Universitatea Nicolae Titulescu din București

Why goals of public organization are more complex and often

conflicting as compared to those of private bodies?

Elaborat de: Jilavu Gelu Marian

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.

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.

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.

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.
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.