Question

One main difference between public sector entities and private sector entities is that their objectives are different. The objectives of the public sector entity is to deliver public goods and services to all citizens in order to maximize their welfare. However, the principal object of the private entity is to make profit on the goods and services they produce and sell in the market.

Required:

Explain SIX (6) reasons why these differences are important

Answer 1

Public Sector

Public Sector encompasses the companies, enterprises, or businesses wherein the Government is the owner of the business by way of a majority shareholding in the business. These businesses are controlled, managed, and operated by the Government.

Companies owned, controlled, managed, and is operated by Government/Government Bodies come under the public sector.

Private Sector

Private Sector includes those companies, enterprises, or businesses that are owned by Private Individuals or Private Companies. The companies in the Private Sector are controlled, managed and operated by Private Individuals/Private Entities.

Companies owned, controlled, managed, and is operated by Private Companies/Private Individuals comes under the private sector.

Companies in Public Sector and Private Sector in the Indian Context

Companies such as National Thermal Power Corporation, Indian Oil Corporation Limited, Bharat Petroleum Corporation Limited, State Bank of India, National Highway Authority Limited are an example of public sector companies operating in power, Oil & Gas, Banking, Roads sectors in India.

There is numerous example of companies operating in the private sector in India. Reliance Industries Limited, HDFC Limited, HDFC Bank, ICICI Bank are a few examples of private sector companies in an Indian context.

Public Sector vs Private Sector – Key Differences

The key differences between the Public Sector vs Private Sector are as follows –

• Public sector companies serve the purpose of providing basic public services to larger people whereas private sector companies are entirely profit-driven.
• The government prefers retaining ownership of companies involved in utility services such as water, electricity, roads, agriculture, and also for industries sensitive to national security. Private sector companies have a large gamut of industries to operate with a growing trend of privatization.
• Both public vs private sector companies can be listed on stock exchanges and their shares can be publically traded
• Public Sector companies are prone to more Government interferences for multiple reasons including political reasons than their public sector counterparts
• The government has a control on pricing of the products in public sector entities which is not the case with private companies
• Public sector companies are relatively better placed than private-sector counterparts in mobilizing funds from the market because of Government backing
• Public sector entities may be asked by Government to fund the Government budget deficit by way of declaring the dividend which is not the case of private sector entities.

Public Sector vs Private Sector Head to Head Differences

Let’s now look at the head to head difference between Public Sector vs Private Sector

Basis		Public Sector		Private Sector
Definition		Public Sector refers to the part of the Country’s overall economy which is controlled by the Government or various Government bodies.		The private Sector refers to the part of the Country’s overall economy which is controlled by Individuals or Private Companies.
Ownership		Public sector companies are owned and managed by Government/Ministries/State Govt./Govt. Bodies		Private sector companies are owned and managed by Private Individuals and Private Companies.
Primary Purpose		Generally, Public Sector entities are driven by the purpose of providing the basic public services to the common public at a reasonable cost in their respective industries by being also self-sustainable and profitable. However, profitability is not the primary motive.		The purpose of Companies in the Private Sector is profit-making by operating within the rules and compliances of the respective country.
Industry Focus		Public sector companies mostly operate in industries such as Water, Electricity, Education, Oil & Gas, Mining, Defence, Banking, Insurance, and Agriculture, etc.		Private Sector companies generally operate in multiple industries such as Technology, Banking, Financial Services, Manufacturing, Pharmaceuticals, Real Estate, Constructions, etc.
Financial Support from Government		Companies in Public Sector get all possible financial support for Government even in adverse circumstances wherein the financial health of the companies is not good.		Very little or no financial support from the Government unless a private entity is too big and systemically important for the Country.
Listing in Stock Markets		Entities in Public Sectors are publically traded on exchanges.		Entities in Private Sectors are publically traded on exchanges.
Profitability		Companies in Public Sector are relatively less profitable because of their primary purpose of not being profitability driven.		Companies in the Private Sector are relatively more profitable than their public sector counterparts in the same industry.
Government Interference		Since Public Sector companies are owned by Government, therefore they are subject to the uncertainties related to unfavorable Government decisions and larger Government interference.		Private Sector entities are relatively less exposed to Government interference.
Ease of Doing Business		Public Sector companies find it relatively easy to operate in a country because of its proximity to the Government		Private Sector companies find it relatively difficult to operate and manage the regulatory issues and compliance in a country in comparison to Public Sector companies
Resource Mobilisation (Funding)		Better placed to raise funds from the market because of backup by Government irrespective of the company’s financial health.		Depends upon the financial strength of the private sector entity. Stronger the financials, better capacity to mobilize funds from the market.
Work Culture for Employees		Relatively relaxed work culture with higher job security. However, pay and perks may not be that attractive in comparison to private sector companies.		Competitive work culture with performance-based career growth and better pay in comparison to public sector companies.

Conclusion

Public sector vs private sector is basically differentiated by the nature of the ownership and their purpose of existence. The businesses operating in both the public and private sectors are critical to the economy of any country and co-exist in the economy. There are certain industries wherein it makes sense for the Government to take ownership and manage the businesses in that industry. Industries like defense wherein many things are sensitive from the national security point of view are owned and managed by Government. Having said that the private sector makes a large part of the overall economy of any country and of late they have been participating in almost all businesses/industries at multiple levels of the value chain.