Table Of Contents
What is the Private Sector?
The private sector is that part of a country’s economy that is owned and managed by private individuals or enterprises not associated with a country’s government. This sector is mainly dominated by businesses such as sole traders, small to medium enterprises, private companies and publicly traded companies. Financial institutions can be classified under the private sector only if they are fully owned by private individuals or if private individuals or enterprises have the majority share ownership. The private sector can only be found in a mixed economy where both government and private entities determine production. In a state-planned economic system, there is no private sector, the government will be responsible for the production of goods and services. The main features of the private sector are, the profit motive, private sources of finance and private ownership to name a few.
The Profit Motive
Unlike state owned enterprises whose aim is to obtain enough revenue to cover expenditures, private owned companies operate to maximise profit. This is the primary feature of the private sector whether it is a small private company or publicly traded institution. Maximising profit is a powerful motive for the success of private business enterprises, without it the business cannot survive and grow.
Another feature of the private sector is private ownership of businesses. Businesses in the private sector are owned by private individuals or institutions and not the government. A sole trader owns and runs his business, private individuals own and manage their private companies, private institutions or individuals have majority share ownership in publicly traded companies. Private sector implies private ownership and control.
Private Products and Services
Private sector businesses offer private goods or services that can only be consumed by one person, this is another important feature of the private sector. Public goods and services such as running water, electricity, defence and public protection are offered by the public sector. Businesses in the private sector do not offer these services because they have positive externalities. A product or service with positive externalities is a product that can benefit more than one person without the others paying an extra cost. Public services such as police services benefit everyone in a country including those that do not pay taxes to enable the government to provide such services. In order to maximise profit, private businesses offer goods and services that they can charge people individually for use; this is not possible with public goods. However, some products that private sector businesses offer have negative externalities, that is when a person consumes them other people can be negatively affected, for example cigarettes.
Skilled Labour Force
A common feature in private sector businesses is the amount of skilled labour force employed. Private companies offer competitive wages and salaries together with other benefits such as healthcare insurance/medical aid. As a result, private businesses employ a large share of highly skilled employees. This is prevalent in most countries. The public sector is limited when it comes to offering employees certain types of benefits that private companies offer. It is interesting to note that government workers in some developing countries are paid better than their private sector counterparts.
Sources of Finance
Features of the private sector sources of finance include shares, loan facilities, venture capital and owners own capital. Most private companies obtain capital from issuing shares or debentures on the stock exchange. Small to medium enterprises and partnerships acquire loans or use their personal finances for capital. Other private enterprises make use of venture capitalists or angel investors. Few large institutions in the private sector raise funds by issuing bonds, like what Government owned institutions do.
Sources of Revenue
An important feature of the private sector is that the major source of revenue is from the sale of products and services unlike the government or public sector that obtains revenue from the public through taxes, duty and penalties. Also, private sector participants are required by law to pay taxes to the government.
Research and Development
Research and development is an essential feature of the private sector. Companies in the private sector aim to increase their profit potential. Some of the ways this can be done is through improving products and services or finding cheaper ways to produce them. As such, companies invest in research and development. Various ways and procedures that improve a product’s quality or decrease costs can then be implemented. New products and services that can be offered to the public are a result of research and development in addition to technological progress. The car manufacturing industry is an example of this, new models of cars that perform better are introduced to consumers regularly. Research and development is not only a feature of the private sector, some governments mainly in developed countries, also invest in research.
One cannot speak of the private sector without mentioning competition. Firms in the private sector are extremely competitive. This feature of the private sector distinguishes private owned businesses from state enterprises. Every business in the private sector seeks to gain a large market share. A business risks being overtaken if the owners and employees become complacent. Even within the internal environment employees are competitive. As a result, performance in the private sector is ever improving especially when employees are promoted on merit unlike in government institutions.
In the private sector, job security is low compared to government owned institutions where they often have rigid rules that restrict hiring and firing of civil servants. The private sector is more flexible when it comes to hiring and firing. The fact that a person can lose as job as quickly as they can secure one in the private sector is a common feature of private sector businesses. The flexible rules of recruiting and laying off workers encourage employees to improve performance whilst the rigid formulas in the public sector make workers complacent. These features of the private sector contribute to the differences in the quality of public sector workers and those from the private sector.