VqO9X ANIMAL HEALTH SERVICES: FINDING THE BALANCE BETWEEN PUBLIC AND PRIVATE DELIVERY Dina L. Umali Gershon Feder Cornelis de Haan X Growing fiscal deficits and greater awareness of the huge economic cost of often- inefficient government activities have renewed interest in transferring the deliv- ery of important services from the public to the private sector in developing countries. This article, drawn from a longer study, offers a framework for deter- mining the appropriate roles of the public and private sectors in delivering ani- mal health services, such as veterinary surveillance, disease vector control, vaccination, clinical treatment of sick animals, inspection of livestock products, and veterinary research and extension. The profitability and therefore the supply of private veterinary services is gov- erned by several factors arising from economies of scale, such as the size of the livestock enterprises in the locality, the nature of potential or actual diseases, and the types of animals raised in the production systems. Thus, in areas where pri- vate veterinary work is unprofitable or where other types of market failure oc- cur, economic or social concerns may make some type of public intervention nec- essary. The transfer of animal health services from the public to the private sector must be done selectively, and government support may be needed to en- sure the success of such transfers. T he livestock sector plays a crucial role in the economies of many developing nations by producing protein-rich food supplies, generating vital income and employment, and earning much-valued foreign ex- change. For many farmers in the developing world, their animals are also a form of stored wealth, a cushion against starvation when food is scarce, a The World Bank Research Observer, vol. 9, no. 1 (January 1994), pp. 71-96 i) 1994 The International Bank for Reconstruction and Development/THE WORLD BANK 71 source of fertilizer or fuel, a means of transportation, and a source of traction ' ncrop production. Whether the livestock sector attains its full productive potential is heavily influenced by the availability and quality of animal health services. Such ser- vices reduce mortality rates and minimize the effect of disease on animal growth, fertility, quality of livestock products, and work output of cattle and horses. Poor health in animal herds and flocks, however, now constrains live- stock development in many countries. Losses in Sub-Saharan Africa from dis- ease-induced deaths and lower meat and milk production in livestock amount to an estimated $2 billion a year (FAO 1985, cited in de Haan and Nissen 1985).1 In Latin America production losses from foot-and-mouth disease, hog cholera, tuberculosis, brucellosis, and rabies have been estimated at $900 mil- lion a year (FAO 1990). In Argentina alone, according to the National Animal Health Service, approximately $455 million would have been saved in 1984 if the main diseases in cattle, sheep, and horses had been eradicated (FAO 1989). At the same time, growing fiscal deficits in many developing countries and, more recently, the shift from planned to market economies in Eastern Europe and the former Soviet Union have energized the perennial debate over liberal- izing markets and privatizing public services. Questions about the possible transfer of economic functions from the public to the private sector have ex- tended to the delivery of agricultural support services in general and animal health services in particular. Key issues in deciding whether to privatize agri- cultural services include the efficiency of private sector delivery and the welfare implications that arise if different segments of the population, particularly small farmers and the rural poor, do not have equitable access to these services. This article examines the roles of the public and private sectors in delivering animal health services and applies economic principles to determine the most efficient channel for their delivery. The extent of public and private sector par- ticipation in delivering animal health services worldwide is reviewed. The fac- tors influencing the demand for, and supply of, private veterinary services are then examined, illustrated by an analysis of break-even levels of operation of a private veterinary practice in Uganda. The study concludes that each service must be classified according to its eco- nomic character to determine whether private delivery is feasible and will re- sult in a socially optimal level of supply. Animal health services cannot and should not all be privatized. Instead, a policy of selective privatization should be pursued. Functional Classification of Services Animal health services in broad terms include preventing disease (in both animals and humans) and curing diseases in livestock. Preventive services in- clude immunization of animals with vaccines; eradication or control of carriers 72 The World Bank Research Observer, vol. 9, no. 1 (January 1994) or vectors, such as ticks and tse-tse flies; other disease control measures, such as veterinary surveillance, quarantine, slaughter of infected animals, and con- trol of the importing and exporting of live animals; and inspection and control of animal products to prevent the transmission of disease to humans (Leonard 1990). Table 1 lists major livestock diseases and measures for their prevention, treatment, and control. For some of these diseases, prevention is the only sat- isfactory approach because the disease, once contracted, is fatal. Vaccines that provide short-term or permanent immunity exist for most of the diseases, how- ever, and their use is standard in most livestock health programs. Although veterinarians are the primary providers of health services, many developing countries also rely on paraprofessionals (field technicians, auxilia- ries, and farmers) to assist or complement veterinarians. Veterinarians are in short supply in some developing countries, and even when there seems to be enough of them, they are often unwilling to work in rural areas. Paraprofes- sionals provide care in areas where veterinary care would otherwise be unavail- able. They perform such relatively simple duties as teaching farmers about proper animal care and sanitation as well the more complicated work of im- munizing animals, assisting veterinarians to perform surgical procedures, and diagnosing and treating minor diseases (de Haan and Nissen 1985; Leonard 1990; de Haan and Bekure 1991). Commercial livestock growers, along with farmers, pastoralists, and people who raise livestock in their backyards are the direct users of animal health ser- vices. Livestock farmers sometimes organize themselves into producer associa- tions, cooperatives, or some other form of collective organization to provide these services. Consumers have a direct interest because humans can contract some livestock diseases (known as zoonotic diseases). These include anthrax, tuberculosis, brucellosis, rabies, and certain parasitic diseases transmitted through animal products. Economic Principles for Determining Optimum Delivery To assess the most efficient methods of delivering animal health services, each service should be classified according to its economic character, using the principles of subtractability and excludability to determine whether a service is closer to being a public or private good. Subtractability applies when one person's use or consumption of a good or service reduces (or subtracts from) its value to others. The veterinarian who treats an animal's broken leg, for ex- ample, has less time available to treat other animals. Excludability applies when only those who have paid for a product or service benefit from it; the farmer who owns the injured animal is the sole beneficiary of the treatment. A private good is characterized by high subtractability and excludability; a public good has low excludability and subtractability. Private firms are unwilling to Dina L. Umali, Gershon Feder, and Cornelis de Haan 73 1 Table 1. Some Major Diseases of Livestock and Their Treatments Disease Host Transmission Virulence Treatment Prevention Control Viral African Swine Fever Pigs Contact, ticks, Fatal No vaccine Slaughter, garbage feeds quarantine Foot-and-Mouth Cattle, sheep, Saliva, urine, feces, Fatal to young, Drugs Vaccination 1-3 Slaughter, Disease goats, pigs milk products, debilitating to times a year quarantine meat and bones adults import bana Hog Cholera Pigs Hog urine, meat, Fatal to young, Drugs Vaccination for Compulsory mice, manure, horse- chronic for adults short-term immunity slaughter flies, earthworms Newcastle Disease Chickens Contact, wild Fatal (up to 100%) Vaccination for Burning or birds permanent immunity burying in quicklime Peste des Petits Goats, sheep Contact with Fatal Drugs Vaccination for Vaccination plus Ruminants infected animals permanent immunity antibiotic treatment Rinderpest Cattle, buffalo Meat, skins, offals, Fatal (20-100%) or Vaccination for Slaughter, sheep, goats, manure, food, chronic permanent immunity quarantine pigs contact with infected animals Bacterial Anthrax Cattle, sheep, Soil, food, Fatal: sudden death Drugs Vaccination for Slaughter pigs, humans inhalation of spores, for cattle, sheep; 2-4 short-term immunity meat and bone meal days for pigs Black Leg Cattle, sheep Soil, food Fatal (1 day) Drugs Vaccination for Slaughter permanent immunity Brucellosis Cattle, goats, Fetal and Induces abortion None Vaccination for Control of sale sheep, humans placental tissues, permanent immunity, of aborted cows, uterine discharges, milk pasteurization slaughter unpasteurized milk, genital system of bull Contagious Bovine Cattle Recovered animals, Debilitating, 50% Drugs Vaccination for Slaughter, Pleuro-Pneumonia respiratory droplets, fatality in early permanent immunity quarantine (CBPP) urine, milk stages, chronic Hemorrhagic Cattle, Soil, stagnant Fatal (85-95% in Drugs Vaccination for None Septicemia buffalo water <3 days) short-term immunity Mastitis Cattle Contact Reduced milk Drugs Good hygiene and None production milking practices Rickettsial Heartwater Cattle, sheep, Ticks Fatal (50-90% in Drugs No vaccine, natural Dipping goats <7days) exposure + antibiotic treatment gives 6-18- month immunity Protozoal Anaplasmosis Cattle Ticks, flies Fatal or long Natural exposure of Dipping recovery period young, vaccination Babesiosis Cattle, sheep, Ticks Fatal to susceptible Drugs Natural exposure of Dipping (Tick Fever) goats, horses, breeds (50-90%) or young, vaccination pigs debilitating up to 3 weeks (Table continues on the following page.) nJ O Table 1. (continued) Disease Host Transmission Virulence Treatment Prevention Control Theilerosis Cattle, Ticks Fatal to unexposed Drugs Recovered animals Dipping, (East Coast Fever) buffalo cattle, weakness have permanent quarantine, immunity slaughter African Cattle, sheep, Tse-tse fly Fatal or chronic Drugs Prior treatment Vector control Trypanosomiasis goats, pigs, weakness with prophylactic (African Sleeping horses, camels, trypanosomidal drugs Sickness) humans Parasitic Diseases Liver Fluke Cattle, humans Snails, grass Poor performance Drugs Rotational grazing Vector control Schistosomiasis Cattle, pigs, Snails, canals and Poor performance in Drugs Vaccination for Vector control humans slow-moving waters, adults, fatal to cattle grass young Tapeworms Cattle, pigs, Manure, infected Poor performance, Drugs Hygiene Meat inspection, humans meat sometimes fatal freezing, tho- rough cooking Intestinal All species Feeds Poor performance Drugs Rotational grazing parasites a. Countries completely free of foot-and-mouth disease will import meat only from other countries free of the disease because the virus can be transmitted in fresh and frozen meats. Source: McCauley 1982; Miller and West 1978; Merck Veterinary Manual 1991. supply services with public good characteristics because it is usually impossible to restrict the benefit only to people who pay for it-the free-rider problem. An individual livestock farmer will not be willing to pay for aerial spraying to control the tse-tse fly because it would require spraying not only his farm but all other adjacent farms, wildlife reserves, and other habitats favorable to the fly's survival. So this service will have to be provided by the government, which can use its powers of taxation to compel all beneficiaries to pay for it (Head 1974; Feldman 1980). Purely private and purely public goods occupy opposite ends of the econom- ic spectrum. Some animal health services lie between these limits. Some pro- duce externalities, or spillover effects. These occur when an individual, in rendering (or consuming) some service for which payment is received (or made), coincidentally also renders services to other people from whom pay- ment cannot be exacted or renders disservices to others whose claims for com- pensation cannot be enforced (Pigou 1946). Immunizing an animal against a contagious disease-foot-and-mouth disease, for example-also reduces the risk of infection of other animals. Typically, the individual responsible for the externality will not consider its positive or negative effects when deciding what levels of service to produce or consume. This may mean that either too little (for positive externalities) or too much (for negative externalities) is produced or consumed. These externalities may therefore justify government interven- tion of some kind, such as subsidizing an activity that results in a positive ex- ternality to raise private consumption to socially desirable levels. Some kinds of veterinary services also raise moral hazard problems, which arise when consumers are unable to assess the quality of the product they are purchasing-for example, whether or not a vaccine will be effective. Because the producer of the vaccine knows the true quality and the consumer does not, the producer may decide to supply a substandard good to the consumer.2 To overcome a moral hazard problem, the government may establish quality stan- dards or even perform the quality control itself. These concepts provide a basis for classifying animal health services. Veter- inary epidemiological services, which involve monitoring the presence of dis- ease, are a purely public good. The information benefits the whole sector and cannot be appropriated by any individual livestock farmer (table 2). Because of free riders (in this case individuals who would obtain information on the occurrence of diseases without paying for it), private firms will have no incen- tive to provide this service because it will not be in the interest of any individ- ual to pay for it. If the service is to be provided, the government will have to provide it or pay a private provider to do so. Animal health extension services may be private or public goods, depending on the medium used and the ease with which information flows to other farm- ers. Extension services conducted through public channels are a public good; an example might be a radio broadcast on the improved hygiene and sanitation of livestock. Extension services tailored to the needs of an individual or a select Dina L. Umali, Gershon Feder, and Cornelis de Haan 77 Table 2. Economic Classification of the Types of Livestock Services Type of economic good Measures to correct for Sectoral delivery Service Public Private Externality Moral hazard Public Private Clinical intervention Diagnosis X YY Treatment X yy Preventive Vaccination X Y YY Vaccine production X YY Vector control Tick control X Y YY Tse-tse control X X Y YY Veterinary surveillance Vet Epidemiology X Yy Diagnostic support X Y YY Quarantine X YY Drug quality control X YY Food hygiene/inspection X YY Veterinary research X X YY YY Veterinary extension X X YY YY Provision of veterinary supplies Production X YY Distribution X YY Note: *, private good with consumption externalities; **, private good with consumption externalities only for infectious diseases; X, good classified as public or private; YY, economically justified; Y, economically justified under special circumstances. group are a private good. Similarly, the products of veterinary research may be public or private goods, depending on whether property rights have been defined. A research product protected by patents is a private good.3 From the perspective of their producers, vaccines and veterinary pharmaceu- ticals are purely private goods. Entrepreneurs producing these products can capture all the benefits available from producing and selling them. Thus, pri- vate entrepreneurs will have an incentive to provide these products at socially desirable levels. Government policies influence private participation in these in- dustries to the extent that they affect the economic incentives. Restrictions on importing veterinary pharmaceuticals and price controls on these products are barriers to entry. In some countries, increasing competition in pharmaceuticals has induced these firms to provide other animal health services, such as free extension services, to attract more customers. The use of vaccines and veterinary pharmaceuticals, however, involves ex- ternalities. That is, vaccination programs, tick control, and diagnostic support are private goods whose consumption produces externalities. Vaccination and 78 The World Bank Research Observer, vol. 9, no. 1 (January 1994) dipping for tick control protect animals from disease: the farmer who owns the animal(s) is the sole beneficiary of the procedure, and no one else is able to benefit from the service during that time. The externality arises because the procedure reduces the risk of exposure of other animals (and humans in the case of zoonoses) to the disease. Similarly, laboratory analyses enable farmers to discover which disease is affecting their livestock as well as to inform nearby farmers of its existence. The effectiveness of these programs in preventing an outbreak of disease will depend on the compliance of the region's livestock producers with the program.4 Thus, effective enforcement is critical. The im- proper use of veterinary pharmaceuticals can result in negative externalities, such as drug resistance, and although dipping helps to control the spread of tick-borne diseases, disposal of the insecticide mixture used in the dips may pose serious environmental problems. These negative externalities may then re- quire public intervention. Control of tse-tse flies in open ranges is ordinarily a public good because the benefit extends to the whole community. Where individual farmers can control the fly to some degree by installing screens and traps (as in several African countries), however, control would be classified as a private good with exter- nalities. Although the externalities associated with diagnostic support, vaccination, use of veterinary drugs, and vector control justify government intervention, these services can also be provided by the private sector if mechanisms can be devised to ensure that those who produce services are paid by those who ben- efit from them. The extent of government involvement then becomes a function of the degree to which the private sector is able to internalize these externali- ties. The nature of public sector intervention depends upon the type of exter- nality and may range from monitoring and regulation to ensure compliance to imposing penalties for noncompliance, subsidizing services to raise consump- tion to socially optimal levels, or, in extreme cases, providing the service. Clinical treatment of an animal is generally considered to be a private good, but there are externalities associated with the treatment of an infectious dis- ease. Although the treatment itself is a private good, it has externalities because it may reduce the risk of transmitting the disease to other animals and thus reduce the economic losses of other farmers. Clinical intervention, however, does not always result in complete cures. In some cases (brucellosis and rinder- pest), the animal continues to be a carrier of the disease even though it no long- er shows any clinical symptoms. Consequently, preventive measures such as vaccination or the slaughter of diseased animals may be the best strategy. Re- imbursing farmers for their slaughtered animals may require public subsidy, although animal insurance plans funded by fees collected from farmers can also provide compensation. Theoretically, if the service involves externalities, public intervention is eco- nomically justified to reduce (for negative externalities) or raise (for positive externalities) utilization to socially optimal levels. In practice, however, some Dina L. Umali, Gershon Feder, and Cornelis de Haan 79 activities, such as clinical interventions (which the private sector can efficiently provide) and vaccination and diagnostic support (which may require public in- tervention) may not always be completely separable. For example, a veterinar- ian who provides all three services may have to travel to a clinical post to provide them. If the transport costs to provide the latter two services require public subsidy, identifying the transport costs associated only with clinical in- tervention becomes administratively difficult. In such cases, a subsidy to pro- mote diagnostic support and vaccination may unavoidably subsidize clinical intervention as well. This should not be perceived, however, as justifying sub- sidies specifically for clinical intervention. Clinical intervention should be a private sector activity, and only private goods with externalities (such as vac- cination and diagnostic support) should be considered for subsidization. Animal quarantine is a public sector intervention that serves as another de- fense against diseases. Because farmers are not likely to consider the potential effect that diseases of their livestock will have on the livestock of other farmers and because they tend to underinvest in preventive measures such as vaccina- tion or vector control, quarantine offers additional protection against the spread of disease.5 Quality control and food hygiene and inspection are similar public sector responses to the moral hazard problems associated with process- ing and distributing veterinary pharmaceuticals and livestock products. Because many developing countries face serious fiscal constraints, subsidiz- ing these services has often resulted in tradeoffs between quantity and quality. Anteneh (1985) found that government recruitment of newly trained veterinary graduates in several West African countries in the 1970s and 1980s placed in- creasing and unsustainable pressure on the budget. In some cases, salaries ac- counted for more than 80 percent of the operating budget for animal health services; the availability and quality of services then declined. Cost recovery has been recommended to ensure the sustainability of public sector programs (de Haan and Nissen 1985; de Haan and Bekure 1991), and how farmers re- spond to cost recovery programs should be analyzed carefully. Some recent studies indicate that farmers are willing to pay for reliable ser- vice. The Uasin Gishu Project in Kenya, financed by the International Fund for Agricultural Development and the Danish government, found that farmers were willing to pay for dipping if it was guaranteed to be effective (de Haan and Bekure 1991). A county in Jiangsu Province in China recovered 85 percent of total expenses by charging for essential services, and the province paid the remaining 15 percent plus staff performance bonuses. The county achieved high levels of vaccination coverage: 100 percent for pigs, 90 percent for buffalo, and 75 percent for poultry. In contrast, the income from charges levied against the 3.6 million rural households in the Chinese province of Jilin was estimated to be less than 18 million yuan, about 50 percent of the provincial budget of the Animal Health Bureau. Poor performance was due in part to fiscal con- straints (World Bank 1987). 80 The World Bank Research Observer, vol. 9, no. 1 (January 1994) The Supply of Services Both quantitative and qualitative data on the supply of animal health ser- vices are scant, and approximate measures must be used. A simple approach to measuring availability is to estimate the number of veterinary livestock units (VLUs) per veterinarian and per veterinary auxiliary.6 Sandford (1983) suggests 20,000 VLUs per veterinarian as the appropriate ratio for curative and preven- tive work in the extensive and low-input livestock production systems in Africa and the Middle East and 2,500 VLUs per veterinarian in the high-density and capital-intensive production systems found in European countries. For regions characterized by a combination of extensive and intensive production systems (North America, South America, Asia, and Oceania), the average (12,500 VLUs per veterinarian) of the recommended ratios for extensive and intensive sys- tems is taken as the standard. These ratios are very approximate because an accurate determination would require much more detailed information than is available on the benefits and costs of veterinary services. The results of our analysis are presented in table 3. Countries in the Middle East had ratios ranging from 653 to 16,170 VLUs per veterinarian in 1989, all sub- stantially below the recommended ratio of 20,000 VLUs per veterinarian; these ratios indicate a surplus of veterinary personnel. By contrast, twenty-seven of the forty-eight African countries (56 percent) exhibited a shortage of veterinarians. Because the supply of trained veterinarians in Africa is limited, great reliance is placed on auxiliary personnel. Their greater number, compared with other re- gions, is manifested in the number of VLUs per auxiliary, with most of the Afri- can countries having relatively low ratios of 2,000 to 15,000 VLUs per auxiliary. Most European countries displayed ratios well within the standard of 2,500 VLUs per veterinarian, but seven countries (Denmark, the former East Germa- ny, France, Ireland, the Netherlands, Poland, and Romania) displayed ratios above the standard, indicating an excess demand for veterinarians. In contrast, North America and Oceania had more than an adequate supply of veterinari- ans. Central America, South America, and Asia displayed a broad range of ra- tios, but most countries were below the average ratio of 12,500 VLUs. Auxiliary personnel possess anywhere from a couple of weeks to a few years of formal veterinary training. Although field experience can greatly enhance their capabilities, auxiliaries are seldom adequate substitutes for trained veter- inarians. Thus, the proportion of veterinarians relative to auxiliary personnel can indicate the quality of veterinary services that are potentially available.7 Based on such a standard, the quality of animal health services would appear to be far lower in Africa than in any other region. Delivery of Services The provision of animal health services has historically been in the domain of the public sector, but that has changed in individual countries over time. In Dina L. Umali, Gershon Feder, and Cornelis de Haan 81 Table 3. Livestock and Livestock Services: Selected Data Ratio of Ratio of auxiliaries government to government Livestock (1988) VLUs (1989) to private plus private as a percentage of per veterinarians veterinarians Region/country Agriculture GDP Veterinarian Auxiliary 1984 1989 1984 1989 Africa Algeria 41.50 1.70 7,813 6,105 309.00 8.00 4.25 77.78 Angola 31.80 2.90 53,139 12,382 - 11.67 - 8.13 Benin 20.76 6.52 22,774 6,927 30.50 32.00 5.48 3.98 Botswana 88.43 5.32 97,483 1,800 9.33 18.00 17.42 85.53 Burkina Faso 27.27 6.37 59,981 11,432 - 16.67 - 8.02 Burundi 5.68 0.36 10,362 1,438 21.00 21.50 0.09 9.29 Cameroon 15.79 1.77 55,530 22,914 - 29.33 - 2.96 Cape Verde - - 7,788 1,684 - - 1.83 6.17 Central African Republic 31.68 10.28 126,639 7,363 6.00 - 45.57 86.00 Chad 38.99 20.52 90,141 10,527 - - - 11.18 Congo 9.68 0.68 2,038 469 - 1.00 - 26.08 C6te d'lvoire 5.14 1.32 16,727 1,776 10.00 13.33 16.06 12.05 Djibouti - - 56,400 13,271 - - 5.67 4.25 Egypt 26.52 6.20 431 642 31.67 8.62 0.20 0.89 Equatorial Guinea - - 1,589 2,043 - - - 1.00 Ethiopia 40.06 22.85 117,754 24,363 - - 33.90 5.50 Gabon 10.47 0.28 12,680 3,623 - 0.00 - 5.83 Gambia, The 15.15 7.08 31,177 2,316 - - 17.92 25.00 Ghana 9.16 2.31 16,185 2,154 84.00 35.67 10.74 8.88 Kenya 37.51 9.81 26,223 7,086 7.08 20.16 - 4.38 Lesotho 69.47 15.47 46,841 13,212 7.00 16.00 6.13 4.59 Liberia 9.13 - 18,900 4,423 6.00 5.00 5.57 7.83 Libya 49.68 1.45 5,256 2,766 - 42.17 3.70 2.21 Madagascar 26.74 18.87 110,243 11,622 - 16.20 - 11.58 Malawi 11.79 7.07 43,271 2,230 - 17.00 11.64 37.72 Mali 44.07 17.90 13,576 11,247 52.00 29.00 19.74 10.78 Mauritania 84.04 16.18 229,607 15,454 - - 11.41 14.86 Mauritius 13.19 1.16 2,180 2,378 - 5.00 - 1.38 Morocco 35.13 - 17,082 4,534 3.71 2.92 3.09 5.47 Mozambique 20.10 12.72 21,505 5,544 - - 6.19 6.19 Namibia 81.67 12.93 84,911 15,587 4.71 2.63 11.73 7.14 Niger 47.08 13.47 111,688 6,556 - - - 25.11 Nigeria 17.88 5.88 11,323 3,942 - 3.30 - 4.07 Reunion 24.36 - 5,743 4,307 - 0.14 - 1.75 Rwanda 10.85 3.01 24,435 1,825 20.00 15.00 33.76 17.16 Senegal 21.05 3.45 59,126 7,558 30.50 9.75 - 12.37 Sierra Leone 11.67 3.06 24,452 7,034 11.00 8.50 4.00 3.84 Somalia 72.50 49.13 43,577 9,566 - - - 6.31 South Africa 49.20 3.78 11,739 22,336 0.21 0.19 1.03 0.65 Sudan 58.30 21.23 34,390 36,852 - - 1.66 1.08 82 The World Bank Research Observer, vol. 9, no. 1 (January 1994) Table 3. (continued) Ratio of Ratio of auxiliaries government to government Livestock (1988) VLUs (1989) to private plus private as a percentage of per veterinarians veterinarians Region/country Agriculture GDP Veterinarian Auxiliary 1984 1989 1984 1989 Swaziland 24.35 7.68 43,810 3,319 12.00 6.50 33.54 17.60 Tanzania 22.63 20.47 60,962 6,923 - 15.00 - 16.73 Togo 11.35 2.71 11,238 6,591 - 5.60 - 3.15 Tunisia 29.53 4.10 4,499 5,138 25.29 6.82 1.63 1.48 Uganda 14.23 8.25 13,531 2,708 26.62 23.47 15.12 5.71 Zaire 5.22 1.47 2,737 1,537 1.25 2.54 3.78 3.10 Zambia 32.07 4.67 28,854 5,723 6.00 30.00 10.69 15.61 Zimbabwe 22.87 4.41 21,892 4,162 0.95 1.31 21.29 6.86 North America Canada 37.85 1.34 3,306 4,149 0.27 0.16 0.24 0.84 United States 46.70 1.33 2,912 5,660 0.13 0.06 0.26 0.66 Central America Belize - - 8,075 8,972 - 5.00 1.50 1.50 Costa Rica 38.26 7.52 4,489 19,086 0.39 0.37 0.29 0.26 El Salvador 25.40 3.49 6,871 18,821 0.83 0.54 0.54 0.38 Guatemala 26.31 4.11 7,300 14,567 0.36 0.35 0.59 0.58 Honduras 27.07 4.26 23,310 20,175 0.77 1.67 1.40 1.39 Mexico 47.04 4.45 5,694 4,807 8.40 0.38 1.30 1.68 Nicaragua 33.79 - 22,245 26,694 3.06 0.80 0.93 1.00 Panama 44.53 4.83 4,448 7,623 1.23 0.89 0.90 0.63 South America Argentina 47.56 9.23 10,748 53,550 - 0.15 - 0.20 Bolivia 46.59 11.44 8,362 273,329 1.42 0.07 0.25 0.03 Brazil 30.14 3.93 7,295 20,307 - 1.79 - 0.58 Chile 41.30 4.80 2,615 71,209 0.87 0.23 - 0.04 Colombia 42.96 7.69 4,708 70,056 - 0.63 - 0.09 Ecuador 88.00 16.32 93,967 44,621 - - 2.18 2.39 Paraguay 28.16 13.97 9,556 5,807 0.79 0.93 0.30 1.90 Peru 39.66 5.29 3,588 22,503 0.97 0.47 0.29 0.20 Surinam 24.49 0.19 16,711 7,520 4.00 8.00 4.40 2.22 Uruguay 78.83 17.16 7,933 16,691 - 0.19 3.21 0.48 Venezuela 59.59 2.99 4,098 19,077 0.40 0.14 0.14 0.24 Asia Afghanistan 41.62 - 24,828 13,659 - 9.43 - 2.53 Bangladesh 15.13 5.63 31,136 - 89.40 29.92 3.35 - Bhutan 25.58 7.77 31,784 1,847 - - 35.50 65.40 Hong Kong 73.86 0.12 5,923 870 0.89 0.41 13.35 9.00 India 19.34 5.32 10,861 5,280 22.00 45.04 2.39 2.32 Indonesia 9.97 2.25 7,630 17,919 - 0.60 - 0.79 Japan 54.14 0.34 569 - 1.47 0.57 - - Korea, Dem. Peop. Rep. of 14.25 - 508 106 - 0.46 - 5.06 (Tahle continues on the following page.) Dina L. Umali, Gershon Feder, and Cornelis de Haan 83 Table 3. (continued) Ratio of Ratio of auxiliaries government to government Livestock (1988) VLUs (1989) to private plus private as a percentage of per veterinarians veterinarians Region/country Agriculture GDP Veterinarian Auxiliary 1984 1989 1984 1989 Korea, Rep. of 33.44 1.14 839 - 0.34 0.62 - - Lao P.D.R. 34.22 41.11 63,231 1,114 - - - 113.48 Malaysia 14.85 2.31 4,607 - - 1.07 - - Mongolia 77.85 - 5,899 2,328 - - - 3.19 Myanmar 12.27 - 8,008 19,668 2.09 1.22 0.59 0.45 Nepal 31.10 14.72 63,286 7,699 39.50 26.83 - 8.51 Pakistan 41.67 14.91 20,215 9,241 - - Philippines 20.58 3.52 3,364 5,517 0.36 0.34 - 1.34 Singapore 97.70 0.69 3,189 1,400 0.67 0.57 9.33 3.15 Sri Lanka 9.16 2.26 13,393 3,995 8.12 12.47 3.76 3.86 Thailand 16.84 3.17 14,186 3,258 - 1.20 - 6.23 Viet Nam 22.47 23.90 5,478 983 - 79.60 - 6.50 Middle East Bahrain - - 653 1,100 9.00 3.00 1.20 1.19 Iraq 34.68 - 1,126 1,839 - 18.20 - 1.31 Israel 44.65 1.30 1,443 5,232 1.55 1.00 0.71 0.52 Jordan 53.37 3.10 4,786 18,824 1.90 45.33 0.41 0.32 Kuwait - - 2,843 2,378 5.20 2.40 1.44 1.21 Lebanon 38.94 - 4,806 8,278 1.27 0.64 0.84 0.88 Oman - - 4,840 3,267 - 9.00 - 3.00 Qatar - - 1,649 4,829 0.73 7.50 0.11 0.41 Saudi Arabia 54.12 1.13 16,170 10,054 - - - 1.61 Syrian Arab Rep. 33.93 8.06 1,238 2,804 - 0.34 1.73 0.49 Turkey 22.71 5.15 6,482 - - 1.25 - United Arab Emirates - - 1,965 3,189 3.88 0.30 1.33 0.63 Europe Albania 43.45 - 877 1,612 - - - 22.23 Austria 66.66 1.81 1,449 - - 1.30 - Belgium 72.65 1.92 1,773 - 0.03 0.06 - Denmark 69.51 3.25 3,075 45,071 0.56 0.42 0.03 0.11 Finland 75.28 1.23 2,476 35,564 5.58 3.57 0.04 0.11 France 51.62 1.88 5,008 15,468 0.08 0.09 0.24 0.37 German Dem. Rep. 60.95 - 3,015 4,230 - 60.00- - 5.71 Germany, Fed. Rep. of 69.36 1.27 2,012 3,209 0.20 0.15 - 1.23 Greece 28.14 2.82 1,528 9,739 1.77 2.56 0.22 0.20 Hungary 48.95 12.61 2,089 - 0.74 0.60 0.37 - Ireland 85.98 8.78 4,738 - 0.26 0.22 - - Italy 37.38 1.00 1,310 - 0.70 0.59 - - Luxembourg - - - - 0.32 0.15 - - 84 The World Bank Research Observer, vol. 9, no. 1 (January 1994) Table 3. (continued) Ratio of Ratio of auxiliaries government to government Livestock (1988) VLUs (1989) to private plus private as a percentage of per veterinarians veterinarians Region/country Agriculture GDP Veterinarian Auxiliary 1984 1989 1984 1989 Netherlands 77.92 3.42 3,894 12,181 0.19 0.15 0.12 0.52 Norway 78.23 0.99 1,236 - 0.52 0.47 - - Poland 45.24 12.54 2,891 4,693 - 105.36 - 0.77 Portugal 44.00 2.55 2,199 - - 3.34 - - Romania 35.07 - 5,286 1,675 - - 4.19 3.80 Spain 35.15 1.83 1,384 - - 2.94 - - Sweden 60.47 0.88 1,918 16,207 2.94 1.96 0.19 0.39 Switzerland 76.63 0.94 2,244 24,687 0.15 0.15 - 0.16 United Kingdom 63.77 1.21 2,489 7,673 0.57 0.08 - 0.37 Yugoslavia 46.74 6.30 2,405 1,494 - - - 1.88 Oceania Australia 6.43 3.38 8,173 14,691 0.21 0.22 1.22 0.65 New Zealand - - 12,204 14,170 0.38 0.23 2.02 1.15 - Not available. Note: One veterinary livestock unit (VLU) equals 1 cow or camel; or 2 horses, pigs, or donkeys; or 10 small ruminants; or 100 fowl. Source: VLUs were estimated using livestock and population figures from FAO-WHO-OIE (1989). Gross domestic product (GDP) figures were from the World Bank data base, and the livestock and agricultural production values were from USDA (1990). The numbers of government and private veterinarians and veterinary auxiliaries were from FAO (1989). most developing nations, animal health services still remain a government re- sponsibility. In the more developed countries, some service functions are being performed in partnership with, or have been transferred to, the private sector. In some developing countries (the Central African Republic, India, and Mo- rocco), donor agencies have facilitated the transfer of responsibilities from the public to the private sector. The following discussion reviews the nature and extent of public and private sector participation in various countries and is based on a survey of expert opinion and a review of the literature.8 Although veterinary surveillance remains a public sector activity worldwide, responsibility for quarantine services, pharmaceutical quality control, and food hygiene and inspection has been subcontracted to private veterinarians in Chile, Denmark, Germany (Leonhardt 1990), Ireland, and the United King- dom. Although private veterinarians perform these services, any potential mor- al hazard problem is surmounted because the public sector still sets the level and controls the quality of services. Governments in Africa and most of Asia and Latin America continue to mo- nopolize animal health extension services. In Argentina (World Bank 1989), Dina L. Umali, Gershon Feder, and Cornelis de Haan 85 Australia, Brazil (World Bank 1990), North America, the Philippines, and Western Europe, extension services are an integral component of the private sector's marketing strategy. To promote and strengthen customer loyalty and expand market share, private veterinarians and sales agents of agribusiness and veterinary pharmaceutical companies often provide free information on live- stock upgrading, improved production practices, hygiene and sanitation, and feeding. In Argentina and Brazil the structure of the livestock industry has led to flourishing private consulting firms that specialize in providing technical ser- vices. These firms have succeeded because their services are tailored to individ- ual needs, minimizing free-rider problems. Moreover, a tendency toward market segmentation is growing in both countries. Private consulting firms ca- ter to the specialized needs of large-scale farmers, while government efforts concentrate on medium- and small-scale enterprises. This trend may have de- veloped because, typically, only large-scale farmers can take advantage of econ- omies of scale in using private consulting services. The survey showed that veterinary research continues to be a public sector function in almost all developing countries, in large part because the market for new veterinary products in many developing countries is small and research by private firms remains unprofitable. Other constraints include scarce scientific re- sources and expertise. In industrial countries agribusiness, veterinary pharmaceu- tical companies, and privately funded research institutes also conduct research on developing feed additives and new vaccines and drugs. These firms generally cater to larger or multiple markets (domestic or foreign), and thus they are able to take advantage of economies of scale. Furthermore, because they usually hold proprietary rights to their research, they are able to collect the return on their investments. Consequently, there is greater incentive for private research. Clinical intervention is conducted exclusively in the private sector in almost all industrial countries. In the rest of the world, public sector involvement varies significantly. In some developing countries the private sector provides clinical services primarily to medium- and large-scale livestock enterprises, while the government supplies the clinical needs of small-scale farmers. This segmentation of the market is largely the result of economies of scale. A survey by Wise (1988) of 894 beef and dairy cattle producers, 338 hog producers, and 395 sheep pro- ducers in the United States showed that the cost of veterinary services per animal generally declines as herd size increases (table 4). The combined costs per animal of health products and veterinary services decreased as cattle, hog, and sheep operations increased in size, except that medium-size hog and sheep enterprises displayed a slight increase in the cost of veterinary services and medium-size sheep enterprises showed a slight increase in the cost of animal health products. Dairy production exhibited economies of scale in veterinary services as size in- creased but showed diseconomies of scale in costs of animal health products. In all cases, farmers spent proportionately more on livestock health products and less on veterinary services as their scale of operation increased. 86 The World Bank Research Observer, vol. 9, no. 1 (January 1994) Table 4. Livestock Health Expenditures in the United States, 1985 Herd size Variable 1-49 50-99 100 Beef cattle Times used veterinarian per year 3 4 6 Health expense per animal Cs) Animal health products 6.35 5.38 4.65 Veterinary service 5.19 3.08 2.10 Total 11.54 8.46 6.75 Dairy cattle Times used veterinarian per year 15 20 25 Health expense per animal ($) Animal health products 13.16 13.38 14.49 Veterinary service 13.16 13.31 10.87 Total 26.32 26.69 25.36 Hogs Times used veterinarian per year 5 6 6 Health expense per animal CS) Animal health products 13.33 12.92 5.27 Veterinary service 5.00 5.83 1.08 Total 18.33 18.75 6.35 Sheep Times used veterinarian per year 4 5 6 Health expense per animal ($) Animal health products 5.67 7.08 4.12 Veterinary service 3.73 3.12 1.76 Total 9.40 10.20 5.88 Note: All values are median values. Source: Wise (1988). Our survey showed that public sector involvement in vaccination programs ranges from mere regulation to complete provision. In Africa and Asia vacci- nations are predominantly or exclusively administered by government veteri- narians and veterinary auxiliaries. In Argentina (World Bank 1989), Brazil (World Bank 1990), Morocco, and the industrialized countries, the government subcontracts its vaccination functions to the private sector, particularly for the more critical infectious diseases, such as foot-and-mouth disease and brucello- sis. However, the government strictly monitors compliance by farmers by in- specting the vaccination receipts issued by private veterinarians. In Africa, Asia, and Latin America medium- and large-scale farms that raise improved breeds use private veterinarians to vaccinate their animals, while small-scale farmers rely on the government. Inadequate coverage and the occasional unre- liability of government operations have induced medium- and large-scale farm- ers to undertake their own vaccination programs. Dina L. Umali, Gershon Feder, and Cornelis de Haan 87 Diseases that have an effect at the national level may necessitate govern- ment intervention to ensure the effectiveness of a vaccination program or adequate use of clinical services. Moreover, because many countries ban im- ports of livestock products from countries with highly contagious diseases and foot-and-mouth disease, Argentina, Brazil, and other countries whose livestock products account for a large proportion of exports have found it in their best interest to assume control of vaccination programs. Otherwise, the inaction of individual farmers might lead to bans on the country's exports as a whole. Vector control worldwide is largely the shared responsibility of the public and private sectors, but private sector participation has been rising. In North America and Oceania, farms generally operate their own dip or spraying facil- ities. In Kenya, medium- and large-scale enterprises generally manage their own dip or spraying facilities, while small-scale farms rely mainly on govern- ment-operated facilities (World Bank 1986b). Controlling tse-tse flies on open rangelands remains in the public domain in several African countries because of its public-good character. In the Central African Republic, however, live- stock farmers install special screens and traps near their own herds to control these flies. In Germany compensation for the slaughter of infected animals is covered by insurance, such as the Enzootics Control Fund, which is funded equally by the state and livestock farmers (through fees). The fund also enforc- es measures to control enzootic diseases, pays for diagnostic examinations in state veterinary clinics, and compensates private practitioners for participating in epizootic control programs. In most developing countries, animal vaccines are produced by government research laboratories, although private companies (mostly subsidiaries of mul- tinationals) have set up local production plants. Private production of vaccines is often integrated with the production of veterinary drugs. Both the public and private sectors supply animal vaccines in Australia, Brazil, the Netherlands, the United Kingdom, and Uruguay, but vaccines are the sole province of private firms in Argentina, Canada, Chile, the United States, and most of Western Eu- rope. In China, the Animal Health Bureau prepares vaccines for hog diseases in state laboratories (World Bank 1987). Factors Influencing Farmer Demand Livestock owners must take many things into account when deciding wheth- er or not to make use of animal health services. The most important are: * The nature of the potential or actual disease * The size of the herd * The nature of the livestock production system * The availability and quality of veterinary services * The relation of possible benefits to actual costs. 88 The World Bank Research Observer, vol. 9, no. 1 (January 1994) The Nature of the Disease and the Type of Animal Assessing the possible effects of disease is no simple matter for the livestock owner. Different diseases have different effects on livestock, and the economic impact on the livestock enterprise therefore may also be different. Brucellosis, for example, causes cows to abort their unborn young. Thus, the owner of a dairy herd (whose total milk production may be seriously affected because of death among the next generation of milk cows) may be more inclined to take steps to combat brucellosis than to deal with foot-and-mouth disease. Al- though the latter disease is debilitating to adult milk cows, its net effect on milk production may not be as severe. Economic losses from the same disease may also differ among different live- stock breeds. For example, the economic losses from reduced milk production of dairy cattle infected with foot-and-mouth disease are generally significantly higher than losses for infected cattle raised for meat. Dairy farmers may there- fore have more incentive to prevent the introduction of foot-and-mouth disease than cattle farmers. Another factor in the owner's decision on how to deal with disease may be the breed of the livestock involved. Zebu cattle in Kenya, for example, are known to have greater resistance than other strains of cattle to the various dis- eases transmitted by ticks, such as East Coast Fever. One study found that owners of small herds of Zebu cattle tended to skimp on the standard preven- tive measure of dipping the cattle in pesticide solutions (World Bank 1986). The Size of the Herd As the literature on the subject shows, the size of a herd of livestock can have many different ramifications for veterinary care. A general (although not infallible) rule of thumb is that, as the herd or flock increases in size, the vet- erinary cost per animal decreases. From the farmer's perspective this cost dif- ferential can become a screening device as to who can afford veterinary services, because only the larger commercial farmers may be able to afford the service. Under the right circumstances, owners of small herds can still take advan- tage of economies of scale by becoming members of producer associations. The fees each member pays allow the association to hire one or more veterinarians (and veterinary paraprofessionals) to provide animal health care to all of its members. Because the veterinarians serve all members of the association, the problem of free riders that comes with the provision of some services may also be reduced. Associations provide a mechanism for internalizing externalities associated with some services. For example, the association can enforce the compulsory vaccination of members' herds or flocks. In some developing countries the number of producer associations has be- come quite large. In 1970 the national and some of the state governments of Dina L. Umali, Gershon Feder, and Cornelis de Haan 89 India (with World Bank assistance) established an association of smallholder dairy cattle farmers to increase milk production and market it more effectively as well as to provide the herds with animal health care. The association had 1.8 million members by 1981, and 4.9 million members by 1986. As a result the volume of milk marketed more than doubled, from 2.6 million liters to 7.9 mil- lion liters during the same period (Doornbos and Nair 1990). In 1982 the National Federation of Livestock Producers in the Central African Republic assumed full responsibility for marketing and distributing animal health pharmaceuticals when the government livestock service experienced serious op- erational difficulties. International donor assistance provided an initial subsidy to the federation to set up its operation, while the government set up programs to train livestock farmers to use the drugs properly. An assessment by the World Bank concluded that the herders were steadily becoming more adept at treating their animals, and 90 percent of the owners had learned how to administer drugs for intestinal parasites correctly (World Bank 1986a). In 1986 the Association of Milk Cooperatives of Indonesia employed twenty veterinarians to ensure that farmer members would have access to livestock health and production services (Winrock International Institute for Agricultural Development 1986). The Nature of the Livestock Production System The potential for disease transmission is affected by the type of livestock production system. In Argentina, for example, cattle breeding is undertaken on large ranches where animal density is relatively low, which minimizes the risk of the spread of contagious diseases and thus the demand for preventive ser- vices such as vaccinations. In contrast, the livestock farmers in the high-densi- ty, cattle-fattening areas have a higher demand for preventive services because the risks of disease outbreaks are higher (World Bank 1989). The Availability and Quality of Veterinary Services The availability and quality of veterinary services also help determine how and when animal health care is provided. In Kenya, for example, the owners of medium- and large-scale cattle enterprises generally operate their own facil- ities for dipping or spraying animals to protect them against insect pests. These owners have concluded that operating their own facilities makes more econom- ic sense than sending the animals to government installations, which are not considered as reliable and where herds are mixed and thus may be exposed to animals infected with contagious diseases. The Relation of Benefits to Cost Ultimately farmers will demand animal health care only if the benefits of the care exceed its costs. Because of export considerations, for example, the 90 The World Bank Research Observer, vol. 9, no. 1 (January 1994) Brazilian government requires cattle owners to vaccinate their animals against foot-and-mouth disease. Cattle owners in the extensive cattle-growing areas frequently seek to evade the law, however, because the profits on livestock pro- duction are low, and the cost involved in vaccinating the animals further de- presses profits (World Bank 1990). To illustrate the varying incentives farmers receive for using animal health services for different diseases, Felton and Ellis (1978) report a cost-benefit ratio of 1:8 for the rinderpest vaccination campaign in Nigeria. In another study, Domenech and Coulomb (1981) calculated an internal rate of return between 12 and 53 percent for brucellosis control in Chad. Factors Influencing Private Supply Private veterinarians and paraprofessionals will offer their services so long as they can maintain profitable operations. The profitability and sustainability of private practice are influenced by several factors, which include the costs of operating the practice, the magnitude of farmer demand for services, and the degree of competition from both public and other private practitioners. Be- cause of the large fixed costs of operating a veterinary practice-a clinic, a ve- hicle to visit farmers, animal examination, and laboratory equipment-private veterinarians must have a specific minimum level of business to earn a reason- able profit. Therefore, an area where a large demand exists, such as a region dominated by large commercial livestock farms, is better able to support a pri- vate veterinary practice than an area with small, dispersed herds. Private vet- erinarians, however, cannot compete with public veterinarians, even if demand exists, if the public veterinarians are subsidized so that they can offer their ser- vices at lower rates or for free. To illustrate the factors that influence the profitability of a private veterinary practice and therefore the supply of veterinary services, the following section ex- amines how livestock density and the option to sell veterinary pharmaceuticals can influence the costs and returns of setting up a private practice in Uganda. Private Practice in Uganda: A Case Study Private entry into the animal health services sector depends on whether an economically profitable practice can be sustained. An important concern for private practitioners is the minimum number of animals they must treat to break even (net profit = 0). The following discussion presents the results of an estimation of break-even VLUs under three different production systems in Uganda: traditional, intermediate, and high intensity. It is assumed that the traditional production system is characterized by smallholder-pastoralist farm- ing and low productivity (fewer than 500 liters of milk a year and less than 12 percent offtake-the percentage of total stock sold each year), while the Dina L. Umali, Gershon Feder, and Cornelis de Haan 91 intermediate production system is typified by more capital-intensive operations and higher productivity (from 500-2,500 liters of milk a year and 12-18 percent offtake). The high-intensity production system is assumed to be capital inten- sive, with milk production greater than 2,500 liters a year and offtake greater than 18 percent. It is assumed that the average fee per animal is $2, $12, or $20 under the traditional, intermediate, and high-intensity systems, respectively, and that the veterinarian could earn additional revenue by adding a markup of either 25 or 50 percent to the cost of drugs. Table 5 lists the costs involved Table 5. Costs of Private Veterinary Practice in Uganda, 1990 Cost per year Item ($) Depreciation 2,528 Vehicle 450 Veterinary equipment 2,078 Operating expenses 3,500 Supplies: Hypodermic syringe, nylon 30 Hypodermic needles, packs of 12 20 Nylon suture material, cassette 70 Nylon suture material, refills 30 Catgut sutures, cassette 250 Calving rope (nylon) 20 Disposable uterine catheters, 25s 20 Teat canulae, packs of 12 10 Chemicals 200 Insurance 650 Rent for clinic 1,500 Utilities 400 Stationery and postage 200 Subscriptions and memberships 100 Fuel and maintenance (per tripa) 100 trips per year 720 200 trips per year 1,440 240 trips per year 1,728 Cost of capital (per trip, at 38 percent per year) 100 trips per year 2,564 200 trips per year 2,838 240 trips per year 2,947 Total costs (per trip) 100 trips per year 9,312 200 trips per year 10,306 240 trips per year 10,703 a. Assumes $0.18 per kilometer; 40 kilometers per trip. Source: World Bank data. 92 The World Bank Research Observer, vol. 9, no. 1 (January 1994) Table 6. Number of VLUs by Production System for a Private Veterinary Practice to Break Even or Earn Profits of $1,000 a Year in Uganda, 1990 Break-even Net income = $1,000 Fee per Pure Vet service Vet service Pure Vet service Vet service Production animal vet + 25% + 50% vet + 25% + 50% system ($) service' margin margin service margin margin Traditional 2 100 trips per year 4,656 3,319 1,982 5,156 3,819 2,482 200 trips per year 5,153 3,816 2,478 5,653 4,316 2,978 240 trips per year 5,352 4,014 2,677 5,852 4,514 3,177 Intermediate 12 100 trips per year 776 553 330 859 636 414 200 trips per year 859 636 413 942 719 496 240 trips per year 892 669 446 975 752 530 High intensity 20 100 trips per year 466 332 198 516 382 248 200 trips per year 515 382 248 565 432 298 240 trips per year 535 401 268 585 451 318 Note: Break-even VLU = (depreciation costs + operating costs - drug sales margin)/fee per animal. a. Consulting fees only. Source: Umali, Feder, and de Haan (1992). in operating a private practice (see Umali, Feder, and de Haan [1992] for a de- tailed listing of the costs of veterinary practice). The break-even VLUs under traditional, intermediate, and high-intensity sys- tems are presented in table 6. The sources of revenue are the consulting fees (pure veterinary services) and markups on drug sales. The results illustrate the importance of drug sales in the viability of private veterinary practice. The re- sults also imply that, assuming 200 trips a year and a 25 percent margin on drug sales, a private veterinarian must treat an additional 500 VLUs a year un- der the traditional system, an additional 83 under the intermediate system, and an additional 50 under the high-intensity system to earn a net income of $1,000. Conclusion Animal health services should be privatized selectively. As a first step, ser- vices that are basically private goods should be shifted to the private sector. For those services that entail externalities, moral hazard, or free-rider prob- lems, mechanisms to correct these market failures are needed to ensure that the private sector provides the services at socially optimal levels. Otherwise, public sector intervention will remain essential. Transferring responsibility for animal health services to the private sector will ease the financial burdens of the government. To promote these shifts, Dina L. Umali, Gershon Feder, and Cornelis de Haan 93 governments should remove barriers to private development by lowering trade barriers, removing price subsidies on publicly provided drugs, eliminating re- strictions on private practice, and abolishing public sector drug supply monop- olies that bar private sector participation. Governments should also explore promoting private practice by removing barriers to entry and establishing an effective legal framework to enforce par- ticular activities (such as issuance of vaccination certificates), subcontracting services to the private sector, promoting livestock insurance plans, and creating the enabling environment for the development of smallholder producer orga- nizations. In areas where animal health services are necessary but unprofitable to private providers, targeted subsidized delivery should be explored. Veterinary auxiliaries can play an important role in providing preventive services and performing simple clinical procedures. Although they cannot sub- stitute for veterinarians, they supplement the veterinarian's work, expanding the number of farmers served. Because their opportunity costs are lower than those of veterinarians, their services are more affordable to farmers. More im- portant, because it takes substantially less time and money to train them than to train veterinarians, auxiliaries can provide developing countries a cheaper, quicker way to accumulate veterinary personnel. Notes Dina L. Umali, Gershon Feder, and Cornelis de Haan are with the Agriculture and Natural Resources Department of the World Bank. 1. All dollar amounts are in U.S. dollars. 2. Blankart (1987, p. 350) suggests that markets can develop devices to overcome the deficiency of uncertain quality. For such goods, which he refers to as "experience goods,""the customers can extrapolate their experiences of previous transactions, and the suppliers accumulate good- will in order not to disappoint the consumer's expectations." Brand loyalty developed through guaranteed quality of products is an example. 3. See Umali and Schwartz (1993) for more detailed discussion on the roles of the public and private sectors in delivering agricultural extension services and Umali (1992) for more detailed discussion on the roles of the two sectors in agricultural research. 4. The failure of several producers to follow the requirements of the program (for example, to vaccinate all animals properly) can cause a resurgence of the disease and jeopardize the health and productivity of the livestock of all other farmers. 5. In some countries, such as Australia and the United States, where most major diseases have been completely eradicated domestically, quarantine is used as the first line of defense to prevent the reintroduction of these diseases from foreign countries. 6. A veterinary livestock unit (VLU) is a device for statistically standardizing the work require- ments for animal health care of different livestock species. A VLU is equivalent to 1 cow or camel; or 2 horses, pigs, or donkeys; or 10 small ruminants; or 100 fowl (de Haan and Bekure 1991). The values used to calculate these ratios are national averages of livestock population and the number of veterinarians and auxiliary personnel. Differences in availability within the country are not considered. 7. That veterinarians are available does not necessarily imply that they are able to practice their vocation to the fullest extent possible. Government restrictions, lack of access to veterinary 94 The World Bank Research Observ?r, vol. 9, no. 1 (January 1994) supplies, and inadequate transport facilities and infrastructure are among the factors that may constrain them. 8. The information on activities in the public and private sectors was compiled primarily by interviewing livestock and agricultural specialists in the World Bank, the U.S. Department of Agriculture, and various embassies; information from recent literature on the topic supplement- ed those interviews. References The word "processed" describes informally reproduced works that may not be commonly available through library systems. Anteneh, Addis. 1985. "Financing Livestock Services in Some Countries of East and Southern Africa." Livestock Policy Unit Working Paper 6. International Livestock Centre for Africa, Addis Ababa. Processed. Blankart, Charles B. 1987. "Limits to Privatization." European Economic Review (Netherlands) 31 (February/March):346-51. de Haan, Cornelis, and Nico J. Nissen. 1985. Animal Health Services in Sub-Saharan Africa. World Bank Technical Paper 44. Washington, D.C. de Haan, Cornelis, and Solomon Bekure. 1991. Animal Health Services in Sub-Saharan Africa: Initial Experiences with New Approaches. World Bank Technical Paper 134. Washington, D.C. Domenech, J. L., Jacques Coulomb. 1981. Brucellosis in Chad: Impact of Animal Disease Control in Africa. Berlin: Deutsche Stiftung fur Entwicklungshilfe. Doornbos, Martin, and K. N. Nair. 1990. Resources, Institutions, and Strategies: Operation Flood and Indian Dairying. New Delhi: Sage Publications India Pvt. Ltd. Feldman, A. M. 1980. Welfare Economics and Social Choice Theory. Boston: M. Nijhoff Pub- lishing. Felton, M. R., and Peter R. Ellis. 1978. Studies on the Control of Rinderpest in Nigeria. Study 23. Reading, U.K.: University of Reading. Food and Agriculture Organization (FAO). 1989. Argentina Agricultural Services Project Annexes. Report 90/89 CP-ARG-12 PB. Rome: FAO/World Bank Cooperative Programme Investment Cen- tre. 1990. "Strengthening Animal Health Services in Developing Countries." Rome. Pro- cessed. Food and Agriculture Organization, World Health Organization, and International Office of Epizootics. Various issues. Animal Health Yearbook, Rome. Head, John G. 1974. Public Goods and Public Welfare. Durham, N.C.: Duke University Press. Leonard, D. K. 1990. "Research Proposal on the Organization of Animal Health Services in Af- rica." Paper presented at the International Livestock Centre for Africa. Addis Ababa. Pro- cessed. Leonhardt, H. G. 1990. "Animal Health System of the Federal Republic of Germany." Paper presented at the Second Round Table on Livestock Production in Eastern Europe, sponsored by the European Association of Animal Production. Berlin. Processed. McCauley, E. H. 1982. "Animal Diseases in Developing Countries: Technical and Economic As- pects of Their Impact and Control." World Bank, Washington D.C. Processed. Merck & Co., Inc. 1991. Merck Veterinary Manual. 7th Edition. Rathway, N.J. Miller, W. C., and G. P. West. 1978. Black's Veterinary Dictionary. 9th ed. London: Morrison and Gibb Ltd. Pigou, A. C. 1946. The Economics of Welfare. 4th ed. London: Macmillan. Dina L. Umali, Gershon Feder, and Cornelis de Haan 95 Sandford, Stephen. 1983. Management of Pastoral Development in the Third World. New York: John Wiley and Sons. U. S. Department of Agriculture. 1990. World Agriculture Trends and Indicators 1970-89. Statis- tical Bulletin 815. Washington, D.C. Umali, D. L. 1992. Public and Private Sector Roles in Agricultural Research: Theory and Experi- ence. World Bank Discussion Paper 176. Washington, D.C. Umali, D. L., Gershon Feder, and Cornelis de Haan. 1992. The Balance Between Public and Pri- vate Sector Activities in the Delivery of Livestock Services. World Bank Discussion Paper 163. Washirgton D.C. Umali, D. L., and Lisa Schwartz. 1993. "Public and Private Agricultural Extension: Beyond Tra- ditional Frontiers." Agricultural Policies Division, Agricultural and Natural Resources Depart- ment, World Bank. Washington, D.C. Processed. Winrock International Institute for Agricultural Development. 1986. "A Review of the Livestock Sector in the Republic of Indonesia." A report prepared for the Asian Development Bank and the Republic of Indonesia. Morrilton, Ark. Processed. Wise, J. K. 1988. "Animal Health Expenditures by Livestock Producers." Journal of the Ameri- can Veterinary Medical Association, 2:236-38. World Bank. 1986a. "Central African Republic National Livestock Project." Staff Appraisal Re- port 5909-CA. Washington, D.C. Processed. . 1986b, "Kenya Animal Health Services Project." Staff Appraisal Report 6367-KE. Wash- ington, D.C. Processed. 1987. China: The Livestock Sector. Washington, D.C. 1989. "Argentina Agricultural Sector Review, Volume II: Technical Annex." Report 7733-AR. Washington, D.C. Processed. . 1990. "Brazil, Key Policy Issues in the Livestock Sector: Toward a Framework for Effi- cient and Sustainable Growth." Sector Report 8580-BR. Washington, D.C. Processed. 96 The World Bank Research Observer, vol. 9, no. 1 (January 1994)