The issues of prioritization of health care services and allocation of resources have recently received increasing attention and discussion. Several reports have been published by governments in different countries and the issues are discussed in many recent books and papers. In this paper the focus is on the problems faced by a developing country when allocation of health care resources is considered. We consider these issues under three headings and exemplify the situation in a developing country by taking Sri Lanka as an example. Firstly the evidence to formulate an ethical basis for the existing health care system in Sri Lanka is discussed, in particular the problem of defining a minimum quality of health care for the population. Secondly, we consider the issues which arise when we want to formulate the ethical basis for health sector reform. In particular, we examine current World Bank proposals. We shall argue that there are a number of important conceptual and ethical issues that have not been properly addressed in the various policy documents. Finally, we introduce our own alternative ethical framework for policy reform.