Deprivatization

What Is Deprivatization?

Deprivatization is the act of transferring ownership from the private sector to the public sector. Governments may do this for a variety of reasons, such as attempts to maintain the stability of critical infrastructure during periods of economic distress. This can occur in various segments of the economy.

Often in the form of "nationalization," deprivatization can refer to state ownership of a previously privatized entity or industry. Deprivatization is also sometimes simply used as a synonym for nationalization for strategic or political reasons, to avoid the connotations and historical associations of the word "nationalization" when nationalizing a business, industry, or resource.

Key Takeaways

  • Deprivatization is a form of nationalization, where the government takes over a business, industry, or resource that had previously been private.
  • Deprivatization often occurs for the same reasons as any other nationalization.
  • These reasons can include economic distress or status as a natural monopoly, with additional focus on public dissatisfaction with the private entity or allegations of corruption.
  • State ownership typically is seen in key industries such as utilities and healthcare, or among distressed financial firms that are deemed "too big to fail."
  • Several notable instances of deprivatization occurred during and in the aftermath of the financial crisis and the Great Recession of 2008–09.

Understanding Deprivatization

Deprivatization generally occurs in the areas of transportation, electricity generation, natural gas, water supply, and healthcare because governments want to ensure these sectors are functioning properly so that the country can continue to run smoothly. In addition, electrical, natural gas, and hydro utility companies tend to be natural monopolies, where economies of scale lead to a single producer in a given geographic area or market.

Governments will often heavily regulate or nationalize such industries because they want to have control in these areas or to ensure that consumers have access to these essential services at a reasonable cost.

As a special case of nationalization, deprivatization often involves an industry or entity that was previously operated by the government or other public enterprise and was at some point privatized. In many cases, deprivatization involves public dissatisfaction with the outcome of the prior privatization and alleged or actual corruption in the operation of the private entity or the process by which it was privatized.

Other national interests such as protectionist trade policies (e.g., tariffs) or strategic goals to monitor and enforce quality or labor standards can also be reasons to deprivatize.

Special Considerations

Nationalization is one of the primary risks for companies doing business in foreign countries due to the potential of having significant assets seized without compensation. This risk is magnified in countries with unstable political leadership and stagnant or contracting economies. Businesses can purchase insurance covering nationalization and expropriation by foreign governments from the U.S. government.

The key outcome of nationalization is the redirection of revenues to the country's government instead of private operators, who are often alleged to export funds with no benefit to the host country.

Real-World Examples

In recent decades, cases of deprivatization have been rare. Argentina, for example, under an expropriation law in 2012, took 51% of the shares of its biggest oil producer, YPF, which was established as a state-owned enterprise in 1922 and later privatized in 1993. At the time of deprivatization, YPF was owned by Spanish oil company Repsol. Shares of YPF and Repsol were disrupted, though the Spanish oil company later sought a financial settlement from the Argentine government and received $5 billion in compensation. 

During the financial crisis of 2008–09, the U.S. government deprivatized the home mortgage finance agencies the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Both were originally public sector entities established by law during the Great Depression and the 1970s, respectively, who could then issue stocks and other securities on private markets as shareholder-owned, private, government-sponsored enterprises.

In the wake of the 2008 financial and foreclosure crisis, the U.S. federal government took effective ownership and deprivatized both Fannie Mae and Freddie Mac. Each of these interventions was successful in as much as the businesses were saved from liquidation. Results for the U.S. Treasury and shareholders were a mixed bag at best.

More recently, there have been efforts to deprivatize for-profit prisons and the services provided to them. The argument is that not only is criminal justice and reform a duty of the government, but that profit motives can lead to poor conditions, unfair treatment, and mismanagement of inmates. In 2021, for example, the state of Virginia successfully deprivatized the healthcare received in its prisons.

What Is Remunicipalization?

Remunicipalization is a local-level form of deprivatization. Here, a city or local government effectively takes over a private business or enterprise within its auspices. An example may be a private library, school, or hospital (which may have at first been publicly run) that is turned into a public facility.

What Is the Difference Between Privatization and Nationalization?

Privatization occurs when a state-run or government enterprise becomes a private, for-profit entity. This is the reverse of nationalization (i.e., de-privatization), whereby a for-profit entity becomes a state-run one.

Does Nationalization Protect Employees?

If nationalization affords workers protections or union representation, then it can be beneficial for employees. This is because there may be certain rules or procedures that must be followed to fire a government worker than for a boss to fire a worker in a privately-held company. Also, since state-run enterprises do not necessarily follow a goal of profit- and shareholder value-maximization, they may not need to conduct layoffs in order to cut costs.

Does the Nationalization of Utilities Benefit Customers?

Some argue that deprivatized utilities can ensure a high standard of reliability while also offering customers low prices. Unlike a private monopoly, a public utility is not often driven alone by the profit motive. At the same time, critics argue that a free market for utilities providers would create competition that would lead to both innovation and lower prices.

Article Sources

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  1. Ministerio de Cultura Argentina. "On a Day Like Today, June 3, 1922, Yacimientos Petrolíferos Fiscales Was Created." Accessed Dec. 16, 2021.

  2. U.S. Securities and Exchange Commission. "YPF Sociedad Anónima, 2019 Form 20-F," Pages 42-44. Accessed Dec. 16, 2021.

  3. Congressional Research Service. "Fannie Mae and Freddie Mac in Conservatorship: Frequently Asked Questions," Page 1. Accessed Dec. 16, 2021.

  4. WTOP News. "Virginia Supreme Court clears way for de-privatized inmate health care." Accessed Dec. 16, 2021.