DEFINITION of Denationalization

Denationalization, also known as privatization, occurs when a national government sells an asset such as a large firm to private investors.

BREAKING DOWN Denationalization

Denationalization is the process of transferring an asset from public ownership – specifically ownership by a national government – to private ownership. The term is broadly synonymous with privatization, although "privatization" could also apply to ownership by a local, state or provincial government, in which case "denationalization" would not be a strictly accurate description.

For the most part, denationalization occurs when a government sells a controlling stake of a state-owned enterprise – often in the energy, banking, telecommunications, or transportation industries – to private investors.

Reasons for Denationalization

The rationale for a particular denationalization depends on the firm and the country, but a few general themes apply. State-owned firms are often uncompetitive. At times their management is heavily influenced by politicians, who may or may not have business experience and are likely to be focused on political, rather than business, goals.

A state-owned firm might hire large numbers of unnecessary staff as a form of political patronage, for example. If it is a bank, it might lend unprofitably for much the same reason. Governments may be unwilling to let a state-owned firm fail, so it might continue to labor under a growing debt load indefinitely. Since state-owned firms are often monopolies, they can harm consumers even if they are relatively well-run. 

At the same time, critics of denationalization argue that private interests often pursue profit at the expense of the society's overall wellbeing, which may be harmful if the firm provides an essential good or service such as energy, transportation or telephone service.

Examples of Denationalization

A number of countries have divested from firms and other assets in recent decades. The UK denationalized its railroads from 1994 to 1997. Japan is in the process of denationalizing Japan Post. Mexico – which expropriated all foreign oil companies, facilities and reserves in 1938 – opened the sector back up to private investment in 2013, though the former monopoly Pemex remains state-owned. Saudi Arabia is considering floating part of the kingdom's oil company, Saudi Aramco, on an international bourse, though the government plans to retain ownership of the large majority of shares.