Difference Between Public And Private Sectors: Conflicting Perceptions

Some business activity exists to make a profit. In the end, if the business does not make a profit it will have to close – although not always for many years! However, some business activity will not necessarily make any profit but will continue to function. And that is the main difference between private sector companies as well as public sector companies which are all operating with different goals, strategies and understandings as well.

1.2 Concepts:

1.2.1 Public sector,

The public sector is the part of the economy, where goods and services are provided by the government or local authorities carrying out the task instead. These goods and services are sometimes provided free and in other cases consumers have to pay a price. The aim of public sector activity is to provide services or products that benefit the public as a whole. This is because it would be difficult to charge people for the goods and services concerned or people may not be able to afford to pay for them as well as it is considered that the public sector companies are public owned organizations . The government provides these goods and services at a cheaper price than if they were provided by a profit making company. The public sector shares the private sector in most business activities.

The public sector is that portion of society controlled by national, state or provincial, and local governments. In the United States, the public sector encompasses universal, critical services such as national defense, homeland security, police protection, fire fighting, urban planning, corrections, taxation, and various other social programs.

The public sector sometimes overlaps with the private sector in producing or providing certain goods and services. The extent of this overlap varies from country to country, state to state, province to province, and city to city. This overlapping is most often seen in waste management, water management, health care, security services, and shelters for homeless and abused people. Sometimes, service providers move from the public sector to the private. Which is known as privatization, and has been taking place in recent years on a large scale throughout the world.

In other instances, a service may shift from the private sector to the public. This is less common, but health care is one area where some governments are providing or experimenting with services previously furnished by private providers.

Governments routinely hire private corporations to provide goods and services for the public sector, a practice known as outsourcing . Examples include the manufacture, construction, or maintenance of aircraft, military hardware, electronic and communications equipment, computers, roads, freeways, bridges, parks, and recreation areas.

The public sector is usually composed of companies which are owned and operated by the governments. This includes federal, provincial, state, or municipal governments as well, depending on where you live. Privacy legislation usually calls organizations in the public sector a public body or a public authority.

Some examples of public bodies in countries like Canada and the United Kingdom are educational bodies, health care bodies, police and prison services, and local and central government bodies and their departments.

1.2.2 Private sector,

The private sector consists of business activity that is owned, financed and run by private individuals. These businesses can be small firms owned by just one person, or large multi-national businesses that operate around the world (globally). In the case of large businesses, there might be many thousands of owners involved. The ultimate goal of businesses in private sector is to make a profit.

The private sector organizations are one which is owned by its shareholders. The shares are publicly listed “available for sale” but privately owned. The organizations main aim is therefore usually to generate money to its shareholder owners.

A public sector organization is owned by the government (the public owns it through our right to vote and the government’s representation of us). A public sector organization can make a profit but tend not to. For example the police force is a public sector organization and generally uses tax payer money to provide a policing service. They can however charge football clubs to police events and make a small profit on this. This does not change the fact they are publicly “owned”.

The private sector is usually composed of organizations that are privately owned and not part of the government. These usually includes corporations (both profit and non-profit), partnerships, and charities.

An easier way to think of the private sector is by thinking of organizations that are not owned or operated by the government. For example, retail stores, credit unions, and local businesses will operate in the private sector.

1.3 The efficiency of public and private sector

It has been widely assumed that the private sector is obviously more efficient and competent than the public sector. And it is supposed that private companies have demonstrated their superiority in performance. And, this reflects the theoretically expected superiority of markets over bureaucracies under political controls. On the basis of these assumptions, many current debates about policy in infrastructure and services assume that, achieving private sector operation is an important objective in itself, and is always a desirable end result.

By the way, the pragmatic evidence as well as the theoretical debates do not support such assumptions. There is a consistent stream of empirical evidence consistently and again repeatedly viewing that, there is no systematic significant difference between public and private operators in terms of efficiency or other performance measures. The theory behind the assumption of private sector supremacy is also being shown to have serious flaws.

This proof, is of great importance for policy discussion. Due to the unsupported assumption, policies have become critically imbalanced. With various forms of privatization that being introduced. While public sector options that could be much better are being ignored. This is a pricey form of policy failure which causes economic, social and political harm.

1.4 Main differences between public and private sector

The differences between public and private organizations are, there are significant differences between the two sectors. Public organizations are characteristically the primary supplier of services and are not competing in order to maximize profits. This concerned lack of product competition is widely held to mean a lack of incentives to improvement.

on the other hand, the concept that the connection between a firm’s behavior and financial reward is the central dynamic of economic rationale and the development of improvement has to be seen as too simplistic.

Public sector workers may be motivated by impracticality, the joy of creating something new, an intense interest in the topic at hand, friendship and a sense of belonging, career ambitions, etc.

One obvious difference between the public and private sectors is that the public sector is not profit driven in the business sense of the term. However, the motivations for innovation found in the public sector are probably also present in private firms.

The fact that public institutions are not profit driven, should not lead us to believe that public sector employees and managers are not concerned about financial matters. As is the case within private companies, public sector units and organizations fight for funding and influence.

Another important difference is that the political aspect is much more important in the public than in the private sector. Policy decisions normally affect companies indirectly, through laws, regulations and financial support. The public sector is at least formally controlled by elected or appointed politicians. The intimate link between this governance dimension and funding of current expenses of the activities implies a very strong link between ownership and control on the one hand and the growth strategies of the subsidiary organizations.

Just as important are the differences in management incentives. Public managers are in general more likely to receive lower and less performance based material benefits, which may influence their willingness to take risk. It may be that, the public sector on an aggregate level – recruits fewer risk-taking entrepreneurs than the private sector relatively speaking, due to the expectations of rewards or penalties of entrepreneurial activity.

Moreover, it is likely that sometimes private companies are more likely to accept failure than public institutions. By failure is, here meant innovation projects that do not accomplish their expected objectives. Private companies may consider failures an integrated part of any risky enterprise, while the pressure to short term economizing of public funds and not wasting the public purse may imply a critical disincentive to innovation. Overall we would then expect to see public organizations being risk aversive relative to market oriented firms, essentially due to the characteristics of the effective incentive system facing the two kinds of organizations.

1.4.1 Employees in public and private sectors

The scope to which private as well as public sector employees differ in the significance they attach to different types of inducements being part of their employment deal and their evaluations of these inducements is studied. Here, we focus on five content dimensions of the psychosomatic contract: career development opportunities, job contented, financial rewards, social atmosphere and respect for private life. Analyses from several studies of employees show that, compared to private sector employees, public sector employees are motivated by other inducements. In particular, they indeed, attach less importance to career development opportunities and financial rewards promises in their concerned psychological contracts, and perceive these promises as less achieved.

1.4.2 Wages in the public/private sectors

The purpose of this paper was to uncover the determinants of public and private sector wage growth. We also find that a number of variables affecting private sector wage growth, for instance: unemployment rate (negative relationship), inflation rate, total factor productivity, and hours per worker. More important, public sector wages and employment also affect private sector wage growth. In terms of extent, the estimated values are higher than the values suggested by the model. The empirical estimates show a contemporaneous effect of very few private sector wages with respect to public sector wages. Higher public sector wages might translate into higher demand, increasing the pressure on the private sector labor market. Similarly, public sector wage growth may also carry a signal to the private sector on what the government expects for inflation. This finding has important policy implications.

It gives strength to the “wage twist policy discussed by (Pedersen, 1990). Therefore, the governments could use their role as an employer to reduce relative public sector wages. This policy, besides reducing the tax burden necessary to finance government spending, would have a downward impact on private sector wages and, most likely, on inflation and unemployment. Regarding the public sector wages, statistically significant determinants are private sector wages, inflation, and the unemployment rate (positive relationship). Moreover, public sector wages react positively to the budget balance and negatively to government indebtedness. Political variables, however, do not seem to play an important role.

1.5 Evaluation of public and private sectors

There are a number of factors that are considered differently in the valuation of privately held vs. public companies even those that are in the same industry-making a direct comparison for valuation purposes difficult. In some cases, it’s like comparing apples to oranges. Following is a list of some of the issues that may result in differences between the valuations of public and private firms:

1. Market liquidity. A lack of market liquidity is usually the biggest factor contributing to a discount in the value of companies. With public companies, you can, if you choose, switch your investment to the stock of a different public company on a daily if not more frequent basis. The stock of privately held firms, however, is more difficult to sell quickly, making the value drop accordingly.

2. Profit measurement. While private companies seek mostly to minimize taxes, public companies seek to maximize earnings for shareholder reporting purposes. Therefore, the profitability of a private firm may require restatement in order for it to be directly comparable to that of a public firm. In addition, public-company multiples are generally calculated from net income after taxes, while private-company multiples are often based on pre-tax and many times, pre debt income. This discrepancy can result in an inaccurate formula for the valuation of a private company.

3. Capitalization/capital structure. Public companies within a specific industry generally maintain capital structures (debt/equity mixes) that are fairly similar. That means the relative price/earnings ratios (where earnings include the servicing of debt) are usually comparable. Private companies within the same industry, however, can vary widely in capital structure. The valuation of a privately held business is therefore frequently based on “enterprise value,” or the pre-debt value of a business rather than the value of the stock of the business, like public companies. This is another reason why private-company multiples are generally based on pre-tax profits and may not be directly comparable to the price/earnings ratio of public firms.

4. Risk profile. Public companies usually provide an assurance of continuing operations above that of smaller, privately held firms. Downturns in the economy or a change in the environment such as an increase in competition or regulatory changes often have a greater impact on private firms than public firms in terms of performance and market positioning. That higher risk may result in a discount in value for private firms.

5. Differences in operations. It is often difficult to find a public company operating in the same niches as private organizations. Public companies typically have operations spanning a broader range of products and services than do private companies. In addition, even if the products and services are the same, the revenue mix is mostly different.

6. Operational control. Although private companies are more likely to receive valuation discounts than public companies, there is at least one area where they may receive a value premium. While the sale of a private company usually results in the purchase of the controlling interest in the business, ownership of public company stock generally consists of a minority share ownership which may be construed to be less valuable than a controlling interest position.

1.6 Opinion and Conclusion

The two sectors, public sector and private sector are existing to meet the demand of the public. The first at the poll booth, the second at the marketplace. Both are there because people want them to be there available, and it is clear that no one can deliver the task alone at all, which results into that, there is no obvious preference of any of them, and any attempt to extinguish either is violation of people’s will.

The private sector and public sector have together had times in which either was the more powerful and the more popular. There are some ideologies that want everything to be public, and there are others that want everything to be private. The power struggle between the public and private sectors has been a source of much warring and much misconduct on both sides. And while there are many who see either as parasitical, in fact, United States owes much to both. And it is in their constructive interplay that benefit is found.

The public sector’s science is at the starting place of every product that is sold by business. The public sector’s Interstate and Internetworking have created infrastructures that made possible vast business prosperity, and without them many economies would be far smaller than it is greatness now. The public sector’s education has made possible for people to have the skills that they need to work and contribute to private sector prosperity. The public sector’s military and policing protect life and property of people. And it is sheer ignorance, foolishness and irresponsibility for people in a country like US to be anti government, when they benefit from the public sector as much as they can.

At the same time, it is the private sector that has taken the knowledge produced by public sector science and turned it into technology and products that have created prosperity as well. And it is fact that, the private sector whose earnings fund public sector works. Both private sector and public sector are legitimate parts of reality as pertains to fulfilling demands of the people; and as in all non-valued dualities these must operate in a benefit maximizing manner.

At the foundation level, each has the right to defend itself from negative effects of the other. Public sector has the right to protect itself from those who want to defund academia, and education, deny it tax revenues, and starve it into extinction while benefiting from the science, education, infrastructure, policing and military that, it provides. Private sector also has the right to protect itself from strangulating regulation, nationalization, protectionism, and other public sector practices that diminish its ability to produce services, products and generate wealth. Each is there by public demand, and each has its legitimate prerogatives as it relates to fulfilling this public demand.

In the middle tier, the public sector and private sector should leave each other alone to do what they have been put (assigned) there to do: The private sector, to produce prosperity; the public sector, to provide the tasks that it has been voted to do. 

at the top tier, the both sectors, public and private sectors are strongly recommended to work together to create what either cannot do by itself. The private sector using public sector science to implement and utilize technological prosperity, public sector using money created in public sector to provide goods or products and offer public services as well; and public sector working with private sector to put into place high-technology solutions for an environmentally and economically sustainable long-term future; are only some of the potentials for positive collaboration between the public and private sectors.

Simultaneously, there have to be means preventing ever present negative interaction potential between public and private sectors a potential that may result in fascism, in many countries more obviously than in United States. Wars waged for corporate interest, for example, Texas Oil bribing the government to deny global warming and keep the nation from developing effective clean energy solutions and the pharmaceutical industry scamming the taxpayer to give people dangerous and expensive multiple drug combinations, are all clear and present cases of private sector and public sector colluding in ways that are against public advantage. This potential must be constantly watched for in order to avoid these and other destructive outcomes, with people whom both the public and private sector exist to serve, taking the two, public and private actions against the corruption which is an ever present danger where money and politics mix.