SBL Notes Public Sector Pankaj Khandelwal
Chapter 8 Governance CA, CFA, CIA
Public Sector Governance
There are three main sectors in the business environment, each with different objectives, stakeholders, and
governance structures.
Sector Who Controls It? Main Purpose Performance Measure
Earn profit and maximize shareholder
Private Sector Shareholders Profitability
wealth
Provide public goods and services
Public Sector Government (State) Value for money
(Essential services)
Third Sector (NGOs/Not- Meet social needs not fulfilled by Value for money and
Volunteers/Trustees
for-Profit) government or businesses social impact
Public Sector Organisations
Public sector organisations are government-owned or government-funded bodies that provide essential public
goods and services that the private sector cannot or should not provide.
Four Organs of the State
• Executive – Government (runs the country)
• Legislature – Makes laws
• Judiciary – Interprets and enforces laws independently
• Secretariat (Administration) – Implements government policies (e.g., police, hospitals, schools)
Key Features
• Funded mainly through taxes.
• Services may be free (e.g., public schools) or partly paid (e.g., subsidised transport).
• Main goal is public service, not profit.
• Agency Theory: Taxpayers = Principals (owners); Government & public employees = Agents.
Stakeholders
Public sector organisations have many stakeholders, often with different interests.
• Government – Provides funding and sets policies.
• Managers/Civil Servants – Implement government policies.
• Public (Users) – Receive the services.
• Employees – Deliver the services.
• Taxpayers – Fund services through taxes.
Social Contract
• A social contract is an agreement where the government provides fair services, and citizens contribute
through taxes and follow laws.
Performance
Public sector organisations often face lower efficiency because they do not operate under profit pressure.
Common Challenges
• Less cost control because government may cover overspending.
SBL Notes Public Sector Pankaj Khandelwal
Chapter 8 Governance CA, CFA, CIA
• Monopoly services (e.g., passport office), so users cannot choose another provider.
• Free or subsidised services can lead to overuse and inefficient resource allocation.
Improving Performance
Governments use performance management systems by:
• Setting financial and non-financial targets.
• Comparing actual results with targets.
• Using inspections and audits to improve accountability.
Third Sector Organisations (NGOs)
Third Sector Organisations or NGOs (Non-Governmental Organisations) are non-profit organisations that provide
services and meet social needs that the government or private sector cannot or should not provide.
Key Features
• Formed voluntarily
• Independent of the government
• Non-political
• Not-for-profit
• Operate legally and for public benefit
Funding
• Donations from individuals
• Businesses
• Governments
• Grants
Main Objective
Improve society by supporting causes such as:
• Poverty relief
• Healthcare
• Education
• Human rights
• Environmental protection
Stakeholders
• Donors – Provide funding and expect proper use of donations.
• Members – Regular supporters who receive reports and updates.
• Beneficiaries – People or communities receiving help.
• Board of Directors – Manages the NGO.
• Trustees – Ensure the NGO follows its mission.
• Regulators (where applicable) – Monitor compliance and prevent fraud.
Agency Relationship
• Principals: Donors
• Agents: NGO management
SBL Notes Public Sector Pankaj Khandelwal
Chapter 8 Governance CA, CFA, CIA
Performance
Measuring NGO performance is difficult because:
• Success is based on social impact, not profit.
• It is often hard to measure the direct effect of the NGO's work.
Public Sector Objectives and Leadership
Public Sector Strategic Objectives
• Public sector organisations are not independent.
• Their objectives are mainly set by government policies.
• They have limited freedom to set their own goals.
Example: A government-funded school must follow government rules on Curriculum (subjects to teach),
Admissions and Governance processes.
However, it can decide Extra subjects (within government limits), Extracurricular activities, school operating hours
Governance Arrangements
Aspect Private Sector Governance Public Sector Governance
Often managed by a Board of Governors or Board
Governing Body Managed by a Board of Directors
of Trustees
Non-Executive Directors (NEDs) No equivalent NED oversight in many public
Board Oversight
monitor executive directors organisations
External Shareholders oversee the board and No shareholders; accountability is through
Accountability hold it accountable government, regulators, or the public
The Board of Governors:
• Sets the school's vision and strategy.
• Holds the head teacher accountable for performance.
• Ensures public money is spent wisely.
Main Roles of the Board of Governors/Trustees
• Hold directors accountable on behalf of taxpayers (funders).
• Ensure the organisation is well managed.
• Monitor achievement of government performance targets.
• Help approve and monitor the budget.
• Oversee senior appointments.
Democratic Control
In democratic countries, public sector organisations are controlled by elected governments.
• Government policies depend on the political party in power.
• Left-wing (socialist) parties usually support a larger public sector.
• Right-wing (conservative) parties usually support a smaller public sector and greater private sector
involvement.
SBL Notes Public Sector Pankaj Khandelwal
Chapter 8 Governance CA, CFA, CIA
Public Debate Influences Decisions
People and governments debate issues such as:
• Which services should be free (e.g., healthcare, education).
• Whether services should be privatised.
• How much independence public organisations should have.
• Whether organisations should report to central or local government.
Transparency
Transparency = Openness and accountability in government.
How Transparency is Achieved
• Public debates in parliament.
• Press conferences and government websites.
• Public consultations before major decisions.
• Freedom of Information (FOI) laws allowing citizens to access government information.
Why It Matters
• Builds public trust.
• Makes governments accountable.
• Helps citizens understand and influence decisions.
Political Influence (Lobbying)
Lobbying is when special interest groups (SIGs) try to influence government decisions.
Methods
• Campaigns
• Meetings with politicians
• Letters and petitions
• Political donations (legal in some countries)
Pros: Helps governments understand stakeholder concerns.
Cons: May give unfair influence to powerful groups.
Privatisation
Privatisation means transferring government-owned organisations to the private sector, by:
• Selling shares to the public.
• Selling the business to another company.
Examples: Utilities, airlines, oil & gas companies, transport.
Advantages
• Greater efficiency and competition.
• More investment.
• Less political interference.
• Government raises money from selling assets.
SBL Notes Public Sector Pankaj Khandelwal
Chapter 8 Governance CA, CFA, CIA
Disadvantages
• Essential services may be better kept public.
• Profits go to shareholders instead of the government.
• Prices may increase.
• Risk of private monopolies.
• Short-term profit focus may reduce long-term investment.
Public Value
Performance management in the public sector is different from the private sector.
Private Sector Public Sector
Goal is to make profit and increase shareholder
Goal is to provide public services, not make profit.
wealth.
Performance is measured by financial returns Performance is measured by service quality, efficiency, and
(e.g., profit, ROCE). value for money.
Revenue depends on sales and customers. Funding mainly comes from government/taxes.
Competition encourages cost control and
Less market pressure can reduce incentives to control costs.
efficiency.
Public Sector Challenge
• Since funding is often fixed, organisations may adopt a "use-it-or-lose-it" approach, spending the entire
budget to avoid future budget cuts instead of focusing on efficiency.
Value for Money (VFM)
Governments must ensure that taxpayer money is spent on the most important public services and used
efficiently with minimum waste.
The 3Es of Value for Money
E Meaning Simple Explanation
Economy Buying resources at the lowest cost while maintaining quality. Spend wisely.
Efficiency Getting the maximum output from available resources. Do more with less.
Effectiveness Achieving the intended objectives. Meet the goals.
Example: A city hires workers to reduce street litter.
• Effectiveness: Streets become cleaner - Goal achieved.
• Economy: Workers were paid higher wages than planned. - Goal not achieved
• Efficiency: Each worker cleaned less area than expected, so more workers had to be hired - Goal not
achieved