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What is 'Privatization'

Privatization describes the process by which a property or business goes from being owned by the government to being privately owned.

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.

BREAKING DOWN 'Privatization'

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 United States, the public sector includes the US postal service, the public school and university systems, as well as the National Park Service, for example. 

Enterprises not run by the government compose the private sector. In the United States, for instance, private companies include the majority of firms in the consumer discretionary, consumer staples, finance, information technology, industrials, real estate, materials and health care sectors. 

Privatization of specific government operations happens in a number of way, although generally, the government transfers ownership of specific facilities or business processes to a private, for-profit company.

Transitioning from Public to Private

Advocates of privatizing government operations believe that private companies operating with a profit motive can deliver goods and services more efficiently than government agencies that may be bogged down by bureaucracy.

Opponents of this type of privatization often argue that services considered basic necessities, such as water, electricity and education should not be subject to market forces or the drive to generate a profit. In some places, nonessential operations such as liquor stores are controlled by the public sector as a way to increase revenue for the state.   

For example, 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. Once privatized, private businesses such 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.

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 shareholders, Dell offered its 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.

 

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