumers, or may be in short supplyleading to rent seeking.

(c) Problems of distribution

Problems of distribution arise when policies affect different groups of peopledifferently. For example, substantial subsidies and transfer may enhance fiscal deficitand government borrowing leading to higher interest rates and cost-push inflationwhich may hurt the poor.

(d) Bureaucratic inefficiency

Bureaucratic inefficiency and failures arise when policies are wide reaching and too

detailed requiring more people and huge resources beyond the means of thegovernment. Inflexibility due to bureaucracy leads to a lack of fine-tuning


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(governments respond more slowly to problems when circumstances change). Theremay also be unholy nexus among bureaucrats and politicians to retain their vestedinterested.

(e) Long Time lags

Long time lags in planning and implementation of policies cause policies to beineffective, irrelevant or come too late to solve an emerging problem. It also leads tosubstantial increase in adjustment costs as weaker and vulnerable sections areadversely affected during the transition period and need social protection.

(f) Frequent shifts in government policy

Frequent changes in public policies due to change in political parties ruling thegovernment may cause economic inefficiency as business firms and corporate

bodies find it difficult to plan for future without knowledge of tax rates, fiscalincentives, wage controls etc.

(g) Vicious circle of government intervention

There may be cases where government intervention becomes perpetuating and ofpermanent nature. For example, in order to reduce the adverse impact of highinflation on the poor, government may subsidise the prices of some essentialconsumer items of common use such as food-grains and fuel. This may lead to risein fiscal deficit and higher market borrowings by the government leading to crowdingout private investment and hardening of interest rates. These adverse effects may inturn generate cost-push inflation leading to further food and fuel subsidies for thepoor and weaker sections of the society.

4.2 Breaks between Government Spending and Outcomes

Government failures may also arise when there are breaks between the governmentexpenditures and the intended outputs and outcomes of the government activitiesand resources. One can identify seven breaks in the chain between governmentexpenditure and its transformation into intended outcomes. These breaks aredescribed in Box-1.

(1)Spending on the Wrong Goods or the Wrong People

A government spending, which neither improves the supply of public goods norbenefits the poor, can be called a spending on the wrong goods or the wrong people.As explained earlier, public goods are characterised by non-excludability and non-rivalrous and can improve efficiency by ameliorating market failures. Public goodscannot be bought and sold in markets. Adequate private production of these goodsis not feasible because the benefits are widely dispersed.


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(2)The Composition of Spending May Not Be Appropriate

A government may allocate money for, say, operation and maintenance of roads, butmost of that money may be spent for funding wage and salary payments withinadequate money available for funding material and other requirements.(3) Money May Not Reach the Service Provider

Even when the composition of spending is appropriate, the money may not reach theintended service provider. This may happen either because the government maynot, for one reason or another, launch a given project during the year in which it wassupposed to be launched, or because the government may run short of money (over-optimistic revenue forecasts may allow the inclusion of a wish-list of expenditureinitiatives in the budget, with cuts becoming inevitable when the revenue doesntarrive) or because the government may divert the money for some other use. Whatmay also happen is that because of leakages in procurement, the intended serviceprovider (e.g., a school) may receive the supplies (say, tables and chairs) at inflatedprices, or of a lower quality than specified Or the money may reach the intended

service provider or beneficiary, but not in time.

(4)Service Provider May Not Have the Required Capability

Even when the money reaches the intended service provider, the service providermay not have the capability to implement the project that is funded. For example,there may be lack of managerial capacity in the large maternal health programmesthat the central government and Aimags run. Unless this technical constraint isremoved, more investment in maternal health may not result in faster progress.


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Box-1: Seven breaks between public expenditures and outcomes

1. Government may not spend money on the right goods and the right people.2. Even when government spends money on the right goods and the right people,

the composition of spending may not be appropriate.3. Even when the composition of spending is appropriate, the money may not

reach the intended service provider.4. Even when the money reaches the intended service provider, it may not have

the capability to implement the project.5. Even when the service provider has the capability to implement the project,

incentives to provide the service may not be adequate.6. Even when the incentives are adequate, services may not reach the targeted

beneficiaries.7. Even when the services reach the targeted beneficiaries, there could be huge

leakage of money and only a small portion of public expenditure reaches thetargeted beneficiaries.


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(5)Service Providers Incentives to Provide the Service May be Weak

Even when the money reaches the intended service provider, the service providersincentives to provide the service may be weak. Doctors, for example, may not want

to work in villages because of extremely poor quality of housing, absence of facilitiesto keep children and family, and few opportunities for career promotion. Similarly,teachers incentives to work in villages may be weak because of very low salary, lackof adequate facilities, and inadequate supervision. This, in turn, may result in large-scale absenteeism of doctors and nurses in primary health centres and teachers inprimary/ secondary schools in rural areas.

(6) People May Not Take Advantage of Government Services

Even if the services are provided, people may not take advantage of them. Forexample, parents may pull their children out of government schools or not take them

to government hospitals. They may do so because of their perceptions about thequality of education in government schools and the quality of medical care ingovernment hospitals, which may be due to, say, inadequate budgetary allocation forthese services. These demand-side responses may result into a low level ofgovernment services which, in turn, may weaken the link between governmentspending and desired outcomes.

(7) Even when incentives reach the beneficiaries, there could be significantleakage

Actual benefits reaching the beneficiaries may be very small compared to intendedincentives due to leakages in the system as a result of very high administrative andoverhead expenditure. In 1985 the then Indian Prime Minister Rajiv Gandhicommented that only 25 percent of the government expenditures on various povertyalleviation and rural employment generation programs reach the poor households inrural areas due to substantial administrative expenditures by the central, provincialand local governments in charge of implementation and monitoring of theseprograms.

5. Core Functions of the Government4

5.1 Desirable Roles and Functions of the Government

From above discussion it follows that a government in an emerging economy likeMongolia will have the following core functions:

(1) Allocative role

This role requires the government to intervene in the allocative functions of themarket to ensure that the market trades and private transactions take place

4 This section is based on an earlier Report on Non-core Activities Review of Pilot

Agencies prepared by the consultants Public Sector Performance (NZ) Ltd. for the ADB andthe Government of Mongolia in October 1999. The present author fully agrees with theiranalysis, views and recommendations on the role of the government..Ministry of Finance Glocoms Inc. (USA)

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according to established rules and regulations and are fair and just. This rolerequires the government to:

Specify and enforce private property rights (i.e. sale, purchase, transfer,

ownership, lease etc. of property) and laws on business contracts; Address under-provision of public goods and merit goods such as basic health

care and education, national defence, internal security, individual safety etc. Address issues relating to existence of positive and negative externalities; Address the issues relating to existence of imperfect markets or natural

monopolies.

(2) Regulatory role

As part of allocative role, government enacts and enforces laws on property rightsand contracts for business. But, government should also protect basic human rights

and ensure fundamental rights of individuals guaranteed by the constitution. Thisrequires that government should also specify and administer more general system oflaws and justice.

(3) Supportive role

The governments allocative and regulatory roles require the creation andmaintenance of administrative and political functions, including systems and lawsfor revenue raising and expenditure allocation among various sectors.

(4) Stabilisation role

Another major function of the government is to adopt appropriate stabilisationmeasures (such as monetary, fiscal, budgetary, exchange rate, wage-income,labour policies and laws etc.) to tackle adverse impact of high inflation,unemployment and imbalances external markets and thereby to improve socialwelfare.

(5) Distributive role

The government should also address the issues relating to income and wealth

inequalities and social injustice by specifying and implementing appropriate taxationand transfer policies.

5.2 Production and Purchase Arrangements

After identifying the functions, next question arises, should government perform allthese functions alone or rely on public-private partnership? Another question is:how to finance these activities? Thus the output production and purchasingarrangements by the government are very important to establish the effective anddesirable linkages among resourcesactivitiesoutputsandoutcomes.


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Purchaser/ Beneficiary Arrangements

We discuss below various ways for financing government production andpurchases:

(a) Purchaser Arrangements: Payments for outputs may be made by: The government (for example, defence products and military

staff)

Anther party (i.e. an external party pays for a good or serviceprovided by the government such as training and highereducation)

Some combination of these two options (in which case, thegovernments payments could be seen as a subsidy such as thefood, fertiliser, kerosene and domestic LPG subsidies providedby the Indian government; or the subsidised fees in government

colleges and universities prevailing in most of the countries)

(b) Beneficiary (consumer) Arrangements: Outputs can be consumed by: The government (e.g. advice on taxation policy and tax

administration) Another party (e.g. provision of information to taxpayers on

legislative or procedure changes or supply of data on trends ofeconomic variables)

Some combination of these two options.

A consideration of these arrangements for each output helps the government todecide whether government organisations should be producing these outputs or notand what should be the funding arrangements (i.e. whether to contract out theoutputs to the private entrepreneurs or to have public-private partnership).

Output delivery (Quantity, Quality and Price)

Government is interested in maintaining desirable quantity, quality and price of theoutputs produced or purchased by it. For this, appropriate benchmarks for qualityand price need to be specified by the government.

Organizational Arrangements

Equally important is the internal structure, quality of management and capabilities ofan organization producing and supplying the public goods and services. To ensuredesirable quality it is necessary to develop, strengthen and improve the capacitybuilding of the government organisations and institutional set up.

Ownership Arrangements

The appropriate organisational structure (e.g. state enterprise, agency) must beconsidered carefully. If the government opts to own an organization, there must be

sufficient justification for that in terms of externalities or market imperfections andinequity.


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6. Public Sector in Mongolia

In this section, we compare the role of the public sector and its share in GDP ascompared with those in India which has almost the same level of per capita GDP in

terms purchasing power parity. Before that let us compare the industrial compositionin GDP in these two countries.

Table-4 indicates the industrial composition of GDP in Mongolia as compared withIndia in 2002 and 2005. It may be observed that in terms of broad categories of GDPviz. agriculture, industry and services, both Mongolia and India have almost similarindustrial composition in 2005. However, within agriculture and allied services,animal husbandry has major shares in Mongolia, while Agriculture comprising foodgrains, commercial agricultural crops, horticulture and floriculture has major share inIndia. Within industry, manufacturing and construction have major shares in India,while minerals have major share in Mongolia. Within services, financial services, real

estate, public administration and defence, education and health have higher sharesin GDP in India than those in Mongolia, while wholesale and retail trade andtransport have higher shares in GDP in Mongolia than those in India.

Table-5 indicates the share of private sector in GDP in 2002 and 2005 in Mongoliaand India. Table-6 indicates the shares of private and public sectors in GDP byindustrial composition in 2005 in Mongolia and India. It may be observed from Table-6 that public sector has a share around 22 per cent (less than one-fourth) in bothMongolia and India. This implies that most of the sectors have been open for privatesector and only a few sectors have been kept for public investment for strategicreasons. This also implies that there is limited scope for further privatisation. In boththese countries, public sector has nominal share in agriculture and allied sectors(comprising forestry, animal husbandry and fishery) which are basically driven byprivate sector investment and activities.

As regards industry, public sector has a share of only 27 per cent (slightly aboveone-fourth) in India and 32 per cent (slightly less than one-third) in Mongolia.However, there are significant differences for separate sectors within industry. InMongolia, private sector has a major share (two-thirds) in mining, while public sectorhas a major share (four-fifths) in Mining in India as Indian government has notprivatised natural resource based industries such as plantations and mining due to

political ideological reasons. In both the countries, private sector has predominantshare in manufacturing and construction, while there is public monopoly in publicutilities viz. electricity, gas and water supply in both Mongolia and India.

As regards services (excluding education, health and social and personal services),private sector has a dominant share (around three-fourths) in both Mongolia andIndia, although there are differences for the separate sectors. Almost all wholesaleand retail trade, hotels and restaurants, real estate and business activities areoperated by the private sector in both the countries. Private sector has also dominantshare in transport and communications in both the countries. Public sector has amajor share (58 percent) in financial sector in India, while private sector has

dominant share (87 percent) in financial sector in Mongolia. On the contrary, public


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sector has dominant share in education and health in Mongolia; private sector hasdominant share in education and health India.

Table-4 Industrial Composition of GDP (in percentage)

Industry India Mongolia

2002 2005 2002 20051.Agriculture, animal husbandry, forestry 20.9 18.8 20.7 21.7

2. Industry 26.5 28.9 22.3 27.3

2.1 Mining and quarrying 2.8 2.9 10.1 20.4

2.2 Manufacturing 15.3 15.9 6.3 4.4

2.3 Electricity, gas, water 2.4 2.0 3.8 3.1

2.4 Construction 6.0 8.1 2.3 2.3

3. Services 52.6 52.3 57.0 51.0

3.1 Wholesale and retail trade 14.0 14.9 27.7 24.8

3.2 Hotels and restaurants 1.3 1.5 1.2 1.0

3.3 Transport, storage, communications 7.9 8.5 14.7 12.23.4 Financial services 6.4 5.5 3.2 3.9

3.5 Real estate and business 8.2 8.3 1.2 1.3

3.6 Public administration and defence 6.5 5.9 4.5 3.3

3.7 Other services (education, health,social, community, personal and others)

8.3 7.8 7.0 5.2

3.7.1 Education NA NA 4.6 3.1

3.7.2 Health and social works NA NA 1.8 1.6

3.7.3 Other social & personal services NA NA 0.6 0.5

Total GDP 100 100 100 100

Table-5 Private sector share by industry (% share in the respective industry)Industry India Mongolia

2002 2005 2002 2005

1.Agriculture, animal husbandry, forestry 96.1 94.9 98.4 99.8

2. Industry 70.4 72.6 69.9 68.2


2.2 Manufacturing 85.0 85.7 87.8 82.8

2.3 Electricity, gas, water -0.6 2.6 3.1 3.1

2.4 Construction 85.9 87.4 93.1 94.1

3. Services 67.9 71.1 69.2 76.4

3.1 Wholesale and retail trade 97.7 98.3 98.2 99.93.2 Hotels and restaurants 99.0 99.1 100 100

3.3 Transport, storage, communications 60.3 65.3 60.1 66.0

3.4 Financial services 36.0 42.0 59.9 87.2

3.5 Real estate and business 99.6 99.7 86.0 100

3.6 Public administration and defence 0 0 0 0

3.7 Other services (education, health,social, community, personal and others)

66.0 67.8 12.9 17.4

3.7.1 Education NA NA 9.5 13.0



Total GDP 74.5 78.3 74.5 77.4


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Table-6 Share of Public and Private Sector in GDP in India and Mongolia in 2005

Industry India Mongolia

Private Public Private Public

1.Agriculture and allied sectors 94.9 5.1 99.8 0.2

2. Industry 72.6 27.4 68.2 31.8


2.2 Manufacturing 85.7 14.3 82.8 17.2

2.3 Electricity, gas, water 2.6 97.4 3.1 96.9

2.4 Construction 87.4 12.6 94.1 5.9

3. Services 71.1 28.9 76.4 23.6

3.1 Wholesale and retail trade 98.3 1.7 99.9 0.1

3.2 Hotels and restaurants 99.1 0.9 100 0

3.3 Transport, storage, communications 65.3 34.7 66 343.4 Financial services 42 58 87.2 12.8

3.5 Real estate and business 99.7 0.3 100 0

3.6 Public administration and defense 0 100 0 100

3.7 Other services 67.8 32.2 17.4 82.6

3.7.1 Education NA NA 13 87



Total GDP 78.3 21.7 77.4 22.6

Above discussion indicates that the role of the public sector in Mongolia is not verymuch different from that in other developing countries at similar levels of living. Infact, most of the sectors, where private initiatives and investment will be moreproductive and efficient have been kept open for private participation. There is nopresence of public sector in wholesale and retail trade, hotels and restaurants, realestate and commercial business. Public sector has dominant share only in publicutilities (electricity, gas and water supply), education and health. It is well know thatthe public utility sectors are characterized by high incremental capital-output ratio,lumpiness of huge capital, long gestation period, high risk and low return. Because ofthese reasons, private sector is not willing to invest in these sectors unless there issharing of risk by the both private and public sector. For example, in India, most of

the power is generated and transmitted by the public sector, while private sector isengaged in its distribution to the consumers and collecting tariff charges. So thepublic-private partnership on the basis of sharing of cost, risk and benefits may befeasible for supply of electricity, gas and water.

As regards education and health, Mongolian public sector has a predominant share.This is justified because the Millennium Development Goals (MDGs) place highpriority for achieving universal education and nutrition. If all people are healthy andeducated they can participate fully in the development process and gain more fromit.


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7. Programs in Selected Ministries

We have observed in section 5.1 that the public sector participation in a sector is

justified on the following grounds:

(b) Allocative role(c) Regulatory role(d) Supportive role(e) Stabilisation role(f) Distributive role

7.1 A Critical Appraisal of the Functions of the MOECS

Let us judge the programs of the Ministry of Education, Culture and Science (given in

Table-7) on the basis of these criteria.

Table-7: Programs for the Ministry of Education, Culture and ScienceProgramme Can it be

categorized ascore activity?

If yes, on whatCriteria?

Education

Preschooling education Yes

Activities related to policy innovation Yes Allocative

Capacity building of human resource for preschool edu Yes Supportive

Conduct training to improve vocational skills Yes Supportive

Administration, planning Yes Regulatory

Information, monitoring, evaluation of preschool edu Yes Supportive

Providing methodological direction for preschool edu Yes RegulatoryPolicy planning of preschooling education Yes Allocative

Service to be provided for end user Yes Distributive

Kindergarten served for24 hours Yes Supportive

Development and care of preschooling age children Yes Supportive

Food provision Yes Distributive

Optional preschooling training service Yes Supportive

To develop mind and physique of preschool children Yes Supportive

Kindergarten service Yes Supportive

Development and care of preschooling age children Yes Supportive

Cash benefit for tutors, who are going to retire Yes Distributive

Food provision Yes Distributive

General education Yes


In-depth training of English language Yes Supportive

Training material & equip for primary/secondary edu Yes Distributive

Improve material resources of educational schools Yes Supportive

Capacity building of human resources Yes Supportive

"Noon tea break" program funded by Development fund Yes Distributive


Direction and coordination of policy implementation Yes Regulatory

Policy planning of primary, basic, secondary education Yes Allocative

Monitoring, evaluation of primary, basic & sec edu Yes Regulatory

Provide social security of civil servants Yes Distributive

Service to be provided for end user Yes Distributive

Delivery of primary, basic and secondary education Yes Distributive

Training plans & programs for primary, basic & sec edu Yes Supportive

Cash benefit for tutors, who are going to retire Yes DistributiveTo participate in Olympiads Yes Supportive


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Provision of day to day activity Yes Supportive

Delivery of literature education Yes Supportive

Non formal education by alternative programmes Yes Supportive

Dormitory service Yes Supportive

Food provision to dormitory pupils Yes Distributive

Provision of day to day activities to dormitory Yes SupportiveGeneral educational schools with special programmes Yes Supportive

Continuous education delivery to adults Yes Supportive

Delivery of evening classes Yes Supportive

Services in support of vulnerable pupils Yes Distributive

Provision of study materials Yes Distributive

Provision of training equipments Yes Distributive

Extramural study service Yes Distributive

Vocational education Yes



Provide directions to vocational educational institutions Yes Regulatory

Information about vocational education Yes Supportive

Capacity building for vocational educational institutions Yes Supportive

Abroad training Yes SupportiveLocal training Yes Supportive

Service to be provided for end user Yes Supportive

Subsidies to students of vocational educl institutions Yes Distributive

Free services to vulnerable students through libraries Yes Distributive

Dormitories to students of vocational educll institutions Yes Distributive

Food provision to dormitory pupils Yes Distributive

Provision of day to day activities to dormitory Yes Distributive

Basic vocational education and training Yes Supportive

Implementation of training standards, plans and programs Yes Supportive

Provision of day to day activities to dormitory Yes Distributive

Tertiary education Yes


Conduct training for employees of tertiary education Yes Supportive

Abroad training Yes Supportive

Local training Yes Supportive

Financial support to public tertiary educl institutions Yes Distributive

To finance fixed cost Yes Distributive


Providing directions to tertiary educational institutions Yes Regulatory

Information about tertiary education Yes Supportive

Coordination, policy planning for tertiary education Yes Supportive

Service to be provided for end user Yes Supportive

Financial support to students of tertiary edu. institutions Yes Distributive

Undergraduate and postgraduate degree on teaching Yes Distributive

Local undergraduate and postgraduate degree Yes Distributive

Selected students (very poor, herder, 3 students) Yes Distributive

Foreign students who study by government agreement Yes DistributiveLocal students who study abroad with govt agreement Yes Distributive

Transpiration cost Yes Stabilizing

Preparation of administrative civil staff at Soum Yes Supportive

Students' tuition fee of civil servant family Yes Stabilizing

Students' tuition fee of private vocational edu. institute Yes Stabilizing

Culture Yes

Output 1 Yes

Sub-prog-1: Museum, historical, cultural monuments Yes Supportive

Mount of exhibition Yes Supportive

Protection of museum, historical and cultural monuments Yes Supportive

Copy and storage of museum exhibit to CD Yes Supportive

Renovation Yes Supportive

Documentary films, various recordings Yes Supportive

Enrich museum fund Yes SupportiveRenovation of temples Yes Supportive


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Advertisement and trainings on general knowledge Yes Supportive

Renovation of historical and cultural monuments Yes Supportive

Sub programme 2: Stage and screen events Yes Supportive

Revive of plays Yes Supportive

New plays Yes Supportive

Sub programme 3: Libraries Yes SupportiveEnrichment of library's fund Yes Supportive

Sub programme 4: Soum cultural centre Yes Supportive

Sub programme 5: Cultural performance Yes Supportive

Conduct Mongolian and local cultural performance Yes Supportive

Conduct local cultural performance Yes Supportive

Conduct Mongolian cultural performance Yes Supportive

Enrich national fund by best performance Yes Supportive

Performance of heritage, traditional and modern culture Yes Supportive

Protection, storage of literature heritage Yes Supportive

Output 2: Policy related innovation Yes Allocative

Capacity building of HR at cultural institutions Yes Supportive

Attend vocational training to improve skills Yes Supportive

Capacity building of museum curators Yes Supportive

Provide publishing skilled staff, improve vocational skills Yes SupportiveImprove vocational skills of local cultural and art staff Yes Supportive

Provide stage skilled staff, improve vocational skil ls Yes Supportive

Training of restorers for restoration of cultural heritages Yes Supportive

Training of researchers on traditional culture and literature Yes Supportive

Artwork presented at national and international exhibits Yes Supportive

Artwork to be presented at national and international exhibits Yes Supportive

Output 3: administration and planning Yes Supportive

Provide methodology to cultural and art institutions Yes Supportive

Information on culture and art Yes Supportive

Planning and coordination of cultural and art program policy Yes Allocative

General researches Yes Allocative


Policy and planning to develop science and technology Yes Allocative

Information, monitoring and evaluation of science and technology Yes Supportive

Science and technology policy implementation and coordination Yes Supportive

Research in education Yes Supportive

Environmental sector Yes Supportive

Scientific & technology projects funded by budget by govt order Yes Distributive

Social sector Yes Distributive


Technology sector Yes Distributive


Agriculture Yes Distributive

Conducting researches in agriculture Yes Distributive

Health Yes Distributive

Conducting researches in health Yes Distributive

ip and involving all Investment including investment fund Yes Distributive

7.2 A Critical Appraisal of the Functions of the MOSWL

Table-8 makes a critical appraisal of the programs of the MOSWL. Judged by ourcriteria, most the programs can be categorised as core functions of the government,although there is scope for public-private partnership and involving all stakeholders

in the process of economic development and alleviation of poverty and hunger.


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Programme Can it becategorized ascore activity?

If yes, on whatCriteria?


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Education

Program-1: Labor and employment Yes

1.1. Labor, employment policy and management Yes Allocative

2. Employment Support Services Yes Supportive

1.2.1. Service to provide labor market information Yes Supportive

1.2.2. Employer support Yes Regulatory1.2.3. Employment mediation service Yes Supportive

1.2.4. Vocational training and re-training services Yes Supportive

1.2.5. Vocational guideline and consultancy service Yes Regulative

1.2.6. New employment service Yes Supportive

1.3. Micro business support services Yes Supportive

1.3.1. Micro business service Yes Supportive

1.3.2. Business incubator service Yes Distributive

1.3.3. Training and methodological advise Yes Supportive

1.4. Public work program Yes StabilizingPROGRAM 2. SOCIAL WELFARE SERVICES Yes

2.1. Social welfare policy and management Yes Allocative

2.2. Monetary assistance for target groups Yes Distributive

2.2.1. Welfare benefit for the elderly Yes Distributive

2.2.2. Welfare benefits for the disabled Yes Distributive2.2.3. Welfare benefits for single mothers Yes Distributive

2.2.4. Conditional monetary support Yes Distributive

2.2.5. Discount for target groups Yes Distributive

2.3. Social welfare and care services for target groups Yes Distributive

2.3.1. Welfare services based on public participation Yes Distributive

2.3.2. Rehabilitation services Yes Distributive

2.3.3. Centralized and specialized care services Yes Distributive

2.4. Common monetary assistance Yes Distributive

2.4.1. Monetary assistance for honorary senior citizens Yes Distributive

2.4.2. Monetary assistance for mothers with many children Yes Distributive

2.4.3. Child (between 0 18) support money Yes Distributive

2.4.5. Monetary assistance for newly-weds Yes Distributive

2.4.6. Monetary assistance for new-born babies Yes Distributive2.4.6. Monetary assistance for pregnant and breast-feeding women Yes Distributive

PROGRAM 3. SOCIAL INSURANCE Yes

3.1. Social insurance policy and management Yes Stabilizing

3.2. Social insurance pension Yes Stabilizing

3.2.1. Old age pension Yes Distributive

3.2.2. Disability pension Yes Distributive

3.2.3. Pension for the loss of breadwinner Yes Distributive

3.2.4. Pension for soldier Yes Distributive

3.3. Social insurance benefits and fees Yes Distributive

3.3.1. Pension for temporary loss of employment Yes Stabilizing

3.3.2. Burial allowances Yes Stabilizing

3.3.3. Pregnancy and maternity support Yes Distributive

3.3.4. Unemployment benefits Yes Stabilizing


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PROGRAM-4: National Program to support population Yes Distributive

4.1.1. National program on social protection of the elders Yes Distributive

4.1.2. National program on social protection of the disabled Yes Distributive

4.1.3. Child development and protection national program Yes Stabilizing

4.1.4. National program to ensure gender equality Yes Stabilizing4.1.5. National program to support employment Yes Stabilizing

4.1.6. National program to improve labour hygiene and security Yes Stabilizing

4.1.7. National program to fight against human trafficking Yes Stabilizing

8. Concluding Observations

Mongolia and India have almost the same level of PPP adjusted per capita income,although they differ significantly in the size of population and overall GDP. WhileIndia has a vast size of population and GDP, Mongolia is a small economy in termsof population and economic size. However, they have strikingly similar industrialcomposition of GDP and also the similar role of the private and public sectors inoverall GDP. Like India, Mongolia has allowed private participation and privateinvestment in all the sectors. Private sector has predominant share in GDP inagriculture, mining and quarrying, manufacturing, construction, wholesale and retailtrade, hotels and restaurants, transport, storage and communications, financialservices, real estate and business services, and social and personal services. Therole of public sector is limited to defence, public administration, public utilities(comprising electricity, gas and water supply), education, health and social welfare.

An examination of the existing programs of the MOECS and MOSWL in Mongolia

leads to the conclusion that these programs are justified to be operated by the publicsector because of their allocative, distributive, regulative, market stabililizing roles,although there is scope for further enhancing the role of public-private partnershipand involvement of stakeholders in policy planning and execution of projects.Mongolia is already involving NGOs and other society groups in pre-schooleducation, vocational education, higher education, science and culture, variouspoverty alleviation programs, employment generation programs, health andnutritional programs.

(a) Private Investment in Utilities

There is scope for enhancing private participation and public privatepartnership in utilities where the public sector has now monopoly.However, government will have a role to legislate locational, safety andenvironmental regulations for the efficient functioning of utilities. Thesystem of regulations in Mongolia, as in the most countries, has theirorigins to offset market failures. The utilities, petroleum sector, bankingand insurance, transport and telecommunications have special regulatoryrequirements. Greater transparency of the rules and procedures, lessbureaucratic intervention and establishing an efficient regulatoryauthority to fix fair and just tariff rates for utilities are needed toencourage private investment for the supply of electricity, gas and water.

Given the limited availability of domestic private and public resources and


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the needs of the competitive sectors, foreign investment has also to beencouraged for the development of these sectors.

Mineral industries, including petroleum and gas, create particular

problems for investment because resource rents have to be dividedbetween local landowners, the local governments and the centralgovernment. Private firms also seek a share of such rents to compensatethem for the riskiness of mineral exploration and subsequent minedevelopment. The efficient and equitable apportioning of mineral rents isthus an important aspect of the economic policy framework.

Indonesia and Malaysia have been among world leaders in dealing withprivate investment including foreign investment in petroleum, gas andother minerals. India and Papua New Guinea developed mineral resourcetaxes to tax mineral rents. With such policies in place, project by projectnegotiation can be avoided or minimised. Forestry, fisheries andhydroelectricity also generate rents that require special consideration. Allthese industries have environmental aspects that should be taken intoaccount on a nationwide basis rather than project by project.

Agriculture and real estate present difficulties for foreign investmentbecause of complexities of landownership, and rules and taxes regardingtenancy, sale, purchase, transfer, lease or mortgage. Because of theseproblems, many countries like India donot allow foreign investment inagriculture and real estate. In the case of plantation, foreign investment in

nucleus estates and processing facilities can provide a market for farmersand at the same time enable them to improve their productivity.

Water is an essential service or merit good with many positive health andenvironmental spillovers. Mongolia, like most of the governments, iscommitted to achieve the Millennium Development Goals (MDG) by 2015,and to provide universal access to the minimum daily requirement of safewater, but this may require subsidies. Water distribution pipes are amonopoly network of the local government and many water andsanitation systems are buried. These factors complicate the transfer ofwater distribution to private sector.

The scope of unbundling the water sector is not clear with limitedpotential for competition amongst bulk water service providers becausethe main water sources in urban municipalities are location specific andlimited in number. Also the operational costs of providing the rawresource are relatively low compared with sunk capital costs in pipes,dams and treatment stations. Efficiency gains in water supply are morelikely to come from increased opportunities for trade amongst water usersand reduced water losses from distribution rather than increasedcompetition amongst suppliers.


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Inflows of foreign direct investment are determined by a complex set ofeconomic, political and social factors and the investors look beyond thearray of investment incentives (in particular fiscal incentives) offered.Performance requirements and various restrictions and regulations act as

disincentives to foreign direct investment and often serve to offset thepositive effects of investment incentives. What matters most for theforeign investors is their ability to reduce business risk, increaseprofitability to repatriate capital and investment income.

Foreign investors are also attracted by market opportunities (domesticand exports), a clear legal and institutional set up, administrative speedand efficiency, efficient infrastructure services and above all by liberaleconomic policies and stable macro economic environment.

Although some trans-national firms desire to have wholly or majorityowned branches or subsidiaries, it is widely held that some form of jointventure with a host country partner is preferable because of theexperience and insights local partners bring. Local partners areparticularly effective in managing labour and dealing with regulatoryissues.

Foreign investors are also moving into joint ventures with publicenterprises, preferring corporatized ones. Foreign investment with itscapital, technology and management package can make a considerablecontribution to the vast investment required in infrastructure in India.

Existing plants can be made more productive and new facilities can beprovided, often on the Build-Operate-Transfer (BOT), Build-Operate-Own(BOO)/ Build-Operate-Own-Transfer (BOOT) principles, but governmentsand investors are still at the process of learning and experimenting.

(c) Low Demand and Small Market

From the viewpoint of the foreign investors, Mongolia is not an attractiveplace for establishing production bases because of its low demand, smalldomestic market and shortage of skilled manpower. However, Mongolia isgoing through a stage of demographic transition. Younger people make up

a larger proportion of the Mongolian population and can be expected toplay a major role in ensuring a smooth supply of skilled labour in thefuture. Besides low labour costs, various other production costs such asreal estate rents, transport, communications and electricity charges areimportant factors influencing foreign investment.

(d) Rate of Return

Another important factor that determines the inflow of direct investmentis the rate of return for investment. In general, utility sectors have lowrates of return due to irrational user charges and high degree of loss intransmission and distribution. Independent regulatory authorities may be


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established and allowed to rationalise user charges for these sectors inorder to provide an impetus for both domestic and foreign investment.

(e) Financing Infrastructure Investment

Various constraints such as high fixed or sunk costs, long gestationperiods, price ceilings and other regulations on the operations of aninfrastructure facility in host countries, and political risk (expropriation ornationalisation) induce foreign investors to minimise equity commitmentsto such projects and to rely on debt (commercial loans and bonds) andnon-equity financing (technical know-how, expertise, R&D cost sharing,trade credits and supply of capital goods).

There are constraints that arise out of the very nature of some of the waysin which infrastructure projects are financed. Given the perceived risk,investors require high rates of return. This necessarily requires user feescommensurate with the rate of return, which, in many developingcountries, are too high to be sustainable. There are also environmentalissues associated with infrastructure projects. Consequently, negotiationsof BOT/BOO/BOOT and similar schemes - in developing and developedcountries - are typically very complex and take long drawn for finalagreements and financial closure.

(f) Asian Investment Funds

In recent years, a number of Asian investment funds have been created tomobilise international capital to finance Asias infrastructure. These fundsprovide medium and long-term finance (5-10 years) for infrastructureprojects through equity (usually 10% or more) or convertible debt. Fundsare raised from a diverse group such as institutional and private investors, Trans-national companies (TNCs), regional banks and multilateralorganisations. The Asian Infrastructure Fund (AIF), in which the AsianDevelopment Bank was an initial investor, was the first infrastructureinvestment fund in the region. The AIF is investing in utility,

transportation and communications projects in India, China, Indonesia,Malaysia, Thailand, Philippines and Taiwan.

(g) Pensions, Insurance and Provident Funds

In general, long term contractual savings such as pension funds;insurance and provident funds make natural investment for utilities andinfrastructure projects in many countries. But this has not happened inmany developing countries like India as these funds remained under thegovernment control and there were various restrictions for thedeployment of these funds. Government is liberalising these funds and


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allowing private participation including foreign investment. It is hoped thatthese funds would provide resources for utilities in future.

(h) Public-Private Partnership (PPP)

During the transitional period from 100 per cent public investment ininfrastructure to private investment, there is need for promoting public-private partnerships. The government should also take significant equitypositions in utility projects to crowd in commercial debt and equity in theinitial stage, and once the projects are viable, they should disinvest andreinvest in new ones. Government has also to develop and strengthendebt and bond markets, particularly municipal and corporation bonds, forfinancing utilities and urban infrastructure.

The efficacy of the private sector participation would be contingent uponthe capability to commercialise these projects where recovery ofinvestments would be through a system of user charges and the futureinvestments can be financed from the capital markets and internalresources on a self-sustaining basis. In fact, the potential forCommercialisation and competition in utilities and infrastructure is morewidespread than commonly perceived. Activities like power generationand distribution, telecommunications or solid waste collections areadaptable to market provision once they are unbundled from relatedactivities and the associated risks are properly demarcated and allocatedamong all stakeholders.

Over the past decade, private participation has grown significantly inwater, sanitation and electricity in different forms and across the regions(World Bank 2004) due to many reasons such as accessing privateexpertise and investment, and introducing incentives and efficiency inoperations. This has been possible by separating the policy makers fromthe service providers and by strengthening regulatory system andencouraging rationalisation of user charges.

(i) Future Agenda

Detailed examination of public-private partnership was beyond the scope of theproject. In addition, there were time constrains as the ADB Capacity Building projectcomes to an end in the month of March 2008. Similarly, we have not examined thescope of public-private partnership in public utilities, financing infrastructuredevelopment and development management (i.e. managing sustainableenvironment). These tasks can form the future agenda of the next phase ofgovernance reforms in Mongolia.


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Selected References

Baumol, W.J. (1982) Contestable Markets: An Uprising in the Theory of IndustryStructure, American Economic Review (March).

Baumol, W. J., Panzar, J. C. and Willig, R. D. (1982) Contestable Markets and theTheory of Industrial Structure. New York: Harcourt Brace.

Das, Tarun (1996) Policies and Strategies for Promoting Private Sectors Role inIndustrial and Technological Development in Asia, pp.1-171, ST/ESCAP/1696, UN,New York, 1996.

_______ (1997) Foreign Investment- Technology Transfer- and Growth Nexus inAs

Core and Non-core Functions of the Government

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