A point with which I strongly disagree is that some public businesses are profitable so we should leave them alone. First of all, it's trivial to be profitable if you control a monopoly. Also, being profitable doesn't mean you are efficient, some things could be done much more effectively in the private sector. Also, by being overstaffed, even if profitable, you are not allowing all these people working for you to do something more productive.
Beyond that, when talking about profitability, you should consider pension plans and future obligations. Some of these businesses might have a positive balance sheet for the year but what's going to happen if you consider their future, inflated, obligations. A good example are the pensions the Public Electric Company employees get. They are mostly funded by the government.
Let's see why it screws up incentives:
-- What do you think any of the people working in the public sector tries to optimize? Is it the successe of the business they are working on? Do they try to advance their careers? Or do they try to work as little as possible?
-- If an employee is not good, is a government controlled company ever going to fire them?
-- The guy who controls the supplies in the hospitals, does he ever have to report to somebody about that?
-- Do you know a single person in the public sector that he has ever been promoted or fired because of his skills or lack there of?