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23 May 2006

Accountable government, part 3

Public value for public money

In the public sector, as in the private sector, the function of an organisation is to create wealth (or value) by using the factors of production to best advantage. The material difference is that the private sector is primarily concerned with creating private value, while the public sector is primarily concerned with creating public value.

The objectives of private sector organisations ("the firm") and of non-commercial public sector organisations ("the department") are indistinguishable in their nature, though they may differ in form and in presentation. It is possible to start from the assumption that both private and public sector organisations are about creating value for buyers, an approach reflected in the purchaser/provider model.

Apart from government business enterprises, the value created in the public sector is not always measurable by reference to a monetary yardstick or by a measure such as return on investment. The wealth created by a department of state is defined by reference to the meaning and importance attributed by a significant observer to a particular activity, set of activities, outcome(s), process(es) or, sometimes, input.

Elected representatives (for example, Parliament) may consider that adherence to a particular process (compliance) is of greater value than the achievement of a specific result at a particular cost (outcome). Until recently, spending the allocated budget (input) - and no more or less - was considered inherently valuable.

This kind of analysis complicates the process of value creation and of decision making beyond the classical model of the firm, which requires of the firm that it be profitable; that is that it meet its costs and generate a return to its owners that is commensurable with their investment.

In reality, the interests of different stakeholders are neither equal nor equivalent, as we will see shortly. It is accepted by economists that the firm operates under several constraints, related to resources (e.g. availability of essential inputs), output quantity or quality (e.g. delivery requirements or customer service standards or industry quality standards) or legal matters (e.g. environmental law, trade practices legislation).

If the firm remains profitable within the existing constraints (and adapts as they change) it can be reasonably expected that it will meet the legitimate expectations of the shareholders (or owners).

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