DEFINITION of Deprivatization
Deprivatization is the act of transferring ownership from the private sector to the public sector. This often occurs when a government attempts to maintain the stability of its critical infrastructure during periods of economic distress. This can occur in various segments of the economy.
Also known as "nationalization".
BREAKING DOWN 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 companies tend to be monopolies, and governments will often want to have control in these areas to ensure that consumers have access to these essential services at a reasonable cost.
Nationalization and Investing
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. The key outcome of nationalization is the redirection of revenues to the country’s government instead of private operators who may export funds with no benefit to the host country.
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 were owned by Spanish oil company Repsol S.A., declaring it of "public interest." Shares of YPF and Repsol were disrupted, though the Spanish oil company did later receive a financial settlement from the Argentine government. In 2015, Argentina began nationalizing its commuter railroads.
Businesses can purchase insurance covering nationalization and expropriation from the U.S. government.
During the financial crisis of 2008-09 the U.S. government effectively nationalized businesses including General Motors, Fannie Mae and Freddie Mac. Insurance giant AIG was bailed out but was fell short of being privatized. 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.
"The cost of a disorderly liquidation to the families and businesses across the country that rely on the auto industry would have been far higher," the Treasury Department noted in 2014. "The government's actions not only saved GM and Chrysler, but they saved many businesses up and down the supply chain."
ProPublica maintains a list of bailout recipients and the net loss or profit to the Treasury here.