8 suppliers exit, and the whole exercise would have been a costly waste of resources. To help lock in the essential changes in market perception the subsidy should be phased out over time.

2.13 In contrast to the market-expansion scenario, the 'traditional' public sector enterprise service provider approach could conceivably result in a reduction in domestic service supply (because the subsidized supply of services reduces the average price obtainable for services), or a contractionary shift in supply (e.g. if existing service firms perceive that they can no longer compete and they have to exit the market ). Its effect on demand is difficult to predict (it could reduce demand for existing services or it might over time have a leaming/demonstration effect from increased knowledge of available services). 21 2.14 Among the partial approaches to market development is one which fosters competitive supply. This occurred for example with business training services (used e.g. in Chile). The approach was to allow private service provision but to select providers centrally through a (donor or State-sponsored) competition process (an approach which retains a degree of central control of the supply side). This is partial because it supports competitive supply and price but it does not directly solve the problem of relevance and quality vis-a-vis client demand. The same procedure is used by one of the leading consulting agencies in this field.<sup>22</sup> 2.15 One method of targeting demand, through a partial subsidy, has been through a Matching Grant Fund (MGF) instrument, which has been used by the Bank increasingly (though still infrequently) for delivering consulting and training assistance to business enterprises, as well as inputs into other sectors such as education and social services. The MGF has up to now been used mainly to boost demand but it could be also used to expand and upgrade service providers to meet more sophisticated demand by user firms. It could fund both non-transactional and transactional services ranging from simply free information provision to financing the purchase of a business service.

2.16 Another demand-side approach is to use vouchers. Vouchers are a partial transactional subsidy like a matching grant, but they provide a currency of payment for services.<sup>23</sup> This feature can further reduce the risk of the transaction to both service supplier and user. Some voucher projects have had good results. For example the evaluation of a Paraguay training voucher project claimed that "instead of the empty classrooms and lack of enthusiasm for the supply side approach even with private providers, demand for training services picked up strongly." 2.17 Figure 3 depicts a continuum of assistance approaches, from the traditional centralized supply side method to the most decentralized demand-driven method. In practice there are many variations on these models and there is no case for saying that one approach is _necessarily_ superior to another; specific conditions are critical. For example some facilities are not intended to be part of a local service market, but are temporary donor agency outreach oT coordination offices, supplying specific services to support donor projects. But theory and experience suggest that a demand-driven approach if it can be adequately managed, will give superior capacity building results and a stronger development impact.

> 21 These issues are also explored in 'East Africa - Non-Policy Instruments for Private Sector development' World Bank 1994

> 22 SwissContact have designed many projects around the idea of local firms bidding to become preferred providers. 23 It should be noted that the value of the voucher 'grant' still depends on the ability of service supply capacity to shift. If supply is inelastic then the increased demand would simply cause prices to rise.