Cash or tax-equivalent financial tools

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Both cash and tax or royalty-based transfers provide financial incentives and disincentives to policy actors to undertake or refrain from undertaking specific activities encouraged or discouraged by governments. However, such encouragement and discouragement does not always require a direct or indirect cash much less direct use of their spending powers to offset costs or provide additional benefits to policy targets. Several of the more prominent of these tools are discussed below.

Preferential procurement

Procurement involves the use of government purchases to subsidize companies or investors which agree to abide by specific provisions of government contracts. These can extend to preferential treatment for firms which, for example, employ the disabled or women, or ethnic or linguistic minorities, but also often extend to special favourable treatment for small business; national defence contractors; and regional development schemes in which investors receive government contracts if they agree to locate factories or distribution or other services in specially designated regions (Bajari and Tadelis 2001; Rolfstam 2009).

Procurement schemes play a major part in efforts by governments to promote ‘third sector’ or volunteer and community group-based delivery of public services and are often a part of corporatist governance arrangements. In many cases it may be illegal or unconstitutional for a government to directly deliver funding to such groups, especially since many have a religious or ‘faith base’ which can violate constitutional limits separating church and state activities (Dollery and Wallis 2003; Black et al. 2004; Kissane 2007; Hula et al. 2007; Zehavi 2008). However, these groups may still be able to receive favourable treatment such as in bidding for government contracts, making procurement an important part of their funding base and of efforts to enhance their policy delivery capacity (Carmel and Harlock 2008; Chapman et al. 2008; Diamond 2008; Hasan and Onyx 2008; Walsh et al. 2008).

Like direct cash subsidies, many trade agreements attempt to ban procurement plans which favour national over international suppliers but these provisions do not extend to favourable treatment for marginalized groups or individuals. Such procurement schemes, of course, by extending favourable treatment to some contractors also act as a disincentive to non-favoured groups and firms which are discouraged from bidding for contracts and other services to the extent of the subsidy provided (McCrudden 2004). The main advantage of such forms of subsidy over other forms of payments is their low visibility profile, which encourages their use.

Favourable insurance and loan guarantees

Insurance or loan guarantees also act as a subsidy to the extent that government backing helps to secure loans thereby raising the reliability of borrowers, altering the types of borrowers who might otherwise not qualify for loans, or reducing interest payments and charges that individuals and companies would otherwise have to pay (Maslove 1983). The difference in cost constitutes a subsidy. Such guarantees are very common in areas such as student loans, for example, in which governments agree to serve as the guarantor of loans to banks which otherwise would reject most students as too risky. They are also common in areas such as export development, whereby a government may provide insurance to a domestic firm to help it offset the risk of undertaking some action in a foreign country, or provide a foreign company or government with assurance that a contract will be fulfilled by the supplying firm. Some loans can also be made directly to individuals and firms on a ‘conditionally repayable’ basis; that is, whereby a loan turns into a grant if the conditions are successfully met, for example, in making housing payments. These tools are almost invisible, can be precisely targeted and are often considered to be less intrusive than grants and direct cash or tax transfers, making them a popular choice for policy designs in sectors in which governments are pursuing market modes of governance.

Vouchers for public services

Vouchers are ‘money replacements’ provided by governments to certain groups in order to allow them to purchase specified goods and services in specific amounts. These are typically used when a government does not trust someone to use a cash transfer for its intended purpose, for example with vouchers for food (food stamps), child care or welfare hotel/housing payments. Some governments like Denmark and Sweden, however, also use these to provide some freedom of choice for consumers to select particular kinds of public services (usually education) in order to promote competition within monopoly provision systems or to allow equitable funding arrangements between providers based on specific attributes – such as schools provided by different religious denominations (Le Grand 2007; Andersen 2008; Klitgaard 2008). These can lead to grey markets (when food stamps, for example are sold at a discount to ‘undeserving’ recipients) and may not improve service delivery if there is little choice provided in the supply of goods and services for which vouchers are issued (Valkama and Bailey 2001). As a result, although often mooted, vouchers appear only rarely in policy designs.

Sales of state assets at below market prices

Governments can also sell off or ‘rent out’ certain items – from the TV and radio spectrum to old or surplus equipment, buildings and land. If prices are set below market rates then this is a subsidy to investors and businesses (Sunnevag 2000). Many privatizations of formerly state-owned firms in collapsed socialist countries in the 1990s, for example, involved this kind of sale, including for lucrative mineral and oil and gas rights, which made billions of dollars for the many former officials who were favoured in these deals (Newbery 2003). Given the costs involved, and their generally high profile, however, this tool also does not feature very often in policy designs in countries which are stable and solvent.


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