Editorial: Why Use the Private Sector?

PSP-One Deputy Director Jeff Barnes presents this editorial on why the private sector should be used for product distribution in poor countries and we invite you to review it and provide your own opinion, questions, or feedback.

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Some of the recent focus on poverty in Africa has rekindled a debate on an issue which public health programmers have faced for years. The issue is how best to get poor people to use essential health products and services; distribute the products for free or to sell them at affordable prices? This has come up most recently in the context of treated mosquito nets, largely because Jeff Sachs has been such an ardent advocate for massive free distribution. However, the dilemma has been faced in many other public health interventions over the past 20-30 years for products ranging from contraceptives to oral rehydration salts.

One of the key areas of dispute is whether products distributed for free are more likely to be wasted than products that are purchased by consumers. If someone pays their own money for a product, even at subsidized prices, it is more likely that that person will put the product to good use. As intuitive as this may seem, there is precious little evidence to prove it.

Part of the problem is what it means to “put the product to good use”. From the public health perspective, good use means using a health product to prevent or treat a condition as intended. However, from the consumer’s perspective it could mean using mosquito nets to catch fish, using condoms for party balloons, using ORS to produce sports drinks or using oral contraceptives to fatten your pigs. Since nearly any object, let alone health products, have multiple uses, it is virtually impossible to prevent “misuse” of public health products, whether they are sold or given out free. As long as the price of the subsidized nets is cheaper than the price of fishing nets, then fishermen will have an incentive to misuse mosquito nets. It is probably impossible to prevent such misuse, and it should simply be considered a cost of a public health program.

People from the free-distribution and the sales camps are watching carefully for evidence of use and misuse of mosquito nets—both statistical and anecdotal. The free distribution advocates hope to make their case by showing that the difference in use rates is negligible. While use rates are important and useful, it should not be taken as proof that free distribution is better than selling or the other way around. Things are always more complicated than that.

“Free” distribution is never free—neither to the donor nor to the consumer. It may be the case that the cost to a mother of traveling to a clinic where nets are given out for free is greater than the cost of buying a net at her local shop. How consumers use or misuse products depends much more on what they have heard about the product than through which supply channel they obtained the product. I recently evaluated a program which promoted mosquito nets as providing a good night’s sleep. This argument apparently had the unintended consequence of increasing the proportion of nets purchased and used by adult men, who are at the least risk of contracting malaria. Unless programmers take such issues into account, they will continue to have less effective programs.

The current debate reminds me of my experience in South Africa when the government was increasing its free distribution of condoms. I was trying to make a similar case against investing too many resources in free distribution, largely on the grounds that more condoms and money would be wasted in free programs. That was in 1999 when the commercial market was about 8m condoms and the government was giving out over 150m condoms. The government commissioned a study on 'the fate of condoms' which looked at wastage at the consumer level and found that the rate of wastage of government free condoms was slightly more than purchased condoms. The key there was that even the free condoms were not pushed onto people, they were simply available in clinics, so people still had to make some kind of effort to get the condoms. Nor did the study consider condoms wasted in the supply chain where there were many reports of condoms sitting in warehouses until they expired. Moreover, that was in South Africa where public sector employees are better paid and more motivated than most sub-Saharan African countries. Ultimately, the government decided that whatever wastage was going to occur, the cost was acceptable (especially since the unit cost of a condom is only $0.04) in order to ensure that condoms were available everywhere in South Africa. Today, the commercial market is about 20m pieces and the government is giving out 460m condoms.

The best arguments for using the private sector to distribute products is not waste or misuse by consumers, but the efficiency of channel management and financial sustainability. In a private sector distribution mechanism, every wholesaler and distributor in the chain puts his/her own money into the product and has every incentive to store the product properly to ensure that the consumer will ultimately buy the product. No donor or government has to pay them to handle the product carefully. They are paid by what they earn on the margin of reselling the product. In a public sector or free distribution system, you have to pay people to store the product and ship it. You have to buy and maintain vehicles to deliver the products. I suppose if you are running a well-funded vertical program to deliver commodities to Millennium Development Villages, this is not a concern. However, in the world of scarce resources, pushing products through a public sector system with poorly paid functionaries who get no benefit and additional work from moving those products is very difficult. It shouldn’t be surprising that in such circumstances, a lot of those products will “get lost in warehouses” or “fall off a truck.” You probably won’t have enough trucks for the products to fall off of.

The private sector also offers greater financial sustainability. To do the free distribution, you not only have to come up with the funds to pay for all the commodities, people and trucks to take the mosquito nets from the manufacturers to the poor people, you have to do it every three years when the nets need to be replaced. With the private sector, the supplies will continue as long as people keep buying them.

Does this mean using the private sector is always better than subsidized free distribution? Of course it doesn’t. The poorest of the poor may not benefit from commercial resupply because they live beyond the reach of the commercial network and cannot even afford to pay subsidized prices. So there is a role for free distribution - but it should be limited to filling gaps left by the private sector. Public health programmers must make the best use of existing investments, both public and private and must make appropriate use of all tested strategies.

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