Loading the player...

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.

 

RELATED TERMS
  1. Private Sector

    The private sector is the part of the economy that is not state ...
  2. Private Banking

    Private banking includes personalized financial and banking services ...
  3. Private Currency

    A private currency is typically issued by a private firm or group ...
  4. Public

    Public refers to anything that can be accessed by any person ...
  5. Crossover Fund

    A crossover fund is an investment fund that holds both public ...
  6. Private Foundation

    A private foundation is an organization created via a single ...
Related Articles
  1. Investing

    Methods used in valuing private companies

    There are a few methods for calculating the valuation of a private company. By using financial information from peer groups, we can estimate the valuation of a target firm.
  2. Investing

    How to Invest in Private Equity

    Private equity might be a pricey investment, but the payoff could be big. Here's why and where you should invest in private equity.
  3. Investing

    Grasp the Accounting of Private Equity Funds

    Read about private equity accounting and how it is different than that of other investment vehicles. The nature of private equity makes a difference.
  4. Investing

    Should Water Be Privatized?

    Could water privatization mean lower costs, greater efficiency and higher quality compared to public sector providers? A look at the evidence so far.
  5. Insights

    Why Are Companies Taking Longer To Go Public?

    Learn why private companies are waiting longer to have their IPOs. Understand why it may be more advantageous for a company to stay private.
  6. Insights

    Which Are the World's 10 Largest Private Banks?

    Most of the largest private banking providers in the world are headquartered in Europe or the United States.
  7. Financial Advisor

    How To Invest In Private Equity Real Estate

    A brief introduction to private equity real estate, and what investors should know if they want to get started.
  8. Investing

    Private Equity: America's Richest Bosses

    Beyond your wildest dreams: heads of private equity firms are taking home America's biggest paychecks.
RELATED FAQS
  1. What's the difference between publicly- and privately-held companies?

    Privately-held companies are owned by the company's founders, management, or private investors. Public companies are owned ... Read Answer >>
  2. Investment Banking vs Private Equity

    Despite both shared similar characteristics, they are different in many ways. Check out how private equity and investment ... Read Answer >>
  3. How do returns on private equity investments compare to returns on other types of ...

    Learn how private equity performance compares with other alternative investment asset classes and traditional types of investment ... Read Answer >>
  4. Is a private company required to show financial information?

    Understand whether a private company is required to disclose financial information to the public. Learn what is required ... Read Answer >>
Trading Center