Denationalization

What Is Denationalization?

Denationalization, which is a form of privatization, is the process of turning over publicly owned and operated businesses or services to private companies.

A government may denationalize a single industry, such as rail transportation, if it is deemed to be a more efficient and cost-effective way to provide a service. On a far larger scale, a country transitioning from a socialist economic model to a capitalist model may turn over control of most or all of its key businesses and services to private companies.

Key Takeaways

Denationalization is the process of transferring property or business from government ownership to private ownership.
This form of privatization is usually motivated by a desire to reduce government spending, increase efficiency, or both.
State-owned enterprises that have been denationalized include banks, postal services, utilities, communications, and transportation services.

How Denationalization Works

Denationalization is the process of transferring an asset from public ownership—specifically ownership by a national government—to private ownership and operation.

The term is broadly synonymous with privatization, although privatization could apply to ownership by a local, state, or provincial government, in which case "denationalization" would not be a strictly accurate term.

Advantages of Denationalization

The rationale for denationalization depends on the product and the country, but a few general themes apply. Private companies are perceived as more efficient in delivering a service and more forward-looking in terms of adapting and enhancing their service over time.

State-owned firms are often virtual monopolies. Their management may be 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. If it is a bank, it might lend unprofitably for much the same reason.

Governments are naturally unwilling to let a state-owned firm fail, so it might continue to labor under a growing debt load indefinitely.

Disadvantages of Privatization

Even in a government with a capitalist system, there are arguments for some essential services to be owned and run by the government. Mass transportation services, water delivery, and public safety all are generally seen as crucial for the public welfare and are either owned outright or heavily regulated by governments.

Privatization opponents believe that services that are crucial to public health and welfare shouldn’t be vulnerable to market forces or driven by profit.

Some state-owned businesses are profitable, however. In some U.S. states and municipalities, liquor stores and some other nonessential businesses are government-owned and run as revenue-generating operations.

Examples of Denationalization

A number of countries have divested themselves of services and other assets in recent decades.

The U.K. denationalized its railroad system from 1994 to 1997. Passenger train and freight services both were divided into multiple franchise parcels and sold to a number of private companies. Some now argue that the result was disastrous, leading to the highest commuting costs in Europe despite the infusion of "hidden subsidies" by the government.
Japan began denationalizing Japan Post, the nation's largest single employer, in 2007. Then the nation's largest employer with 400,000 workers and nearly 25,000 branches, Japan Post is not only a postal service but a savings bank and an insurance company. The move towards privatization was fueled by public scandal, not least the misuse of Japan Post's vast cash reserves for ill-advised government projects. The privatization process has not gone smoothly. The government still holds a majority of shares in the company, with a full transition expected in 2028.
Mexico expropriated all foreign oil companies, facilities, and reserves in 1938 in order to keep control of the country's valuable resources, It reopened the sector to private investment in 2013 but its largest oil company, Pemex, remains a state-owned monopoly.

The government of Saudi Arabia launched an initial public offering for the world's most profitable company, Saudi Aramco, on the Saudi stock exchange in 2019. The government retains ownership of the vast majority of shares. The move was seen as an attempt by the government to diversify the company and transform it into a global energy company.

Russia's Privatization

The collapse of the Soviet Union in 1991 brought about a vast wave of privatization in a country, Russia, where private ownership of property and businesses had been outlawed since 1923 by a government intent on imposing the strictest dictates of communism.

The transition has not been smooth. Even in the earliest stages of privatization, 1992 to 1994, political insiders and well-connected career criminals nailed down majority stakes in the nation's most lucrative businesses.

By the mid-1990s, about 77 percent of Russia's large and mid-sized businesses had become private enterprises. The newly-rich owners promptly bought up small businesses across the country, cutting out the former workers who were supposed to take them over. A new class of billionaires, the Russian oligarch, was born.

What Are the Pros and Cons of Privatization?

Moving businesses from government control to the hands of private interests is intended to shrink the government and reduce government spending. Its advocates argue that it increases efficiency and innovation, as private companies have a profit incentive. This presumably motivates them to provide better service and head off competition.

On the other hand, private businesses have no motivation to subsidize unprofitable areas of their businesses or serve unprofitable customers.

For example, a public rail service may maintain unprofitable branch lines for the benefit of the relatively few communities and people who rely on them. A private service is not in the business of subsidizing unprofitable customers.

Does the U.S. Engage in Privatization?

Yes. The U.S. has privatized a number of essential services over the past decades. For example:

The privatization of prisons. Under this initiative, launched in 1984, a state or local government pays subsidies to private companies to house incarcerated individuals in privately-owned facilities. This has had limited success. Only about 8% of the U.S. prison population is currently housed in private prisons.
The charter school system. Begun in 1991, this program pays subsidies to parents in the form of vouchers for the costs of sending their children to private schools. Charters are contracts with a government agency to meet stated performance goals or face closure. About 3.7 million American children now attend one of 7,800 charter schools across the U.S.
Privatization of government functions. The system of hiring federal contractors to replace government workers was greatly expanded during the administration of President Ronald Reagan in the 1980s in the name of shrinking the government deficit. The Amtrak passenger rail system, the U.S. Postal Service, and even some military operations were wholly or partially privatized during this period.

What Are the Main Types of Privatization?

Privatization comes in a number of forms depending on the history, goals, and motivations of the government that institutes it.

Restitution. This returns assets to their former owners, typically after a government has seized them. This generally occurs after a government system undergoes radical change, such as from a communist model to a free-market model.
Direct Sale. A government may decide to privatize an essential service or industry. If it represents a valuable business opportunity, it is often sold outright or listed on a stock exchange as a public offering. The government may or may not hold a stake in the private company.
Management-employee buyout. Not surprisingly, this is the most politically popular choice for privatization. It was implemented with some success in Poland as it transitioned to a free market economy.

The Bottom Line

Privatization is usually done in the name of shrinking the government and saving taxpayer money. It is a process of returning essential functions from government to private control. Its proponents argue that private businesses are more efficient than governments at providing services to the public.

More rarely, privatization is done in the name of revolutionary change. Notably, some of the former satellite states of the Soviet Union undertook a wave of privatization efforts after its dissolution in 1991. Some were more successful than others, in terms of the quality of the services provided to the public.