Privatization: What It Is, How It Works, and Examples

What Is Privatization?

Privatization occurs when a government-owned business, operation, or property becomes owned by a private, non-government party.

Privatization also may describe a transition that takes a company from being publicly traded to becoming privately held. This is referred to as corporate 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 universities, the police and firefighter departments, the national park service, and the national security and defense services.

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 healthcare sectors.

Public-to-Private Privatization vs. Corporate Privatization

Corporate privatization allows a company to manage its business or restructure its operations without the strict regulatory or shareholders' oversight imposed on publicly listed companies.

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. In 2018, Dell reverted back to being a public company.

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.

Real-World Examples 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. 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.

One of the most famous and historically important examples of privatization occurred after the fall of the Soviet Union. The Soviet Union's form of government was communism, where everything was owned and run by the state; there was no private property or business. Privatization began before the collapse of the Soviet Union under Mikhail Gorbachev, its then-leader, who implemented reforms to hand over certain government enterprises to the private sector. After the Soviet Union collapsed, there was mass privatization of previous government enterprises to a select portion of the populace in Russia, known as oligarchs, that dramatically increased inequality within the nation.

The Bottom Line

Transferring services provided by the government to private businesses is known as privatization. Another use of the term involves publicly traded companies becoming privately owned. Jails and prisons are examples of government-run services that sometimes are transferred to private businesses. Something like liquor sales varies from state to state. Some states manage all liquor sales, while others allow private businesses to sell liquor.