Public Vs Private Sector — A Decision With Many Influences
The common assumption that the private sector is a more efficient provider of services than the public sector needs to be challenged. In the words of the old song from Porgy and Bess, “it ain’t necessarily so. “ In this article I argue that it certainly does not need to be so.
Let us start with our expectations as a community. Above all we expect our governments to preserve the public good and to act in our long-term best interest. https://www.bghit-nekhdem.com We expect our elected to make wise decisions based on high quality impartial advice.
We expect our businesses to put shareholders interests ahead of other interests, with the result that the share market’s focus on quarterly profits and share price gains makes it difficult for managers to consider broader public interest concerns. We have been slow to reward adoption of “Triple bottom line” evaluation of business performance when we make our investment decisions, despite the recent demise of large financial corporations that put short term profits ahead of ethical behavior and the public interest. The damage they did to us is still hurting.
If we cannot trust the private sector to put community interests as high in their priorities as we need, we are dependent on the form of contracts to ensure that the public good is preserved. This seems to be beyond the capability of the public sector negotiators and lawyers who draft these contracts, with the result that the public is helpless in the face of fraud, over-pricing, and low quality delivery of services. “Over-promise, under-deliver and hope no-one notices” is the way to maximise profits. Just check the reports on the billions of taxpayer funds that have been lost on private sector contracts in Iraq.
We also believe the myth that the public sector is grossly inefficient, and we observe the stupid behaviour of junior bureaucrats slavishly following silly systems as they tell us “That is what you have to do. “ They reinforce our prejudices regularly.
What is the reason? Are public sector managers less intelligent than private sector managers? Are they less well trained? Or are they set impossible goals using bad systems by their political masters?
My experience in introducing revolutionary change to large public sector organisations is a resounding NO to the first two questions. I have watched “dyed in the wool” public servants move on to stellar careers in the private sector as they adopted commercially competitive ideas. I have watched public sector organisations take on private sector competitors and win the business, but only after they have been taught the rules of the new game they have to play.
So let us look at the impossible goals our public servants are set by their political masters. In a state-owned enterprise, is “the maximisation of shareholder value” a worthwhile goal? Can this private sector goal be achieved without sacrificing the public good? Few have demonstrated that it is possible.
A recent example:
Meridian Energy, a power generator owned by the New Zealand Government, recently purchased a wind farm in South Australia, arguing that it was a good investment, and second, that the investment would maximise the shareholder’s return on investment. Meridian also justified its decision by saying that it would borrow the money offshore so its reserves for investment in New Zealand would not be diminished. Borrowing would leverage its capital and improve business returns.
Financial journalists challenged the price paid, suggesting that the wind farm had been on the market for a long time and the private sector investor had made a great return for holding it for a short period. Standard & Poors said that Meridian’s increased gearing would not affect its credit rating this time, but the warning was clear; Meridian’s business risk profile had deteriorated, and the implied government guarantee has saved the day.
What about the public interest? New Zealand has seen massive shortfalls in energy infrastructure investment over the last 30 years, and privatisation or corporatisation of the sector has led to huge price increases and dividends to shareholders. Our electricity supply systems are unreliable and our international competitive position is in jeopardy.
Meridian justifies its risky investment by reference to its over-riding goal, maximising shareholder value, and effectively gives lower priority to the interests of the New Zealand public who are its ultimate owners, even though they do not appear on the shareholder register.
In the meantime, the government says nothing and justifies its silence on the grounds that its appointed board of directors run the company.
I conclude that if the government sets goals for public sector organisations that do not provide for the public interest, the managers have no choice to adopt high risk private sector strategies.
This get worse when the politicians pass laws and regulations that enshrine inefficiency and entrench bad management practices. If they are not willing to change the rules of the game they cannot expect even the best public sector managers to operate efficiently.
Too often or debate on this thorny topic works at only one end of the spectrum, and decisions are driven by ideological assumptions, not by evidence. As usual, the right answer to the management conundrum is somewhere in the middle of the spectrum. While we wait for the politicians to find the right answer, the long suffering taxpayer, the funder of last resort, continues to pay for either the risks or the inefficiencies, or too often for both.
Michael Taplin contributed to major public sector reform programs in Australia by training public sector managers in private sector management techniques. He then taught public sector management in New Zealand and around the Pacific Island communities for Massey University. He believes that it is possible to train public sector managers to achieve private sector efficiency levels without losing the public good.