Core and Non-Core Functions of The Government

Core and Non-core Functions of the Government of Mongolia

- A Critical Appraisal
___________________________________________________________________
Prof. Tarun Das1, Ph.D.
ADB Capacity Building Project

On Governance Reforms
Government of Mongolia
Ministry of Finance
Ulaanbaatar, Mongolia
February 2008
___________________________________________________________________
1
Glocoms inc. (USA) Strategic Planning Expert. Formerly Economic Adviser, Ministry of
Finance and the Planning Commission, Government of India, and Professor (Public Policy),
Institute of Integrated Learning in Management, New Delhi, India. For any clarifications
contact das.tarun@hotmail.com.
Ministry of Finance 1 Glocoms Inc. (USA)

Contents
1. Introduction and Scope
2. Economic Reforms and New Role of the Government

2.1 Second generation reforms in Mongolia
2.2 Need for re-orientation of public policies
2.3 Need for redefining the role of government
3. Basic Functions of a Government in an Emerging Economy

3.1 To repair market failures
3.2 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 Ministries

7.1 Programs in MOECS
7.2 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

1. Introduction and Scope
As per the Terms of Reference of the ADB Capacity Building Project on Governance
Reforms, 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 of
ministries and budgetary agencies, critically review the functions of the key line
portfolio ministries to segregate the core from non-core functions. The functional
review will include all agencies that come under the structure of the ministries
included.
(ii)Formulate recommendations based on the above review, to streamline the core

functions of the ministries concerned.
(iii) Assess the administrative expenditures of Ministry of Finance (MOF), Ministry

of Health (MOH), Ministry of Education, Culture, and Science (MOECS), and
Ministry of Social Welfare and Labour (MSWL) and if necessary redefine and
set ceilings on such expenditures.
(iv) Formulate recommendations on alternative arrangements for carrying out

non-core functions.
(v) Prepare a report deriving lessons for the whole of the Government from these
assessments.”
Shortly after joining the ADB Capacity Building Project on Governance Reforms,
Ministry of Finance, Government of Mongolia, the international consultant was
informed that the World Bank ECTAC Project is also working on the similar issues.
Accordingly, the international consultant along with National Consultant E. Sandagdorj
held 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, National
Functional Review Consultant) dealing with Civil Service Reforms in the Ministry of
Health. 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
3

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 Project
team. It was understood that the said report would be ready in January 2008. The
ADB 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 the
administrative expenditures of MOF, MOH, MOECS, and MSWL and if necessary
redefine and set ceilings on such expenditures.” The following detailed reports have
been produced on benchmarks for output costing and output budgeting including
benchmarks for administrative expenditure:
“(1) Benchmarks Setting and Best Practices For Output Costing and Output
Budgeting- Part-1: Basic Concepts and Methodology, pp.1-31, December
2007.”
“(2) Benchmarks Setting and Best Practices For Output Costing and Output
Budgeting- 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 been
circulated among the major line ministries.
We waited for the World Bank ECTAC Project Report on Core and non-core
Functions until the end of January 2008. We have not yet received a copy of their
report. 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 major
line 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 to
adopt an open door policy for investment, production and trade of goods. Its
domestic economy and external sectors are much more liberalised today than they
were before 1990s. During last five years Mongolia has also progressed significantly
in the spheres of privatization, public sector reforms and governance reforms.
Mongolia is now passing through a phase of second generation reforms to improve

efficiency and productivity in both private and public sectors and to impart dynamism
to the overall growth process. The Strategic Business Plans (SBPs) for the line
ministries have to be integrated fully with these structural and governance reforms
and capacity building. But, the SBPs need to adopt a gradual, step by step,
evolutionary and cumulative approach towards reforms, and should avoid the
temptation of adopting the so-called big bang, shock therapy or revolutionary
approach adopted by some developed nations in Latin America and Europe. As
Mongolia is a low-income country with significant incidence of poverty, the reforms
and SBPs need to have adequate safety nets for the vulnerable and weaker sections
of the society so that they are adversely affected by structural changes and the
waves 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 development
policies. If every Mongolian is skilled and healthy and lives longer, then they can
participate 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 Business

Plans (Das and Sandagdorj, September 2007) that there is need for re-orientation
of public policies. SBPs should put emphasis on creating an enabling environment
for public-private partnership (PPP), linking fiscal incentives to productivity and
efficiency, streamlining public investment programs, repairing market failures, and
developing and strengthening structures and institutions. SBPs should focus on
consultations with stakeholders, flexibility, decentralization, selectivity, outputs and
outcome, implementation, evaluation, monitoring, co-ordination of policies and
programs.
There is need for putting emphasis on Public-Private Partnership (PPP) and

involvement of sub-national governments (Aimags, Soums, City Councils) and NGOs
and other civil societies for delivery of public goods and service, so that the
associated risks, costs and benefits of reforms are shared by both private and public
economic agents and by all stakeholders in development process. There is also a
need for decentralization of both financial and administrative powers for execution of
programs, as the local governments would be more efficient in implementing projects
at 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 government
from a controller to an enabler, from a supplier to a facilitator, from an operator to a
policy maker, and from a regulator to a trustee of social equity and environmental
sustainability.
Both well governed state and well functioning markets are essential for high growth
and poverty reduction. Government and free markets should supplement and
complement each other. Government should withdraw from sectors where private
participation and management, including foreign investment, are more productive
and more efficient. But, the scope of government will remain large in the
development of social sectors (viz. health, education and physical infrastructure.
3. Basic Functions of a Government

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 and
efficient manner. There are four main sources of market failures viz. (a)
existence of externalities, (b) no provision of public goods, (c) existence of
imperfect competition and (d) existence of inequity. According to theories in
welfare economics, allocative efficiency in these situations can happen when
marginal social benefit (MSB) equals marginal social cost (MSC), which cannot be
achieved without appropriate government interventions.
(a) Externalities
Externalities occur when some of the costs or benefits associated with production or
consumption of goods and services spill over onto third parties. There could be
positive or negative externalities depending on the nature of the impact on the
society. Positive externalities occur when society benefits from the consumption or
production of a commodity or service such as basic education, basic health care,
sanitation, vaccination, public parks, public libraries etc. Negative externalities
occur when costs are imposed on society from the consumption or production of a
commodity 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 of
environment in general.
Positive externalities are highly correlated with the so-called merit goods, which the
society values most, and judges that everyone should have, for example, basic
healthcare, basic education, public libraries, sanitation, national defence, internal
security, individual safety and protection of environment. Consumption of such goods
leads to an increase in social welfare as the Marginal Social Benefit (MSB) exceeds
the Marginal Private Benefit (MPB) (MSB > MPB). However, there might be under-
consumption of these goods and services due to existence of imperfect knowledge
and information which makes individuals unaware of the long-term benefits and
positive externalities of merit goods.
On the other hand, negative externalities are highly associated with the so-called
demerit goods, which the society values least, and judges to be bad for individuals.
For example, consumption of alcohol, cigarettes, prohibited drugs, addiction to
gambling, money laundering, terrorism, smuggling, illegal trade, immoral trafficking
etc. Consumption of such goods leads to a fall in social welfare as the Marginal
Private Benefit (MPB) exceeds the Marginal Social Benefit (MSB), (MPB > MSB).
There may be over-consumption of these goods and services due to existence of
imperfect knowledge and information, which makes individuals unaware of long-term
detriments and negative externalities of demerit goods. Government needs to
develop and strengthen appropriate legal and institutional set up to prohibit these
activities.

(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 and
public libraries etc. A private good is one that is both rivalrous, excludable and
contestable such as private transport and automobiles, clothing, food etc.
1. Non-rivalrous – its benefits are not depleted by an additional user. The

supply 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 be
provided at no charge.
2. Non-excludable – impossible (or difficult) to exclude people from its

consumption or benefits. Public good is a ‘free rider’. There is a problem for
collecting user charges as no one will pay for what he can get free. The
private firms will not provide public goods as they are unable to charge the
consumers. So the public goods have to be exclusively provided by the
government.
3. Non-contestable- A market may be described as perfectly contestable if no

barriers to entry or exit exist (Baumol, Panzar and Willig 1982).
Consequently, contestability can act as a surrogate for competition in markets
dominated by a monopoly, duopoly or an oligopoly firms. However, there
could be circumstances when contestability cannot exist. For example, the
private 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 an
emerging 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 infrastructure
becomes non-contestable and the government has to take the full
responsibility for the development of basic infrastructure, both physical and
human capital formation, at the initial stage of development.
Another case of non-contestability arises when there is no general “trust that

the organisation producing the good will not engage in 'opportunism' or
illegible activities” (Vining and Weimer 1991, p. 6/7). Best examples of
public goods where "trust" is very essential and justices continued public
production are production of critical defence products and cadres of armed
forces.
(c) Existence of imperfect competition
Perfect competition exists only when (a) there is a large number of buyers and
sellers, (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) there
is perfect knowledge and information about the market structure. But, the real
markets are neither competitive nor perfect due to existence of various market
barriers such as lack of free entry, existence of licenses, and heterogeneity in the
quality 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 monopolist’s output is not allocatively efficient as it produces at a
point where marker price exceeds marginal cost (P > MC) creating a loss of both
consumer and producer surplus.
(d) Existence of inequity
The problem of inequity is distinct from that of inequality. Equality is a mathematical

and statistical term which means that everybody in the society posses the same level
of income. On the contrary, equity is a term of justice and jurisprudence and refers to
an income distribution that is considered to be fair and just as judged by certain
norms and standards. An equal income distribution is not an equitable distribution,
because it provides equal income to everyone, irrespective of considerations of
one’s age and sex, qualifications and experiences, which cannot be justified by any
norm. Therefore, some degree of income inequality is justifiable and desirable to
provide incentives for hard work or to compensate for higher skill and experiences.
However, there is tolerable limit on equality. Welfare economist Pareto on the basis
of income distribution data in many countries during 1930’s argued that an income
inequality, as measured by the Gini-Lorenz ratio, up to 0.5 can be acceptable for a
society. 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 law
is based on incomes of feudal landed property which cannot be acceptable for
socialist 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 social
equity. Table-1 below describes various kinds of government’s interventions and
their relative merits and demerits to tackle these situations. These interventions
basically 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 include
iimposition of tax or price controls on a monopolist, enacting antitrust laws,
and ensuring competition through deregulation, delicensing and decontrol of
investment, production and trade;
(e) To reduce inequalities, measures include imposition of wealth tax and
inheritance tax; to make the tax system progressive; to provide cash or in-kind
benefits to poor; unemployment benefits, State pensions, child benefits, and
universal basic healthcare and basic education.
(f) Nationalisation of private enterprises engaged in unfair production and trade
practices (for example natural monopolies supplying public utilities).

Table-1A: Government Interventions

Problem Intervention Evaluation
Zero • Direct provision of public Advantages
provision of goods • Increases social welfare at
public goods • Provision of merit goods lower public expenditure, for
at low prices or free of example, the provision of free
charge health services helps to contain
and combat the spread of
disease and so less expenditure
on curative and hospitalization
expenditure;
• Social justice: Merits goods
should be provided according to
needs and not ability to pay
• Protection of Dependants:
Dependants are subject to their
guardians decision which are not
necessarily the best, so
provision of services like free
education and free dental
treatment is needed to protect
dependants from bad decisions
Disadvantages
• Puts constraints on public
resources.
• Non-targeted provision may lead
to misuse and over
consumption.
Negative Financial intervention: taxes Advantages
externalities (equal to the monetary value of  Leaves space for market forces to
the Marginal Externality Cost) are interact
imposed on individuals or a firm,  Generates revenue for the govt
internalizing externality costs. Disadvantages
 Difficulty in valuating externality
cost.
 Overvaluation means output is
below social optimum, and
undervaluation means that
negative impact is not sufficiently
controlled.
 Tax effectiveness depends on
externality costs.
Legislation: laws and Enforcement is difficult and
administrative rules are expensive
passed to prohibit or regulate
behaviour that imposes an
Externality Cost, e.g. pollution
permits
Education, campaigns and Benefits must outweigh the costs of
advertisements solve the implementation.
problem of imperfect information A lot of time may be needed for
by allowing the external costs to effects to be felt.
be made known to the consumer,
discouraging demand.

Table-1B: Government Interventions
Positive Financial intervention: subsidies Advantages

externalities paid to the producer or consumer  Considered the most effective way
of solving under-consumption and
it can be easily implemented
Disadvantages
 Like taxes, the valuation of
external benefit is difficult
 High government expenditure is
required and it may put pressures
on government resources.
 Okun’s leaky bucket: each dollar
transferred from a richer to a
poorer individual, results in less
than a dollar increase in income for
the recipient. Leaks arise due to
high administrative costs, changes
in work efforts, attitudes etc. as a
result of redistribution
Legislation include regulation Enforcement requires constant

such as seatbelt usage, checking which may translate to
compulsory education etc. high costs.
Imperfect Imposition of a lump-sum tax Advantages

markets on a monopolist (shifts AC  Ensures fair price for consumers.
upwards), and supernormal
profits are taken as tax.
Disadvantages
Governments may also regulate  Determination of fair price and
MC/AC pricing for monopolies monopoly profits is difficult.
through price controls.  Monopolies will transfer taxes to
the consumers who might actually
Government may impose pay higher prices.
regulations to control monopoly  Price controls need to be avoided
power, unfair production. trade in a free market economy. It may
and business practices: be better to remove any barriers to
1. Forbidding the formation of entry of new firms.
monopolies (e.g., antitrust
laws)
2. Forbidding monopolistic
behaviour (like predatory
pricing)
3. Ensuring standards of
provision.
4. Ensuring competition exists
(e.g., deregulation,
delicensing, decontrol)

Table-1C: Government Interventions
Inequity and The tax system can be used to Advantages

inequality reduce inequalities in income and  Ensures social justice by reducing
wealth. income differentials.
• Progressive taxes: people
earning higher incomes are
taxed a higher percentage
of their income
• Direct tax imposition on
wealth (inheritance taxes)
Monetary provision: money

raised through the tax system is
paid to low-income groups to
increase their disposable income
• Means-tested benefits
Disadvantages
paid to those that fit certain
criteria
• May create disincentives to
-- Unemployment benefits
work efforts with excessive
• Universal benefits are progressivity.
paid out to everyone in • Unemployment benefits are
certain categories not always claimed by those
regardless of their for whom they are designed.
income/wealth • Expensive to administer.
--- State pensions, child • Low take-up of unemployment
benefits benefits due to bureaucracy
Direct provision of goods/ and social stigma.
services financed through the tax • Universal benefits may be very
system. Free provision means that expensive for the govt due to
if services are used equally by all, political reasons, and may
lower income groups gain more imply paying out money to
benefits leading to reduction of those who do not need it.
income inequality.
(a) Universal basic healthcare
and basic education.
Unfair trade Nationalisation Advantages

and Nationalisation refers to the  Consumers are protected from
production public (government) ownership of high prices.
practices certain firms to provide goods and  Ensures social cots and benefits
services sold in the market i.e. to be taken into account when
corporations engaged in production decisions are made.
commercial activities. Government
often take over natural monopolies Disadvantages
engaged in production and
 Cross inefficiency may arise.
distribution of public utilities
 No profit motive may lead to
(power, water, gas and sanitation)
nationalized enterprises being
to prevent monopoly power.
allocatively inefficient.


3.3 Privatisation and Public-Private Partnership
Government should review its own activities and functions and withdraw from those
activities where private participation and private management will be more
productive and more efficient. Privatization refers to a change in ownership of an
activity from the public to the private sector. State owned companies having lost
money may also privatize to give new owners the responsibility of restructuring the
enterprise. Table-2 presents the merits and demerits of privatization. It may be
observed from the table that, in the absence of strong regulatory bodies with the task
of enforcing adequate anti-trust laws and regulations to control unfair production and
trade practices, privatization may lead to higher prices and loss of both consumer
and social welfare.
(a) Different Forms of Privatization
There are various definitions of privatization. In the narrow sense, privatization

means outright sale or denationalization of a public enterprise. In a wider sense,
privatization means an increase in the private participation including public-private
partnership in economic activities. As Holden and Rajapatirana (1995) explicitly
state, “The goal of privatisation, stated simply is to increase the role of the private
sector in the economy, thereby promoting the more efficient use of resources.
Alternatively, privatisation can be viewed as putting more resources at the disposal
of 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 of

government assets or shares. The government may retain some shares (the so-
called golden shares) in the enterprise, and acts as a regulator to ensure that
public interest is protected.
2. Disinvestment: Sale of government equity by parts and become minority share

holder over time. Franchising: Gives the private sector a right to operate a
particular service/activity for a given length of time. May be exclusive or
competitive
3. Privatization of production: Government buys goods and services instead of

producing them.
4. Privatization of financing: Government relies on user charges (directly or

through 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 the

removal of barriers to entry (creation of contestable markets) in the case of
telecommunications, financial industry, airlines (US ‘open skies’ policy) etc.

Table-2 Evaluation of Privatization
For Against
Revenue for the government – reduces Long term revenue loss – future profits
public-sector borrowing requirement. from industries are lost by the state.
Allows the government to make tax cuts Natural monopolies are best left to the
without reducing spending. Revenue may public sector as duplication of services is
increase due to higher corporate tax unnecessary, wasteful and inefficient and
receipts from the privatized companies. not in the best interests of consumers.
Increased competition due to creation Competition may not increase as a
of contestable markets and profit motives public-sector monopoly may be replaced
which translates to consumers benefits in by a private-sector monopoly leading to
the form of lower prices, wider choices more inefficiency and inequity.
and better qualities.
Increased efficiency and flexibility as Market forces may not ensure greater
private companies are normally more efficiency as privatization may lead to
successful in raising capital, lowering emergence private-sector monopolies,
prices and reducing wastage. Little duopolies or oligopolies and cartelisation,
governmental interference allows the which are likely to earn supernormal
company to respond to market forces profits even if they are inefficient. Large
and make commercially sensible firm size also prevents firms from being
decisions and investments. taken over.
Wider share ownership increases Private-sector firms may not act in
accountability to the public. public interest as they do not take into
account negative externalities (like
resultant unemployment) and are unlikely
to base their decisions on output and
pricing on social justice and equity.
Cost-push inflation is reduced. Private Private-sector firms may earn super
firms are less willing to accept inefficient normal profits in the absence of
working practices. Wage increases have adequate anti-trust laws and regulations
to be justified by higher productivity. to control unfair trade practices.
6. Management-employee buyouts
Management-employee buyouts involve the transfer of ownership to existing

management and employees. These are considered to be more appropriate for
medium- and smaller-scale enterprises, relatively fast and easy to implement and
ranked high in terms of corporate governance, efficiency, reward for efforts. They
were widely used in Croatia, Poland, Romania and Slovenia, where employees and
their families used vouchers and cash to buy major stakes in their own firms.
However, this method generates little revenue to the government because it cannot
charge high prices to insiders. Insiders may generally be regarded as being unable
to introduce new skills and capital and could be resistant to outside interference.

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 the
means of acquiring share certificates in exchange for the vouchers, with or without
cash support. This interesting scheme, whereby vouchers are distributed across the
population on an even basis, is regarded as highly effective in terms of speed of
implementation and equity. However, such distributions may not raise revenue for
government and may not improve corporate governance. Mongolia, Lithuania and
the former Czechoslovakia were the first to implement this form of privatisation. A
variation on the “giveaway” option is that low-priced vouchers are sold, and these
can be used to purchase shares in companies. This could generate or enhance
domestic capital.
(b) Trade-offs among major alternative privatization routes
Table-3 below indicates the trade-offs among major alternative routes for
privatization. As per the evaluation made by the World Bank, although the selected
privatization route in Mongolia (i.e. distribution of vouchers) was fast and fair, it did
not generate enough revenues for the government and its impact on the better
corporate governance and accessibility to capital and skill upgradation is doubtful.
Table-3: Trade-offs among major alternative privatization routes
Methods of Objectives of privatization

privatization
Better Speed and Better More Greater
corporate feasibility access to government fairness
governance capital and revenue
skill
Sale to + _ + + _
outside
owners
Management _ + _ _ _
-employee
buyout
Equal-access ? + ? _ +
voucher
privatisation
Spontaneous ? ? _ _ _
Privatisation
(Outright
sale)
Source: World Development Report, 1996, World Bank, p.52

4. Government failures
Another important function of the government, which is not discussed in classical

economics, is to deal with its own imperfections and to ensure good governance. As
there are market failures and market imperfections, there could also be government
failures and government imperfections. Government failure arises when
government intervention in the market to repair market failures worsens the market
conditions or increases market distortions and leads to reduction of social welfare
and 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 avoid
taxes 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 lack
information. The government may not know the full costs and benefits of policies
even though it wishes to work to the interests of all stakeholders.
• With imperfect information about the true value of a negative externality, it is
difficult to trace the source of a negative externality, and to formulate
appropriate taxation policies.
• With imperfect information about the level of consumer demand, public goods
provided may not be needed by the consumers, or may be in short supply
leading to rent seeking.
(c) Problems of distribution
Problems of distribution arise when policies affect different groups of people

differently. For example, substantial subsidies and transfer may enhance fiscal deficit
and government borrowing leading to higher interest rates and cost-push inflation
which 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 the
government. Inflexibility due to bureaucracy leads to a lack of fine-tuning
(governments respond more slowly to problems when circumstances change). There

may also be unholy nexus among bureaucrats and politicians to retain their vested
interested.
(e) Long Time lags
Long time lags in planning and implementation of policies cause policies to be

ineffective, irrelevant or come too late to solve an emerging problem. It also leads to
substantial increase in adjustment costs as weaker and vulnerable sections are
adversely 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 the
government may cause economic inefficiency as business firms and corporate
bodies find it difficult to plan for future without knowledge of tax rates, fiscal
incentives, wage controls etc.
(g) Vicious circle of government intervention
There may be cases where government intervention becomes perpetuating and of

permanent nature. For example, in order to reduce the adverse impact of high
inflation on the poor, government may subsidise the prices of some essential
consumer items of common use such as food-grains and fuel. This may lead to rise
in fiscal deficit and higher market borrowings by the government leading to crowding
out private investment and hardening of interest rates. These adverse effects may in
turn generate cost-push inflation leading to further food and fuel subsidies for the
poor 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 government
expenditures and the intended outputs and outcomes of the government activities
and resources. One can identify seven breaks in the chain between government
expenditure and its transformation into intended outcomes. These breaks are
described in Box-1.
(1) Spending on the Wrong Goods or the Wrong People
A government spending, which neither improves the supply of public goods nor
benefits 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 goods
cannot be bought and sold in markets. Adequate private production of these goods
is not feasible because the benefits are widely dispersed.

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 the
targeted beneficiaries.
(2)The Composition of Spending May Not Be Appropriate
A government may allocate money for, say, operation and maintenance of roads, but
most of that money may be spent for funding wage and salary payments with
inadequate 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 the
intended service provider. This may happen either because the government may
not, for one reason or another, launch a given project during the year in which it was
supposed 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 expenditure
initiatives in the budget, with cuts becoming inevitable when the revenue doesn’t
arrive) or because the government may divert the money for some other use. What
may also happen is that because of leakages in procurement, the intended service
provider (e.g., a school) may receive the supplies (say, tables and chairs) at inflated
prices, 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 provider
may 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 programmes
that the central government and Aimags run. Unless this technical constraint is
removed, more investment in maternal health may not result in faster progress.

(5) Service Provider’s Incentives to Provide the Service May be Weak
Even when the money reaches the intended service provider, the service provider’s
incentives 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 facilities
to 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, lack
of adequate facilities, and inadequate supervision. This, in turn, may result in large-
scale absenteeism of doctors and nurses in primary health centres and teachers in
primary/ 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. For
example, 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 the
quality of education in government schools and the quality of medical care in
government hospitals, which may be due to, say, inadequate budgetary allocation for
these services. These demand-side responses may result into a low level of
government services which, in turn, may weaken the link between government
spending and desired outcomes.
(7) Even when incentives reach the beneficiaries, there could be significant
leakage
Actual benefits reaching the beneficiaries may be very small compared to intended
incentives due to leakages in the system as a result of very high administrative and
overhead expenditure. In 1985 the then Indian Prime Minister Rajiv Gandhi
commented that only 25 percent of the government expenditures on various poverty
alleviation and rural employment generation programs reach the poor households in
rural areas due to substantial administrative expenditures by the central, provincial
and local governments in charge of implementation and monitoring of these
programs.
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 like

Mongolia will have the following core functions:
(1) Allocative role
This role requires the government to intervene in the allocative functions of the
market 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 and
the Government of Mongolia in October 1999. The present author fully agrees with their
analysis, views and recommendations on the role of the government..
according to established rules and regulations and are fair and just. This role
requires 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 rights
and contracts for business. But, government should also protect basic human rights
and ensure fundamental rights of individuals guaranteed by the constitution. This
requires that government should also specify and administer more general system of
laws and justice.
(3) Supportive role
The government’s allocative and regulatory roles require the creation and
maintenance of administrative and political functions, including systems and laws
for revenue raising and expenditure allocation among various sectors.
(4) Stabilisation role
Another major function of the government is to adopt appropriate stabilisation

measures (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 social
welfare.
(5) Distributive role
The government should also address the issues relating to income and wealth
inequalities and social injustice by specifying and implementing appropriate taxation
and transfer policies.
5.2 Production and Purchase Arrangements
After identifying the functions, next question arises, should government perform all
these functions alone or rely on public-private partnership? Another question is:
how to finance these activities? Thus the output production and purchasing
arrangements by the government are very important to establish the effective and
desirable linkages among resources→activities→outputs→and→outcomes.

Purchaser/ Beneficiary Arrangements
We discuss below various ways for financing government production and

purchases:
(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 service
provided by the government such as training and higher
education)
 Some combination of these two options (in which case, the
government’s payments could be seen as a subsidy such as the
food, fertiliser, kerosene and domestic LPG subsidies provided
by 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 of
economic variables)
• Some combination of these two options.
A consideration of these arrangements for each output helps the government to

decide whether government organisations should be producing these outputs or not
and what should be the funding arrangements (i.e. whether to contract out the
outputs 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 the

outputs produced or purchased by it. For this, appropriate benchmarks for quality
and price need to be specified by the government.
Organizational Arrangements
Equally important is the internal structure, quality of management and capabilities of

an organization producing and supplying the public goods and services. To ensure
desirable quality it is necessary to develop, strengthen and improve the capacity
building of the government organisations and institutional set up.
Ownership Arrangements
The appropriate organisational structure (e.g. state enterprise, agency) must be

considered carefully. If the government opts to own an organization, there must be
sufficient justification for that in terms of externalities or market imperfections and
inequity.
6. Public Sector in Mongolia
In this section, we compare the role of the public sector and its share in GDP as
compared 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 composition
in GDP in these two countries.
Table-4 indicates the industrial composition of GDP in Mongolia as compared with

India in 2002 and 2005. It may be observed that in terms of broad categories of GDP
viz. agriculture, industry and services, both Mongolia and India have almost similar
industrial composition in 2005. However, within agriculture and allied services,
animal husbandry has major shares in Mongolia, while Agriculture comprising food
grains, commercial agricultural crops, horticulture and floriculture has major share in
India. 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 shares
in GDP in India than those in Mongolia, while wholesale and retail trade and
transport 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 Mongolia
and India. Table-6 indicates the shares of private and public sectors in GDP by
industrial 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 both
Mongolia and India. This implies that most of the sectors have been open for private
sector and only a few sectors have been kept for public investment for strategic
reasons. This also implies that there is limited scope for further privatisation. In both
these countries, public sector has nominal share in agriculture and allied sectors
(comprising forestry, animal husbandry and fishery) which are basically driven by
private sector investment and activities.
As regards industry, public sector has a share of only 27 per cent (slightly above
one-fourth) in India and 32 per cent (slightly less than one-third) in Mongolia.
However, there are significant differences for separate sectors within industry. In
Mongolia, private sector has a major share (two-thirds) in mining, while public sector
has a major share (four-fifths) in Mining in India as Indian government has not
privatised natural resource based industries such as plantations and mining due to
political ideological reasons. In both the countries, private sector has predominant
share in manufacturing and construction, while there is public monopoly in public
utilities 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 and
India, although there are differences for the separate sectors. Almost all wholesale
and retail trade, hotels and restaurants, real estate and business activities are
operated by the private sector in both the countries. Private sector has also dominant
share in transport and communications in both the countries. Public sector has a
major 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

sector has dominant share in education and health in Mongolia; private sector has
dominant share in education and health India.
Table-4 Industrial Composition of GDP (in percentage)
Industry India Mongolia
2002 2005 2002 2005
1.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 12.2
3.4 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, 8.3 7.8 7.0 5.2
social, community, personal and others)
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)

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
3.2 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, 66.0 67.8 12.9 17.4
social, community, personal and others)
3.7.1 Education NA NA 9.5 13.0
Total GDP 74.5 78.3 74.5 77.4

Table-6 Share of Public and Private Sector in GDP in India and Mongolia in 2005
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
3.2 Hotels and restaurants 99.1 0.9 100 0
3.3 Transport, storage, communications 65.3 34.7 66 34
3.4 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 very
much different from that in other developing countries at similar levels of living. In
fact, most of the sectors, where private initiatives and investment will be more
productive and efficient have been kept open for private participation. There is no
presence of public sector in wholesale and retail trade, hotels and restaurants, real
estate and commercial business. Public sector has dominant share only in public
utilities (electricity, gas and water supply), education and health. It is well know that
the public utility sectors are characterized by high incremental capital-output ratio,
lumpiness of huge capital, long gestation period, high risk and low return. Because of
these reasons, private sector is not willing to invest in these sectors unless there is
sharing 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 is
engaged in its distribution to the consumers and collecting tariff charges. So the
public-private partnership on the basis of sharing of cost, risk and benefits may be
feasible 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 high
priority for achieving universal education and nutrition. If all people are healthy and
educated they can participate fully in the development process and gain more from
it.

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 Science

Programme Can it be If yes, on what
categorized as Criteria?
core activity?
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 Regulatory
Policy 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 Distributive
To participate in Olympiads Yes Supportive

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 Supportive
General 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 Supportive
Local 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 Distributive
Local 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 Supportive
Renovation of temples Yes Supportive

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 Supportive
Enrichment 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 Supportive
Improve vocational skills of local cultural and art staff Yes Supportive
Provide stage skilled staff, improve vocational skills 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 our
criteria, 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.

Programme Can it be If yes, on what

categorized as Criteria?
core activity?

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 Regulatory
1.2.3. 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 Stabilizing
PROGRAM 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 Distributive
2.2.3. 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 Distributive
2.4.6. 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

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 Stabilizing
4.1.5. 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. While
India has a vast size of population and GDP, Mongolia is a small economy in terms
of population and economic size. However, they have strikingly similar industrial
composition of GDP and also the similar role of the private and public sectors in
overall GDP. Like India, Mongolia has allowed private participation and private
investment in all the sectors. Private sector has predominant share in GDP in
agriculture, mining and quarrying, manufacturing, construction, wholesale and retail
trade, hotels and restaurants, transport, storage and communications, financial
services, real estate and business services, and social and personal services. The
role 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 public
sector because of their allocative, distributive, regulative, market stabililizing roles,
although there is scope for further enhancing the role of public-private partnership
and involvement of stakeholders in policy planning and execution of projects.
Mongolia is already involving NGOs and other society groups in pre-school
education, vocational education, higher education, science and culture, various
poverty alleviation programs, employment generation programs, health and
nutritional programs.
(a) Private Investment in Utilities
There is scope for enhancing private participation and public private

partnership in utilities where the public sector has now monopoly.
However, government will have a role to legislate locational, safety and
environmental regulations for the efficient functioning of utilities. The
system of regulations in Mongolia, as in the most countries, has their
origins to offset market failures. The utilities, petroleum sector, banking
and insurance, transport and telecommunications have special regulatory
requirements. Greater transparency of the rules and procedures, less
bureaucratic intervention and establishing an efficient regulatory
authority to fix fair and just tariff rates for utilities are needed to
encourage private investment for the supply of electricity, gas and water.
Given the limited availability of domestic private and public resources and

the needs of the competitive sectors, foreign investment has also to be

encouraged for the development of these sectors.
Mineral industries, including petroleum and gas, create particular

problems for investment because resource rents have to be divided
between local landowners, the local governments and the central
government. Private firms also seek a share of such rents to compensate
them for the riskiness of mineral exploration and subsequent mine
development. The efficient and equitable apportioning of mineral rents is
thus an important aspect of the economic policy framework.
Indonesia and Malaysia have been among world leaders in dealing with
private investment including foreign investment in petroleum, gas and
other minerals. India and Papua New Guinea developed mineral resource
taxes to tax mineral rents. With such policies in place, project by project
negotiation can be avoided or minimised. Forestry, fisheries and
hydroelectricity also generate rents that require special consideration. All
these industries have environmental aspects that should be taken into
account on a nationwide basis rather than project by project.
Agriculture and real estate present difficulties for foreign investment

because of complexities of landownership, and rules and taxes regarding
tenancy, sale, purchase, transfer, lease or mortgage. Because of these
problems, many countries like India donot allow foreign investment in
agriculture and real estate. In the case of plantation, foreign investment in
nucleus estates and processing facilities can provide a market for farmers
and at the same time enable them to improve their productivity.
Water is an essential service or merit good with many positive health and
environmental spillovers. Mongolia, like most of the governments, is
committed to achieve the Millennium Development Goals (MDG) by 2015,
and to provide universal access to the minimum daily requirement of safe
water, but this may require subsidies. Water distribution pipes are a
monopoly network of the local government and many water and
sanitation systems are buried. These factors complicate the transfer of
water distribution to private sector.
The scope of unbundling the water sector is not clear with limited
potential for competition amongst bulk water service providers because
the main water sources in urban municipalities are location specific and
limited in number. Also the operational costs of providing the raw
resource are relatively low compared with sunk capital costs in pipes,
dams and treatment stations. Efficiency gains in water supply are more
likely to come from increased opportunities for trade amongst water users
and reduced water losses from distribution rather than increased
competition amongst suppliers.

In the case of water supply, organisational restructuring, corporatization

and unbundling of water sectors should precede commercialisation or full
private participation. Resource management functions such as catchment
planning and management should be separated from potentially
commercial functions of service delivery. Government should be
responsible for the former while private operators can compete for the
latter.
Concessions leave government owning the monopoly water pipe and

sewerage network while private operators can lease the long-term rights
to use these pipelines and collect revenues from service delivery. Private
operators have financial incentives to reduce water losses, expand
services and consumer connections and deliver significant cost savings
and improved services to the consumers.
It is necessary to develop clear-cut private property rights and commercial

law, to establish clear accounting, environmental and other standards,
transparent legal and regulatory system, and introduce specific BOT
(Build-Operate-Transfer) legislation to encourage private investment in
utilities. Tariff reform is equally fundamental to improve utility efficiency
and delivery. While private operators should bear construction,
commercial and operation costs and risks, government should bear the
sovereign risks guaranteeing that the operators will not be adversely
affected by policy changes and government utilities will meet contractual
obligations. International best practices include both vertical unbundling
of operations (such as generation, transmission and distribution in the
case of power) and geographical or horizontal unbundling of integrated
monopolies by regions (such as water supply).
(b) Fiscal and Other Incentives for Private Investment
In 1960s the International Chambers of Commerce argued strongly that

developing countries should attract foreign investment with tax ‘holidays’
and other incentives such as subsidised credit and privileged access to
protect domestic markets. The International Monetary Fund (IMF) favoured
the suggestions, but advised that there should be no discrimination and
incentives should be extended to all investors. Many developing countries
began to compete for foreign investment with various fiscal, monetary
and other incentives (such as supply of free land on long lease). But, a
considerable body of evidence showed that these incentives failed to
attract foreign investment. Only those ‘fly-by-night’ firms that move from
country to country, exploiting tax holidays, are attracted by these
incentives, but they exit as soon as fiscal incentives expire or are
withdrawn. An efficient and equitable tax system with internationally
competitive taxes and duties is far more conducive to long run investment
inflows than incentives.

Inflows of foreign direct investment are determined by a complex set of

economic, political and social factors and the investors look beyond the
array 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 the
positive effects of investment incentives. What matters most for the
foreign investors is their ability to reduce business risk, increase
profitability to repatriate capital and investment income.
Foreign investors are also attracted by market opportunities (domestic

and exports), a clear legal and institutional set up, administrative speed
and efficiency, efficient infrastructure services and above all by liberal
economic policies and stable macro economic environment.
Although some trans-national firms desire to have wholly or majority

owned branches or subsidiaries, it is widely held that some form of joint
venture with a host country partner is preferable because of the
experience and insights local partners bring. Local partners are
particularly effective in managing labour and dealing with regulatory
issues.
Foreign investors are also moving into joint ventures with public
enterprises, preferring corporatized ones. Foreign investment with its
capital, technology and management package can make a considerable
contribution to the vast investment required in infrastructure in India.
Existing plants can be made more productive and new facilities can be
provided, often on the Build-Operate-Transfer (BOT), Build-Operate-Own
(BOO)/ Build-Operate-Own-Transfer (BOOT) principles, but governments
and 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 attractive

place for establishing production bases because of its low demand, small
domestic market and shortage of skilled manpower. However, Mongolia is
going through a stage of demographic transition. Younger people make up
a larger proportion of the Mongolian population and can be expected to
play a major role in ensuring a smooth supply of skilled labour in the
future. Besides low labour costs, various other production costs such as
real estate rents, transport, communications and electricity charges are
important factors influencing foreign investment.
(d) Rate of Return
Another important factor that determines the inflow of direct investment

is the rate of return for investment. In general, utility sectors have low
rates of return due to irrational user charges and high degree of loss in
transmission and distribution. Independent regulatory authorities may be

established and allowed to rationalise user charges for these sectors in

order to provide an impetus for both domestic and foreign investment.
(e) Financing Infrastructure Investment
Various constraints such as high fixed or sunk costs, long gestation

periods, price ceilings and other regulations on the operations of an
infrastructure facility in host countries, and political risk (expropriation or
nationalisation) induce foreign investors to minimise equity commitments
to such projects and to rely on debt (commercial loans and bonds) and
non-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 ways
in which infrastructure projects are financed. Given the perceived risk,
investors require high rates of return. This necessarily requires user fees
commensurate with the rate of return, which, in many developing
countries, are too high to be sustainable. There are also environmental
issues associated with infrastructure projects. Consequently, negotiations
of BOT/BOO/BOOT and similar schemes - in developing and developed
countries - are typically very complex and take long drawn for final
agreements and financial closure.
(f) Asian Investment Funds
In recent years, a number of Asian investment funds have been created to

mobilise international capital to finance Asia’s infrastructure. These funds
provide medium and long-term finance (5-10 years) for infrastructure
projects through equity (usually 10% or more) or convertible debt. Funds
are raised from a diverse group such as institutional and private investors,
Trans-national companies (TNCs), regional banks and multilateral
organisations. The Asian Infrastructure Fund (AIF), in which the Asian
Development Bank was an initial investor, was the first infrastructure
investment 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 and
infrastructure projects in many countries. But this has not happened in
many developing countries like India as these funds remained under the
government control and there were various restrictions for the
deployment of these funds. Government is liberalising these funds and

allowing private participation including foreign investment. It is hoped that

these funds would provide resources for utilities in future.
(h) Public-Private Partnership (PPP)
During the transitional period from 100 per cent public investment in
infrastructure to private investment, there is need for promoting public-
private partnerships. The government should also take significant equity
positions in utility projects to crowd in commercial debt and equity in the
initial stage, and once the projects are viable, they should disinvest and
reinvest in new ones. Government has also to develop and strengthen
debt and bond markets, particularly municipal and corporation bonds, for
financing utilities and urban infrastructure.
The efficacy of the private sector participation would be contingent upon

the capability to commercialise these projects where recovery of
investments would be through a system of user charges and the future
investments can be financed from the capital markets and internal
resources on a self-sustaining basis. In fact, the potential for
Commercialisation and competition in utilities and infrastructure is more
widespread than commonly perceived. Activities like power generation
and distribution, telecommunications or solid waste collections are
adaptable to market provision once they are unbundled from related
activities and the associated risks are properly demarcated and allocated
among all stakeholders.
Over the past decade, private participation has grown significantly in

water, sanitation and electricity in different forms and across the regions
(World Bank 2004) due to many reasons such as accessing private
expertise and investment, and introducing incentives and efficiency in
operations. This has been possible by separating the policy makers from
the service providers and by strengthening regulatory system and
encouraging rationalisation of user charges.
(i) Future Agenda
Detailed examination of public-private partnership was beyond the scope of the

project. In addition, there were time constrains as the ADB Capacity Building project
comes to an end in the month of March 2008. Similarly, we have not examined the
scope of public-private partnership in public utilities, financing infrastructure
development and development management (i.e. managing sustainable
environment). These tasks can form the future agenda of the next phase of
governance reforms in Mongolia.

Selected References
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Das, Tarun (1996) Policies and Strategies for Promoting Private Sector’s Role in
Industrial and Technological Development in Asia, pp.1-171, ST/ESCAP/1696, UN,
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_______ (1997) Foreign Investment- Technology Transfer- and Growth Nexus in

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_______ (1998) Private Sector Development Programmes in Selected Asian

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Holden, Paul and Sarath Rajapatirana (1995) Unshackling the Private Sector – A
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Core and Non-Core Functions of The Government

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