What Is Privatization?

Privatization occurs when a government-owned business, operation, or property becomes owned by a private, non-government party. Note that privatization also describes the transition of a company from being publicly traded to becoming privately held. This is referred to as corporate privatization.

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Privatization

How Privatization Works

Privatization of specific government operations happens in a number of ways, though generally, the government transfers ownership of specific facilities or business processes to a private, for-profit company. Privatization generally helps governments save money and increase efficiency. In general, two main sectors compose an economy—the public sector and the private sector.

Government agencies generally run operations and industries within the public sector. In the U.S., the public sector includes the U.S. Postal Service, public schools, and university systems, as well as the National Park Service. Enterprises not run by the government comprise the private sector. Private companies include the majority of firms in the consumer discretionary, consumer staples, finance, information technology, industrial, real estate, materials, and health care sectors.

There are two types of privatization—government and corporate, although the term generally applies to government-to-private transfers.

Public-to-Private Privatization vs. Corporate Privatization

Corporate privatization, on the other hand, allows a company to restructure its operations without needing to take shareholders into account. This often appeals to companies if the leadership wants to make structural changes that would negatively impact shareholders. Corporate privatization sometimes takes place after a merger or following a tender offer to purchase a company’s shares. In order to be considered privately owned, a company cannot get financing through public trading via a stock exchange.

Dell Inc. is an example of a company that transitioned from being publicly traded to privately held. In 2013, with approval from its shareholders, Dell offered shareholders a fixed amount per share, plus a specified dividend as a way to buy back its stock and delist. Once the company paid off its existing shareholders, it ceased any public trading and removed its shares from the NASDAQ Stock Exchange, completing the transition to being privately held.

Key Takeaways

  • Privatization describes the process by which a piece of property or business goes from being owned by the government to being privately owned.
  • It generally helps governments save money and increase efficiency, where private companies can move goods quicker and more efficiently.
  • Opposers suggest basic services, such as education, shouldn’t be subject to market forces.

Advantages and Disadvantages of Privatization

Proponents of privatization argue that privately-owned companies run businesses more economically and efficiently because they are profit incentivized to eliminate wasteful spending. Furthermore, private entities don’t have to contend with the bureaucratic red tape that can plague government entities.

On the other hand, privatization naysayers believe necessities like electricity, water, and schools shouldn’t be vulnerable to market forces or driven by profit. In certain states and municipalities, liquor stores and other non-essential businesses are run by public sectors, as revenue-generating operations.

Example of Privatization

Before 2012, the state of Washington controlled all sales of liquor within the state, meaning that only the state could operate liquor stores. This policy allowed the state to regulate how and when liquor was sold, and to collect all revenue from liquor sales within the state. However, in 2012, the state moved to privatize liquor sales.

There have been several attempts to privatize the Social Security system in the U.S.

Once privatized, private businesses such as Costco and Walmart could sell liquor to the general public. All previously state-run stores were sold to private owners or closed, and the state ceased collecting all revenue from liquor sales.