Privatization occurs when a government-owned business, operation, or property becomes owned by a private, non-government party. Privatization may also describe a transition that takes a company from being publicly traded to becoming privately held, known as corporate privatization.
Key Takeaways
- Privatization describes a transfer of ownership from the government to a private entity.
- Governments often save money and increase efficiency through privatization, as private firms can often operate more effectively.
- Critics argue that essential services like education and utilities should remain publicly run and not be subject to market forces.
- The term may also refer to transitioning a public company to a privately held entity.
How Privatization Works
Government operations can be privatized in multiple ways, generally involving the transfer of ownership to a private, for-profit company. This often results in cost savings and increased efficiency for governments.
Typically, an economy consists of two main sectors: the public sector and the private sector. Governmental agencies manage operations within the public sector, such as the Postal Service, public schools, police, fire departments, national parks, and defense services in the U.S. Conversely, private enterprises not run by the government make up the private sector, which includes businesses in industries like finance, healthcare, technology, and more.
Two categories of privatization exist: government and corporate, although it usually applies to government-to-private transfers.
Public-to-Private Privatization vs. Corporate Privatization
Corporate privatization allows a company to restructure or manage its business without the strict regulatory scrutiny or shareholder oversight imposed on publicly listed companies. This can appeal to leadership wanting to enact significant structural changes.
A notable example is Dell Inc., which transitioned from a publicly traded to a privately held company in 2013. By buying out shareholders, Dell ceased public trading and removed its stock from NASDAQ. In 2018, Dell reverted to being a public company.
Advantages and Disadvantages of Privatization
Proponents claim that privatization leads to more economical and efficient operations, driven by profit incentives to cut waste. Private entities also avoid bureaucratic red tape.
However, detractors argue that vital services like electricity, water, and education should not depend on market forces or profit motives. Some governments run non-essential operations like liquor stores, generating revenue for the public sector.
Real-World Examples of Privatization
In 2012, Washington state privatized liquor sales, allowing corporations like Costco and Walmart to sell liquor. Previously state-run stores either were sold to private owners or closed, with the state no longer collecting revenue from liquor sales.
A historically significant instance is the privatization that occurred post-Soviet Union collapse. Under Mikhail Gorbachev, initial reforms started the privatization process, and after the Soviet Union fell, many government enterprises shifted to private hands, often benefitting a small group known as oligarchs and increasing inequality.
What Types of Institutions Can Become Privatized?
A variety of institutions and facilities typically run by public officials or governments can and have been privatized. These include prisons, public schools and universities, hospitals, highways, airports, harbors, public utilities like water and electricity, waste disposal, mail delivery, and communications infrastructure.
Why Are Some Prisons Privatized?
Privatization of prisons and jails often happens to lower costs, raise capital, and create jobs. Specialized companies may be better equipped for managing inmate populations. Critics, however, argue that for-profit prisons can suffer from unethical practices, such as cutting corners and mistreating prisoners.
Do Shareholders Get Anything if a Company Goes Private?
Yes. Shareholders must agree to relinquish ownership in exchange for compensation. Once approved, they receive a payment per share, usually at a premium to market price. This delists the stock from public exchanges.
The Bottom Line
Privatization involves transferring services from government management to private enterprises. Publicly traded companies might also become privately held. While some government-run services like prisons can transfer to private management, essential services need careful consideration. Each change must balance efficiency with public welfare.
Related Terms: public sector, private sector, merger, shareholders, financing.
References
- Dell. “Dell Is Now a Private Company”.
- The Wall Street Journal. “Dell Returns to Public Equity Markets”.
- Pennsylvania Liquor Control Board. “About Us”.
- Department of Revenue Washington State. “Privatizing Spirits Sales”.
- International Monetary Fund. “Time to Rethink Privatization in Transition Economies?”
- TIME Magazine. “The True History of America’s Private Prison Industry”.
