Overview of the private sector
The private sector is the part of a country’s economic system that is run by individuals and companies, rather than the government. Organizations in the private sector are usually free from government control or ownership but sometimes choose to partner with a government body in a public-private partnership to jointly deliver a service or business venture to a community. Most private sector organizations are run with the intention of generating income and returning profit back to its owners.
A private sector is organized when it has a definite structure that accommodates benefits, insurance, pension. A private sector can engage in the following:
- Buying and selling- Private sectors can engage in the exchange of goods and products for a consideration which could be in cash or in kind.
- Provision of Services- Private sectors can act as service providers where they render services.
Small, privately owned businesses form the greater part of the private sector. Despite this fact, this sector boasts a rich diversity of individuals, partnerships, and groups — from small mom and pop stores to multi-national conglomerates. The private sector includes entities such as households and individuals, for-profit enterprises, sole proprietorship (one-man business where one person does the whole job with little or no assistance), partnerships, corporations, nonprofit-making organizations, charities, and nongovernmental organizations (NGOs). The distinction between private sector and public sector reflects the two alternative methods of solving the allocation of resources in an economy: markets or government. Markets utilize private ownership of resources; thus the term ‘private sector’ connotes voluntary allocation decisions. In contrast to the public sector, the private sector, with the exception of nonprofit-making organizations, charities, and nongovernmental organizations mainly searches for profit opportunities. Private companies and organizations produce goods and services in response to supply-and-demand forces in the market, with the final goal of making a profit for the owners and shareholders of the private enterprise
Advantages of private sector
- The private sector plays a pivotal and expanding role in improving the well-being of societies, communities and individuals.
- It can help produce the economic wealth that lifts people out of poverty and expands access to health care, education and other vital public services.
- It can create economic opportunities to fulfil the aspirations of the young, the poor, the disenfranchised and all people intent on staking out their individual path to continuing improvement and a prosperous future for their families.
- It can generate ideas, innovation and efficiency in the use of resources, to help meet the environmental challenges of our times.
Disadvantages of private sector
- Private sector can enrich a few at the cost of the many.
- It can recklessly overexploit the environment and obstruct innovation.
- It can disenfranchise, destabilize society and foster corruption, whether in communities, markets, governments or international relations, ultimately undermining the prerequisites for its own existence.
- Corruption risks in the business sector and success in controlling them are crucial determinants of whether businesses and markets can live up to their productive, contributory role, or succumb to their destructive potential.
Corruption in the private sector
Narayana in his work “Tackling corruption in business: profitable and feasible in Global Corruption” states that growing a successful and sustainable business requires at least three things:
- an uncompromising devotion to developing products and services that contribute real value and allow clients to achieve their goals in the most effective and efficient way;
- passionate leadership that attracts and inspires the best of the class to join this venture;
- and an unwavering commitment to act as a responsible player in the community, nurturing the public trust and support on which all businesses ultimately depend.
Corruption erodes each of these pillars of business success: it means cutting corners and shirking honest competition rather than producing real, competitive value for clients; it means compromising corporate and individual integrity, deterring and demotivating the brightest and most innovative entrepreneurs and scientists from signing on; and it means consenting to, and propping up, a business environment in which complicity is for sale, entrusted public power is routinely abused for the sake of private gain, and public trust in the beneficial partnership between business and society is gradually undone.
Private sector organizations are susceptible to acts of corruption. Corporate scandals are also getting increasingly common in recent years. A flurry of high-profile corruption scandals ranging from BAE Systems to Siemens, Halliburton to Samsung highlights that private sector face a broad range of different corruption challenges. The problem arises because the principals (owners or shareholders) and agents (professional managers and their subordinates) have conflicting interests. It is well known that private corporations’ objective is profit maximization while a typical public sector corporation aims to maximize the society’s welfare. Despite differences in the objectives, there are lessons which the private sector organizations can emulate from the public sector partly because both are susceptible to the agency problem.
Corruption in the private sector takes many forms, among them bribery, undue influence, fraud, money laundering and collusion. Corruption distorts markets and has a negative impact on society as a whole, in both the developing and the developed world. Private sector corruption contributes to environmental damage, health and safety problems, economic instability and human rights violations by diverting scarce resources, both financial and human. Private sector corruption erodes confidence in public institutions and deprives citizens of capital needed for economic growth.
Acts of corrupt practices in the private sector
- Facilitation payment/Kickbacks: This is payment made to another that acts as incentive to complete some action or process expeditiously, to the benefit of the party making the payment. A kickback is similar to a bribe but usually refers to a payment given in return for receiving a contract, which is ‘kicked back’ to someone involved in awarding the contract.
- Accepting unwelcoming gift: Unwelcoming gifts are gifts that once received can make the receiver become biased and will take action in favour of the sender. The only gifts that are acceptable are promotional items, or items of nominal value.
- Trading in influence (also called lobbying or influence peddling): An illegal practice of using one’s influence in government or connections with persons in authority to obtain favours or preferential treatment for another, usually in return for payment. Typically this form of corruption can be perpetrated by those in prominent positions or with political power or connections.
- Personal aggrandizement due to one’s position: Power corrupts and absolute power corrupts absolutely. Where an individual vested with powers or authority to do acts on behalf of the organisation decides to use those powers for personal or third party gain, personal aggrandizement is complete. This may also be in the form of exercise of discretion to purchase goods and services in a company in which he or she (person in authority) has personal interest.
- Conflict of Interest: This is a set of circumstances that creates a risk that professional judgement or actions regarding a primary interest will be unduly influenced by a secondary interest”. Primary interest refers to the principal goals of the organisation while secondary interest includes personal benefit and is not limited to only financial gain but also such motives as the desire for professional advancement, or the wish to do favours for family and friends. These secondary interests are not treated as wrong, but become objectionable when they are believed to have greater weight than the primary interests.
- Insider Trading: It is a non-public fact regarding the plans or condition of a publicly traded company that could provide a financial advantage when used to buy or sell shares of the company’s stock. Insider information is typically gained by someone who is working within or close to a listed company.
- Illicit enrichment: This refers to a situation in which officials cannot explain their wealth in relation to the income they lawfully earn. The wealth that is not explicable may be the proceeds of a bribe or a form of stealing such as embezzlement, misappropriation, concealment of property, money laundering or false accounting.
- Embezzlement: This is theft or misappropriation of funds placed in one’s trust or belonging to one’s employer. It is the act of withholding assets for the purpose of conversion (theft) of such assets, by one or more persons to whom the assets were entrusted, either to be held or to be used for specific purposes.
- Extortion: An act of giving or receiving gifts from another or to cause someone do something illegal on another’s behalf thereby bringing about threat to the person’s life or integrity.
- Bribery: Bribery is probably the most rampant and visible form of corruption in Nigeria. Bribery can be defined as ‘the corrupt payment, receipt, or solicitation of a private favour for official action. Bribery can be initiated by the person who solicits for a bribe or the person who offers and then pays a bribe. A bribe may be any money, good, right in action, property, preferment, privilege, emolument, object of value, advantage, or merely a promise or undertaking to induce or influence the action, vote, or influence of a person in an official or public capacity.
- Stealing: Stealing ordinarily consists of the fraudulent taking or conversion of anything capable of being stolen to his own personal use or the use of a third party by an individual who is not ordinarily entitled to the object(s) stolen but who by virtue of official position or employment has gained access to and dealt improperly with them.
- Fraud: Fraud simply means ‘dishonesty’ may consist of the use of false or misleading information or advise to deprive another individual or organisation of property under the guise of improving efficiency, service delivery or through privatisation.
Effects of Corruption in the Private sector
- Corruption inevitably leads to a diminished business climate when the public trust is put at risk.
- Its existence reduces business credibility and profits when professionals misuse their positions for personal gain.
- When resources are tampered with and used improperly, insufficient resources are available to effectively run the business and maintain its levels of operations.
- Customers/Investors lose respect and trust when the news about corrupt business professionals breaks, because they do not know if the corrupt practice will ruin their industries in time.
- A company involved in corruption will require its officials to spend valuable time and resources to monitor the fallout and reassure clients the company is still viable.
- Practical investors steer clear of businesses with a corrupt history and this leads to a weakened development.
- Corruption fuels the growth of criminal enterprises and eventually affects the society in which the business operates.
- Additional costs for kickbacks or for establishing corrupt networks as well as opportunity costs for lost contracts due to the bribing of other bidders are consequently transmitted to consumers through higher prices and/or lower quality of products and services.
Although it is true that the private sector is often a victim of corrupt government officials who use their power to extort bribes, especially from smaller entrepreneurs, the private sector often facilitates corruption—such as when businessmen try to gain preferential government treatment or win over their competitors.
The addition of an anti-corruption principle to the United Nations Global Compact as announced in June 2004 illustrates the increasing importance of the private sector in a global fight against corruption. The event signified that sustainability, business leadership, and good governance are becoming the defining elements of the private sector’s internal safeguards against corruption. In the words of Ban Ki Moon:
“The private sector also has a crucial role. Good behaviour is good business. Business groups can convert anti-corruption action into firm support for sustainable development. I call on everyone to help end corruption, and come together for global fairness and equity. The world and its people can no longer afford, nor tolerate, corruption.”
The private sector must play an important role in actively bringing about more honest governance and transparency reforms. Free markets and broad prosperity cannot be achieved without eliminating corruption. In many countries, the private sector can have a positive impact to help safeguard market integrity.