If there is surplus value it should stay in the enterprise and be used to improve the enterprise by improving processes or improving the lives of workers. Failing that it should be returned to the customers through lower prices.
One good thing about government services is they're more efficient because they don't have this value being extracted by uninvolved parties. That means they're able to provide better service or lower prices with the value that would've been sucked out by profit takers.
A lot of the value in government services tends to be extracted by public employee unions. Politicians make excessive commitments around wages, pensions, and job security in order to buy union votes and maintain labor peace. Then the politicians move on and future taxpayers are left holding the bag.
What grandfather is suggesting is something like an ESOP, co-op, or etc. There are a long history of these kinds of organizations, and they thrive in free-market economies--unfortunately, nobody really lives in one of those anymore.
It is telling that you say public employee unions "extract value" by demanding the pensions/job protections that should by rights belong to everyone (and often did, in the past). Conversely, private corporations "extract value" from the labor marker by struggling to provide any job security, any retirement, or even anything resembling a living wage.
Just which sector is failing to be profitable, here?
Profit is surplus value. The opposite of waste. Forcing it back into the place it originated versus letting it transport to the most-useful thing it can do is how you get sclerotic feudalism. Had we adhered to this philosophy during the Industrial Revolution, we would have just kept farming.