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What incentives can be used to encourage private sector involvement in public goods provision?

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Public goods are goods that are non-excludable and non-rivalrous, meaning that no one can be prevented from using them and their use does not reduce their availability to others. Examples of public goods include national defense, clean air, and public parks. However, public goods are often underprovided by the market, because private firms cannot capture the full benefits of their production and face the problem of free riders, who enjoy the public goods without paying for them. This is a type of market failure that requires government intervention to correct. However, government provision of public goods may also face challenges, such as budget constraints, political interference, and inefficiency. Therefore, it may be desirable to involve the private sector in the provision of public goods, as long as there are appropriate incentives to align their interests with the social welfare. In this article, we will discuss some of the possible incentives that can be used to encourage private sector involvement in public goods provision.

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Constantine Shulyak

Author of $100M+ social project | Featured on Forbes | CEO at BLCKMGC
Olufemi Michael OLARINDE

Head, Fiscal & Tax Reforms Implementation, FIRS, Nigeria | Tax Policy & Advisory Expert | United Nations Health Taxes…
Blessing Odetokun

Enterprise Risk Management & Control Officer | UBA | Economist | Chartered Accountant | Researcher | Finance | Blood…

1 Contracts and subsidies

One way to incentivize the private sector to provide public goods is to use contracts and subsidies. Contracts are agreements between the government and the private firm that specify the terms and conditions of the public goods provision, such as the quantity, quality, price, and duration. Contracts can help to reduce uncertainty and risk for the private firm, and to ensure accountability and performance for the government. Subsidies are payments from the government to the private firm that reduce the cost of production or increase the revenue of the public goods provision. Subsidies can help to overcome the problem of free riders and to make the public goods provision more profitable for the private firm. However, contracts and subsidies also have some drawbacks, such as the possibility of corruption, rent-seeking, and moral hazard, as well as the difficulty of designing and enforcing optimal contracts and subsidies.

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Constantine Shulyak

Author of $100M+ social project | Featured on Forbes | CEO at BLCKMGC
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Contracts and subsidies indeed play a vital role in incentivizing private sector participation in public goods provision. While they offer clear benefits like reducing risk and ensuring accountability, there are potential downsides like corruption and market distortions. In my view, striking a balance between providing incentives and mitigating risks through transparent processes and effective oversight is essential. Additionally, focusing on outcomes and aligning incentives with long-term societal benefits can help address some of the challenges associated with contracts and subsidies.

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2 Tax incentives and credits

Another way to incentivize the private sector to provide public goods is to use tax incentives and credits. Tax incentives are reductions or exemptions from taxes that are granted to the private firm that provides public goods. Tax credits are refunds or offsets from taxes that are given to the private firm that provides public goods. Tax incentives and credits can help to lower the tax burden and increase the net income of the private firm that provides public goods, and to stimulate investment and innovation in the public goods sector. However, tax incentives and credits also have some drawbacks, such as the loss of tax revenue for the government, the distortion of market signals and resource allocation, and the potential for abuse and fraud.

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Olufemi Michael OLARINDE

Head, Fiscal & Tax Reforms Implementation, FIRS, Nigeria | Tax Policy & Advisory Expert | United Nations Health Taxes Committee | Financial Management | Research
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Tax credits can be given to private sector operators wishing to develop public goods. There should be a premium on their investment to serve as an incentive to them.

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Parth Bhatia

Ernst & Young (EY) | President at Nivesh | CA Intermediate (G-1 Cleared) | SailThru Ventures | KMV~DU'25
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Encouraging the private sector to contribute to public goods can be achieved through tax incentives and credits. These measures, involving tax reductions or exemptions for firms providing public goods, aim to lower the tax burden, boost income, and stimulate investment and innovation. However, drawbacks include potential loss of government tax revenue, market signal distortions, and the risk of abuse and fraud. But despite these drawbacks this is the only solution to include private sector and make the public goods manufactured by private sector as the tax exemptions would encourage them.

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Jonathan Ikpenu (ACA)

Tax Expert
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The process through which the private sector participates should also be more transparent. There have been reports in times past where government agencies refuse private sector participation. This is because personal benefits that would have otherwise accrued to government officials will 'lost'. The potential for abuse is very real and government officials can frustrate the efforts of interested parties and wait until government commences such projects, where 'cost padding' can freely take place. Instituting a proper, public, transparent system will go a significant way in fostering private sector participation for infrastructure develpment, and eventually, economic stability and growth.

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3 Vouchers and certificates

A third way to incentivize the private sector to provide public goods is to use vouchers and certificates. Vouchers are coupons or tokens that are issued by the government to the consumers of public goods, that can be redeemed for a specific amount or service from the private firm that provides public goods. Certificates are documents or labels that are issued by the government or a third party to the private firm that provides public goods, that certify or verify the quality or standard of the public goods. Vouchers and certificates can help to increase the demand and supply of public goods, and to enhance the choice and competition in the public goods market. However, vouchers and certificates also have some drawbacks, such as the administrative and transaction costs, the information and monitoring problems, and the equity and distributional issues.

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4 Social impact bonds and crowdfunding

A fourth way to incentivize the private sector to provide public goods is to use social impact bonds and crowdfunding. Social impact bonds are contracts between the government and the private firm that link the payment of the public goods provision to the achievement of specific social outcomes, such as reducing recidivism, improving health, or increasing education. Crowdfunding is a method of raising funds from a large number of individuals or organizations through an online platform, for a specific public goods project, such as building a school, restoring a forest, or supporting a charity. Social impact bonds and crowdfunding can help to mobilize private capital and expertise for public goods provision, and to align the incentives of the government, the private firm, and the society. However, social impact bonds and crowdfunding also have some drawbacks, such as the complexity and uncertainty of measuring and verifying social outcomes, the dependency and vulnerability of the public goods provision to external factors, and the ethical and legal implications of involving non-state actors in public goods provision.

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CPA Namuli Brilliant

Finance Manager | Audit & Compliance Specialist | Tax Specialist | ESG enthusiast | Expert in Financial Reporting, Tax Strategy, and Donor-Funded Projects
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Social Impact Bonds (SIBs) and crowdfunding act as motivators for private sector engagement in providing public goods by presenting alternative funding models, redistributing risk, encouraging creativity, and encouraging community participation.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Blessing Odetokun

Enterprise Risk Management & Control Officer | UBA | Economist | Chartered Accountant | Researcher | Finance | Blood Donor | Volunteer | MSc Economics
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To encourage private sector involvement in public goods provision, governments can use various incentives, including financial support, public-private partnerships, regulatory simplification, performance-based contracts, market-based mechanisms, innovation rewards, reputation building, and providing access to resources. These incentives aim to engage private companies in delivering essential public goods while ensuring efficiency, accountability, and positive social impact.

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Dhwani Naik

??Global HR Officer @iProbono | Economics Grad @Concordia | Follow me to 2x your impact at the workplace with actionable career advice & HR insights.
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Certain other incentives that I think could be useful : 1. Performance-Based Contracts: Implement contracts that tie payment to performance, incentivizing private companies to deliver efficient and effective services. 2. Innovation Incentives: Offer rewards or contracts to companies that develop innovative solutions to public sector challenges. 3. Access to Markets: Provide access to new markets or exclusive rights to operate in certain sectors. 4. Capacity Building: Offer training and technical assistance to help private companies build the capacity to participate in public sector projects effectively. 5. Risk Sharing: Share risks associated with public projects with private sector partners to make investment more attractive.

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What incentives can be used to encourage private sector involvement in public goods provision?

1

2

3

4

5

1 Contracts and subsidies

2 Tax incentives and credits

3 Vouchers and certificates

4 Social impact bonds and crowdfunding

5 Here’s what else to consider

Economics

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What incentives can be used to encourage private sector involvement in public goods provision?

1

2

3

4

5

1 Contracts and subsidies

2 Tax incentives and credits

3 Vouchers and certificates

4 Social impact bonds and crowdfunding

5 Here’s what else to consider

Economics

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