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Privatization (or privatisation in
British English British English (BrE) is the standard dialect A standard language (also standard variety, standard dialect, and standard) is a language variety that has undergone substantial codification of grammar and usage and is employed by a populatio ...
) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for
deregulation Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a r ...
when a heavily regulated private company or industry becomes less regulated. Government functions and services may also be privatised (which may also be known as "franchising" or "out-sourcing"); in this case, private entities are tasked with the implementation of government programs or performance of government services that had previously been the purview of state-run agencies. Some examples include revenue collection,
law enforcement File:CBP female officers going aboard a ship.jpg, upU.S. Customs and Border Protection officers boarding a ship 'Law enforcement'' is the activity of some members of government who act in an organized manner to enforce the law by discovering, dete ...
,
water supply Water supply is the provision of water Water (chemical formula H2O) is an , transparent, tasteless, odorless, and , which is the main constituent of 's and the s of all known living organisms (in which it acts as a ). It is vital for ...
, and prison management. Another definition is that privatization is the sale of a
state-owned enterprise A state-owned enterprise (SOE) or government-owned enterprise (GOE) is a business enterprise where the government or state has significant control through full, majority, or significant minority ownership. Defining characteristics of SOEs are ...
or
municipally owned corporationA municipally owned corporation is a corporation owned by a municipality. They are typically "organisations with independent corporate status, managed by an executive board appointed primarily by local government officials, and with majority public o ...
to private investors; in this case shares may be traded in the public market for the first time, or for the first time since an enterprise's previous
nationalization Nationalization (or nationalisation) is the process of transforming privately-owned asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangi ...
. This type of privatization can include the
demutualization Demutualization is the process by which a customer-owned mutual organization (''mutual'') or co-operative A cooperative (also known as co-operative, co-op, or coop) is "an autonomy, autonomous association of persons united voluntarily to meet ...
of a
mutual organization A mutual, mutual organization, or mutual society is an organization An organization, or organisation (English in the Commonwealth of Nations, Commonwealth English; American and British English spelling differences#-ise, -ize (-isation, -iza ...
,
cooperative A cooperative (also known as co-operative, co-op, or coop) is "an autonomous The federal subject The federal subjects of Russia, also referred to as the subjects of the Russian Federation (russian: субъекты Российск ...
, or public-private partnership in order to form a
joint-stock company A joint-stock company is a business entity in which shares of the company's stock can be bought & sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their share (finance), shares (certificates of ownership). S ...
. Separately, privatization can refer to the purchase of all
outstanding shares Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them. They are distinguished from treasury shares, which are shares held by the corporation itself, thus represent ...
of a publicly-traded company by
private equity Private equity (PE) typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies that are not publicly traded. Private equity is a type of equity and one of the asset classes consisti ...
investors, which is more often called "going private". Before and after this process the company is privately owned, but after the buyout its shares are withdrawn from being traded at a public
stock exchange A stock exchange, securities exchange, or bourse is an exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorporated community in Green Township, Morgan County, Indiana, Green To ...
.


Etymology

''
The Economist ''The Economist'' is an international weekly newspaper A weekly newspaper is a general-news or current affairsCurrent affairs may refer to: Media * Current Affairs (magazine), ''Current Affairs'' (magazine), a bimonthly magazine of cult ...
'' magazine introduced the term ''privatisation'' (alternatively ''privatisation'' or ''reprivatisation'' after the German ) during the 1930s when it covered
Nazi Germany Nazi Germany, (lit. "National Socialist State"), ' (lit. "Nazi State") for short; also ' (lit. "National Socialist Germany") officially known as the German Reich from 1933 until 1943, and the Greater German Reich from 1943 to 1945, was ...

Nazi Germany
's
economic policy The economic policy of government A government is the system or group of people governing an organized community, generally a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly ...
. It is not clear if the magazine coincidentally invented the word in English or if the term is a loanword from the same expression in German, where it has been in use since the 19th century.


Definition

The word ''privatization'' may mean different things depending on the context in which it is used. It can mean moving something from the public sphere into the private sphere, but it may also be used to describe something that was always private, but heavily regulated, which becomes less regulated through a process of
deregulation Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a r ...
. The term may also be used descriptively for something that has always been private, but could be public in other jurisdictions. There are also private entities that may perform public functions. These entities could also be described as privatized. Privatization may mean the government sells state-owned businesses to private interests, but it may also be discussed in the context of the privatization of services or government functions, where private entities are tasked with the implementation of government programs or the performance of government services. Gillian E. Metzger has written that: "Private entities n the USprovide a vast array of social services for the government; administer core aspects of government programs; and perform tasks that appear quintessentially governmental, such as promulgating standards or regulating third-party activities." Metzger mentions an expansion of privatization that includes health and welfare programs, public education, and prisons.


History


Pre-20th century

The history of privatization dates from
Ancient Greece Ancient Greece ( el, Ἑλλάς, Hellás) was a civilization belonging to a period of History of Greece, Greek history from the Greek Dark Ages of the 12th–9th centuries BC to the end of Classical Antiquity, antiquity ( AD 600). This era wa ...
, when governments contracted out almost everything to the private sector.''International Handbook on Privatization'' by David Parker, David S. Saal In the
Roman Republic The Roman Republic ( la, Rēs pūblica Rōmāna ) was a state of the classical Roman civilization, run through public In public relations Public relations (PR) is the practice of managing and disseminating information from an indiv ...
private individuals and companies performed the majority of services including tax collection (
tax farming Farming or tax-farming is a technique of financial management in which the management of a variable revenue stream is assigned by legal contract to a third party and the holder of the revenue stream receives fixed periodic rents from the contract ...
), army supplies ( military contractors), religious sacrifices and construction. However, the
Roman Empire The Roman Empire ( la, Imperium Rōmānum ; grc-gre, Βασιλεία τῶν Ῥωμαίων, Basileía tôn Rhōmaíōn) was the post-Republican Republican can refer to: Political ideology * An advocate of a republic, a type of governme ...

Roman Empire
also created
state-owned enterprises A state-owned enterprise (SOE) or government-owned enterprise (GOE) is a business enterprise Business is the activity of making one's living or making money by producing or buying and selling Product (business), products (such as goods a ...
—for example, much of the grain was eventually produced on estates owned by the Emperor. David Parker and David S. Saal suggest that the cost of bureaucracy was one of the reasons for the
fall of the Roman Empire The fall of the Western Roman Empire (also called the fall of the Roman Empire or the fall of Rome) was the loss of central political control in the Western Roman Empire The Western Roman Empire comprises the western provinces of the Roma ...
. Perhaps one of the first ideological movements towards privatization came during
China China (), officially the People's Republic of China (PRC; ), is a country in . It is the world's , with a of more than 1.4 billion. China spans five geographical and 14 different countries, the in the world after . Covering an area of ap ...

China
's golden age of the
Han Dynasty#REDIRECT Han dynasty The Han dynasty () was the second Dynasties in Chinese history, imperial dynasty of China (202 BC – 220 AD), established by the rebel leader Liu Bang and ruled by the House of Liu. Preceded by the short-lived Qin dynas ...

Han Dynasty
.
Taoism Taoism (), or Daoism (), is a philosophical and spiritual tradition of China, Chinese origin which emphasizes living in harmony with the ''Tao'' (, Taoism#Spelling and pronunciation, or ''Dao''). In Taoism, the ''Tao'' is the source, pattern a ...
came into prominence for the first time at a state level, and it advocated the
laissez-faire ''Laissez-faire'' ( ; from french: laissez faire , ) is an economic system An economic system, or economic order, is a system of Production (economics), production, allocation of resources, resource allocation and Distribution (economics), d ...
principle of
Wu wei ''Wu wei'' () is a concept literally meaning "inexertion", "inaction", or "effortless action". ''Wu wei'' emerged in the Spring and Autumn period, and from Confucianism, to become an important concept in Chinese statecraft and Taoism, and was m ...
(無為), literally meaning "do nothing". The rulers were counseled by the Taoist clergy that a strong ruler was virtually invisible. During the
Renaissance The Renaissance ( , ) , from , with the same meanings. is a period Period may refer to: Common uses * Era, a length or span of time * Full stop (or period), a punctuation mark Arts, entertainment, and media * Period (music), a concept in ...

Renaissance
, most of Europe was still by and large following the
feudal Feudalism, also known as the feudal system, was the combination of the legal, economic, military, and cultural customs that flourished in Medieval Europe between the 9th and 15th centuries. Broadly defined, it was a way of structuring society ...
economic model. By contrast, the
Ming dynasty The Ming dynasty (), officially the Great Ming, was the ruling dynasty of China from 1368 to 1644 following the collapse of the Mongol The Mongols ( mn, Монголчууд, , ''Mongolchuud'', ; russian: Монголы, ) are an eth ...

Ming dynasty
in
China China (), officially the People's Republic of China (PRC; ), is a country in . It is the world's , with a of more than 1.4 billion. China spans five geographical and 14 different countries, the in the world after . Covering an area of ap ...

China
began once more to practice privatization, especially with regards to their manufacturing industries. This was a reversal of the earlier
Song dynasty The Song dynasty (; ; 960–1279) was an imperial dynasty of China that began in 960 and lasted until 1279. The dynasty was founded by Emperor Taizu of Song Emperor Taizu of Song (21 March 927 – 14 November 976), personal name Zhao Kua ...
policies, which had themselves overturned earlier policies in favor of more rigorous state control. In Britain, the privatization of common lands is referred to as
enclosure Enclosure or Inclosure is a term, used in English landownership, that refers to the appropriation of "waste" or "common land Common land is land owned by a person or collectively by a number of persons, over which other persons have certai ...

enclosure
(in Scotland as the
Lowland Clearances The Lowland Clearances were one of the results of the Scottish Agricultural Revolution, which changed the traditional system of agriculture which had existed in Lowland Scotland in the seventeenth century. Thousands of cottars and tenant farmer ...
and the
Highland Clearances The Highland Clearances ( gd, Fuadaichean nan Gàidheal , the "eviction of the Gaels The Gaels (; ga, Na Gaeil ; gd, Na Gàidheil ; gv, Ny Gaeil ) are an ethnolinguistic group native to Ireland Ireland (; ga, Éire ; Ulster Scots ...
). Significant privatizations of this nature occurred from 1760 to 1820, preceding the
industrial revolution The Industrial Revolution was the transition to new manufacturing processes in Great Britain, continental Europe Continental Europe or mainland Europe is the contiguous continent A continent is any of several large landmasse ...
in that country.


20th century onwards

The first mass privatization of state property occurred in
Nazi Germany Nazi Germany, (lit. "National Socialist State"), ' (lit. "Nazi State") for short; also ' (lit. "National Socialist Germany") officially known as the German Reich from 1933 until 1943, and the Greater German Reich from 1943 to 1945, was ...

Nazi Germany
between 1933 and 1937: "It is a fact that the government of the National Socialist Party sold off public ownership in several state-owned firms in the middle of the 1930s. The firms belonged to a wide range of sectors: steel, mining, banking, local public utilities, shipyard, ship-lines, railways, etc. In addition to this, delivery of some public services produced by public administrations prior to the 1930s, especially social services and services related to work, was transferred to the private sector, mainly to several organizations within the Nazi Party."
Great Britain Great Britain is an island in the North Atlantic Ocean off the northwest coast of continental Europe. With an area of , it is the largest of the British Isles, the List of European islands by area, largest European island, and the List of i ...

Great Britain
privatized its
steel industry Steel is an alloy An alloy is an admixture of metal A metal (from Ancient Greek, Greek μέταλλον ''métallon'', "mine, quarry, metal") is a material that, when freshly prepared, polished, or fractured, shows a lustrous appea ...
in the 1950s, and the
West German ) , capital = Bonn The Federal city of Bonn ( lat, Bonna) is a city on the banks of the Rhine in the German state of North Rhine-Westphalia, with a population of over 300,000. About south-southeast of Cologne, Bonn is in th ...
government embarked on large-scale privatization, including sale of the
majority stake A controlling interest is an ownership interest in a corporation with enough voting stock Stock (also capital stock) is all of the shares into which ownership of a corporation A corporation is an organization—usually a group of peo ...
in
Volkswagen Volkswagen (;English: , . shortened to VW ) is a German motor vehicle manufacturer headquartered in Wolfsburg Wolfsburg ( , , ) is the fifth largest city in the Germany, German state of Lower Saxony, located on the river Aller (Germany), ...

Volkswagen
to small investors in public share offerings in 1961. However, it was in the 1980s under
Margaret Thatcher Margaret Hilda Thatcher, Baroness Thatcher (; 13 October 19258 April 2013), was Prime Minister of the United Kingdom The prime minister of the United Kingdom is the head of government The head of government is either ...

Margaret Thatcher
in the United Kingdom and
Ronald Reagan Ronald Wilson Reagan ( ; February 6, 1911June 5, 2004) was an American politician who served as the 40th president of the United States The president of the United States (POTUS) is the and of the . The president directs the of ...

Ronald Reagan
in the United States that privatization gained worldwide momentum. Notable privatization attempts in the UK included privatization of Britoil (1982), Amersham International (1982),
British Telecom BT Group plc (trading as A trade name, trading name, or business name is a pseudonym A pseudonym () or alias () (originally: ψευδώνυμος in Greek) is a fictitious name that a person or group assumes for a particular purpose, which d ...
(1984),
Sealink Sealink was a ferry A ferry is a merchant vessel used to carry passengers, and sometimes vehicles and cargo, across a body of water. A passenger ferry with many stops, such as in Venice, Italy, is sometimes called a water bus or water ...

Sealink
ferries (1984),
British Petroleum BP plc (official styling ''BP p.l.c.'', formerly The British Petroleum Company plc and BP Amoco plc) is a British multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * ...

British Petroleum
(gradually privatized between 1979 and 1987),
British Aerospace British Aerospace plc (BAe) was a British aircraft An aircraft is a vehicle or machine that is able to fly Flies are insect Insects or Insecta (from Latin Latin (, or , ) is a classical language belonging to the Italic la ...
(1985 to 1987),
British Gas British Gas is an energy and home services provider in the United Kingdom. It is the trading name of British Gas Services Limited and British Gas New Heating Limited, both subsidiaries of Centrica. Serving around twelve million homes in the Unit ...
(1986),
Rolls-Royce Rolls-Royce (always hyphenated) may refer to: * Rolls-Royce Limited Rolls-Royce was a British luxury car and later an aero-engine manufacturing business established in 1904 in Manchester Manchester () is the most-populous city and metr ...
(1987),
Rover Group The Rover Group plc was the British vehicle manufacturing conglomerate known as "BL plc" until 1986 (formerly British Leyland British Leyland was an automotive engineering and manufacturing Conglomerate (company), conglomerate formed in the ...
(formerly
British Leyland British Leyland was an automotive engineering and manufacturing conglomerate Conglomerate or conglomeration may refer to: * Conglomerate (company) * Conglomerate (geology) * Conglomerate (mathematics) In popular culture: * The Conglomerate (A ...
, 1988),
British Steel Corporation British may refer to: Peoples, culture, and language * British people The British people, or Britons, are the citizens of the United Kingdom of Great Britain and Northern Ireland, the British Overseas Territories, and the Crown dependenc ...
(1988), and the regional water authorities (mostly in 1989). After 1979,
council house A council house is a form of British public housing , Hong Kong. The Kin Ming Estate comprises ten housing blocks, providing housing for approximately 22,000 people. Nearly half of Hong Kong's 7.8 million population lives in public housi ...
tenants in the UK were given the right to buy their homes (at a heavily discounted rate). One million purchased their residences by 1986. Such efforts culminated in 1993 when British Rail was privatized under Thatcher's successor,
John Major Sir John Major (born 29 March 1943) is a British politician who served as Prime Minister of the United Kingdom and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1990 to 1997. He served in the Third Thatcher mi ...

John Major
.
British Rail British Railways (BR), which from 1965 traded as British Rail, was the state-owned company that operated most of the overground rail transport in Great Britain The railway system in Great Britain is the oldest railway system in the world. T ...
had been formed by prior
nationalization Nationalization (or nationalisation) is the process of transforming privately-owned asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangi ...
of private rail companies. The privatization was controversial, and its impact is still debated today, as doubling of passenger numbers and investment was balanced by an increase in rail subsidy. This has been reverted by the same party in Britain in the early 2020s with the state-owned Great British Railways. The United Kingdom's largest public share offerings were privatizations of
British Telecom BT Group plc (trading as A trade name, trading name, or business name is a pseudonym A pseudonym () or alias () (originally: ψευδώνυμος in Greek) is a fictitious name that a person or group assumes for a particular purpose, which d ...
and
British Gas British Gas is an energy and home services provider in the United Kingdom. It is the trading name of British Gas Services Limited and British Gas New Heating Limited, both subsidiaries of Centrica. Serving around twelve million homes in the Unit ...
during the 1980s under the
Conservative Conservatism is an aesthetic Aesthetics, or esthetics (), is a branch of philosophy that deals with the nature of beauty and taste (sociology), taste, as well as the philosophy of art (its own area of philosophy that comes out of aest ...

Conservative
government of
Margaret Thatcher Margaret Hilda Thatcher, Baroness Thatcher (; 13 October 19258 April 2013), was Prime Minister of the United Kingdom The prime minister of the United Kingdom is the head of government The head of government is either ...
when many state-run firms were sold off to the private sector. The privatization received very mixed views from the public and the parliament. Even former Conservative prime minister
Harold Macmillan Maurice Harold Macmillan, 1st Earl of Stockton, (10 February 1894 – 29 December 1986) was a British Conservative Conservatism is an aesthetic Aesthetics, or esthetics (), is a branch of philosophy that deals with the nat ...

Harold Macmillan
was critical of the policy, likening it to "selling the family silver". There were around 3 million shareholders in Britain when Thatcher took office in 1979, but the subsequent sale of state-run firms saw the number of shareholders double by 1985. By the time of her resignation in 1990, there were more than 10 million shareholders in Britain. Privatization in Latin America was extensive in the 1980s and 1990s, as a result of a Western liberal economic policy. Companies providing public services such as
water management Water resource management is the activity of planning, developing, distributing and managing the optimum use of water resources. It is an aspect of water cycle management. Water is essential for our survival. The field of water resources manageme ...
, transportation, and
telecommunication Telecommunication is the transmission of information by various types of technologies over wire A wire is a single usually cylindrical A cylinder (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Gr ...
were rapidly sold off to the private sector. In the 1990s, privatization revenue from 18 Latin American countries totaled 6% of gross domestic product."Privatization in Latin America: The rapid rise, recent fall, and continuing puzzle of a contentious economic policy" by John Nellis, Rachel Menezes, Sarah Lucas. Center for Global Development Policy Brief, Jan 2004, p. 1. Private investment in infrastructure from 1990 and 2001 reached $360.5 billion, $150 billion more than in the next emerging economy. While economists generally give favorable evaluations of the impact of privatization in Latin America, opinion polls and public protests across the countries suggest that a large segment of the public is dissatisfied with or have negative views of privatization in the region. In the 1990s, the governments in Eastern and Central Europe engaged in extensive privatization of state-owned enterprises in Eastern and Central Europe and Russia, with assistance from the
World Bank The World Bank is an international financial institution An international financial institution (IFI) is a financial institution that has been established (or chartered) by more than one country, and hence is subject to international law. Its o ...
, the U.S. Agency for International Development, the German
Treuhand The ("Trust law, Trust agency"), colloquially referred to as , was an agency established by the government of the East Germany, German Democratic Republic to Reprivatization, reprivatise/privatization, privatise East German enterprises, Volkseig ...
, and other governmental and
non-governmental organization A non-governmental organization, or simply an NGO, is an organization that is, generally, formed independent from government. They are typically nonprofit organization, nonprofit entities, and many of them are active in humanitarianism or the ...
. Ongoing privatization of
Japan Post is a government-owned corporation A state-owned enterprise (SOE) or government-owned enterprise (GOE) is a business enterprise where the government or state has significant control through full, majority, or significant minority ownersh ...

Japan Post
relates to that of the national postal service and one of the largest banks in the world. After years of debate, the privatization of Japan Post spearheaded by
Junichiro Koizumi Junichiro Koizumi ( ; , ''Koizumi Jun'ichirō'' ; born January 8, 1942) is a Japanese politician who was Prime Minister of Japan The (informally referred to as the PMOJ) is head A head is the part of an organism In biology, an ...

Junichiro Koizumi
finally started in 2007. The privatization process is expected to last until 2017. Japan Post was one of the nation's largest employers, as one-third of Japanese state employees worked for it. It was also said to be the largest holder of personal savings in the world. Criticisms against Japan Post were that it served as a channel of corruption and was inefficient. In September 2003, Koizumi's cabinet proposed splitting Japan Post into four separate companies: a bank, an insurance company, a postal service company, and a fourth company to handle the post offices and retail storefronts of the other three. After the Upper House rejected privatization, Koizumi scheduled nationwide elections for September 11, 2005. He declared the election to be a referendum on postal privatization. Koizumi subsequently won the election, gaining the necessary
supermajority A supermajority, supra-majority, qualified majority, or special majority is a requirement for a proposal to gain a specified level of support which is greater than the threshold of more than one-half used for a majority A majority, also calle ...
and a mandate for reform, and in October 2005, the bill was passed to privatize Japan Post in 2007.
Nippon Telegraph and Telephone , commonly known as NTT, is a Japanese telecommunications Telecommunication is the transmission of information by various types of technologies over , radio, , or other systems. It has its origin in the desire of humans for communication o ...
's privatization in 1987 involved the largest share offering in financial history at the time.The Financial Economics of Privatisation By William L. Megginson, pp. 205–06 15 of the world's 20 largest public share offerings have been privatizations of telecoms. In 1988, the
perestroika Perestroika (; russian: links=no, перестройка, p=pʲɪrʲɪˈstrojkə, a=ru-perestroika.ogg) was a political movement for reformation within the Communist Party of the Soviet Union The Communist Party of the Soviet Union (CPSU) ...
policy of
Mikhail Gorbachev Mikhail Sergeyevich Gorbachev (born 2 March 1931) is a Russian and former Soviet politician, lawyer, and statesman. The List of leaders of the Soviet Union, eighth and final leader of the Soviet Union, he was the General Secretary of the C ...

Mikhail Gorbachev
started allowing privatization of the centrally planned economy. Large privatization of the Soviet economy occurred over the next few years as the country dissolved. Other
Eastern Bloc The Eastern Bloc, also known as the Communist Bloc, the Socialist Bloc and the Soviet Bloc, was the group of socialist state A socialist state, socialist republic, or socialist country, sometimes referred to as a workers' state or workers' ...
countries followed suit after the
Revolutions of 1989 The Revolutions of 1989 formed part of a revolutionary wave A revolutionary wave or revolutionary decade is one series of revolution In political science Political science is the scientific study of politics. It is a social science d ...
introduced non-communist governments. The largest public shares offering in France involved
France Télécom Orange S.A. (), rebranded as Orange, formerly France Télécom S.A., stylized as france telecom, is a French multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Mul ...
. Egypt undertook widespread privatization under
Hosni Mubarak Muhammad Hosni El Sayed Mubarak, (4 May 1928 – 25 February 2020) was an Egyptian military and political leader who served as the fourth president of Egypt from 1981 to 2011. Before he entered politics, Mubarak was a career officer in the ...
. Following his overthrow in the 2011 revolution, most of the public began to call for re-nationalization, citing allegations of the privatized firms practicing
crony capitalism Crony capitalism is an economic system in which businesses thrive not as a result of risk In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect ...
under the old regime.


Forms of privatization

There are several main methods of privatization: # Share issue privatization: shares sale on the
stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in whic ...

stock market
. # Asset sale privatization: asset divestiture to a strategic investor, usually by
auction An auction is usually a process of buying and selling goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), d ...

auction
or through the
Treuhand The ("Trust law, Trust agency"), colloquially referred to as , was an agency established by the government of the East Germany, German Democratic Republic to Reprivatization, reprivatise/privatization, privatise East German enterprises, Volkseig ...
model. #
Voucher privatization 250px, Privatization voucher used in Czechoslovakia Voucher privatization is a privatization Privatization (or privatisation in British English British English (BrE) is the standard dialect of the English language English is a We ...
: distribution of vouchers, which represent part ownership of a corporation, to all citizens, usually for free or at a very low price. #
Privatization from below Privatization (or privatisation in British English) can mean different things including moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when a heavily regulated private compa ...
: start of new private businesses in formerly socialist countries. # Management buyout: purchase of public shares by management of the company, sometimes by borrowing from external lenders #
Employee buyout Employee stock ownership, or employee share ownership, is where a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a m ...
: distribution of shares for free or at a very low price to workers or management of the organization. The choice of sale method is influenced by the
capital market A capital market is a financial market A financial market is a market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Swed ...
and the political and firm-specific factors. Privatization through the stock market is more likely to be the method used when there is an established capital market capable of absorbing the shares. A market with high liquidity can facilitate the privatization. If the capital markets are insufficiently developed, however, it would be difficult to find enough buyers. The shares may have to be underpriced, and the sales may not raise as much capital as would be justified by the fair value of the company being privatized. Many governments, therefore, elect for listings in more sophisticated markets, for example,
Euronext Euronext N.V. (short for European New Exchange Technology) is a pan-European bourse that offers trading in regulated equities Stock (also capital stock) is all of the shares into which ownership of a corporation A corporation is an ...
, and the
London London is the capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscule'') and smaller lowerc ...
,
New York New York most commonly refers to: * New York City, the most populous city in the United States, located in the state of New York * New York (state), a state in the northeastern United States New York may also refer to: Film and television * New ...

New York
and
Hong Kong Hong Kong (; , ), officially the Hong Kong Special Administrative Region of the People's Republic of China (HKSAR), is a city A city is a large human settlement.Goodall, B. (1987) ''The Penguin Dictionary of Human Geography''. London: Pe ...
stock exchanges. Governments in
developing countries A developing country is a sovereign state with a less developed Industrial sector, industrial base and a low Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no ...
and
transition countries A transition economy or transitional economy is an economy which is changing from a planned economy, centrally planned economy to a market economy. Transition economies undergo a set of structural transformations intended to develop market-based ...
more often resort to direct asset sales to a few investors, partly because those countries do not yet have a stock market with high capital. Voucher privatization occurred mainly in the
transition economies A transition economy or transitional economy is an economy which is changing from a centrally planned economy A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place accordi ...
in Central and Eastern Europe, such as
Russia Russia ( rus, link=no, Россия, Rossiya, ), or the Russian Federation, is a country spanning Eastern Europe Eastern Europe is the eastern region of . There is no consistent definition of the precise area it covers, partly because th ...
,
Poland Poland, officially the Republic of Poland, is a country located in Central Europe. It is divided into 16 Voivodeships of Poland, administrative provinces, covering an area of , and has a largely Temperate climate, temperate seasonal cli ...

Poland
, the
Czech Republic The Czech Republic, also known by its short-form name Czechia and formerly known as Bohemia, is a landlocked country in Central Europe. It is bordered by Austria to the south, Germany to the west, Poland to the northeast, and Slovakia to ...
, and
Slovakia Slovakia (; sk, Slovensko ), officially the Slovak Republic ( sk, Slovenská republika, links=no ), is a landlocked country in Central Europe. It is bordered by Poland to the north, Ukraine to the east, Hungary to the south, Austria to th ...

Slovakia
. Additionally, privatization from below had made important contribution to economic growth in transition economies. In one study assimilating some of the literature on "privatization" that occurred in Russian and Czech Republic transition economies, the authors identified three methods of privatization: "privatization by sale", "mass privatization", and "mixed privatization". Their calculations showed that "mass privatization" was the most effective method. However, in economies "characterized by shortages" and maintained by the state bureaucracy, wealth was accumulated and concentrated by "gray/black market" operators. Privatizing industries by sale to these individuals did not mean a transition to "effective private sector owners f formerstate assets". Rather than mainly participating in a market economy, these individuals could prefer elevating their personal status or prefer accumulating political power. Instead, outside foreign investment led to the efficient conduct of former state assets in the private sector and market economy. Through privatization by direct asset sale or the stock market, bidders compete to offer higher prices, generating more revenue for the state. Voucher privatization, on the other hand, could represent a genuine transfer of assets to the general population, creating a sense of participation and inclusion. A market could be created if the government permits transfer of vouchers among voucher holders.


Secured borrowing

Some privatization transactions can be interpreted as a form of a
secured loan A secured loan is a loan In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers an ...
and are criticized as a "particularly noxious form of governmental debt". In this interpretation, the upfront payment from the privatization sale corresponds to the
principal amount Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The deb ...

principal amount
of the loan, while the proceeds from the underlying asset correspond to secured interest payments – the transaction can be considered substantively the same as a secured loan, though it is structured as a sale. This interpretation is particularly argued to apply to recent municipal transactions in the United States, particularly for fixed term, such as the 2008 sale of the proceeds from Chicago parking meters for 75 years. It is argued that this is motivated by "politicians' desires to borrow money surreptitiously", due to legal restrictions on and political resistance to alternative sources of revenue, viz, raising taxes or issuing debt.


Results of privatization

Privatization had different outcomes around the world. Results of privatization may vary depending on the privatization model employed. According to Dr
Irwin Stelzer Irwin M. Stelzer (born 22 May 1932) is an American economist An economist is a practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics ...
, "it is somewhere between difficult and impossible to separate the effects of privatisation from the effects of such things as trends in the economy". According to research performed by the
World Bank The World Bank is an international financial institution An international financial institution (IFI) is a financial institution that has been established (or chartered) by more than one country, and hence is subject to international law. Its o ...
and William L. Megginson in the early 2000s, privatization in competitive industries with well-informed consumers, consistently improved efficiency. According to APEC, the more competitive the industry, the greater the improvement in output, profitability, and efficiency. Such efficiency gains mean a one-off increase in Gross domestic product, GDP, but through improved incentives to innovate and reduce costs also tend to raise the rate of economic growth. More recent research and literature review performed by Professor Saul Estrin and Adeline Pelletier concluded that "the literature now reflects a more cautious and nuanced evaluation of privatization" and that "private ownership alone is no longer argued to automatically generate economic gains in developing economies". According to a 2008 study published in ''Annals of Public and Cooperative Economics'', liberalization and privatization has produced mixed results. Although typically there are many costs associated with these efficiency gains, many economists argue that these can be dealt with by appropriate government support through Redistribution (economics), redistribution and perhaps retraining. Yet, some empirical literature suggests that privatization could also have very modest effects on efficiency and quite regressive distributive impact. In the first attempt at a social welfare analysis of the British privatization program under the Conservative governments of
Margaret Thatcher Margaret Hilda Thatcher, Baroness Thatcher (; 13 October 19258 April 2013), was Prime Minister of the United Kingdom The prime minister of the United Kingdom is the head of government The head of government is either ...

Margaret Thatcher
and
John Major Sir John Major (born 29 March 1943) is a British politician who served as Prime Minister of the United Kingdom and Leader of the Conservative Party (UK), Leader of the Conservative Party from 1990 to 1997. He served in the Third Thatcher mi ...

John Major
during the 1980s and 1990s, Massimo Florio points to the absence of any productivity shock resulting strictly from ownership change. Instead, the impact on the previously nationalized companies of the UK productivity leap under the Conservatives varied in different industries. In some cases, it occurred prior to privatization, and in other cases, it occurred upon privatization or several years afterward. A 2012 study published by the European Commission argues that privatisation in Europe had mixed effects on service quality and has achieved only minor productivity gains, driven mainly by lower labour input combined with other cost cutting strategies that led to a deterioration of employment and working conditions. Meanwhile, a different study by the Commission found that the UK rail network (which was privatized from 1994 to 1997) was most improved out of all the 27 EU nations from 1997 to 2012. The report examined a range of 14 different factors and the UK came top in four of the factors, second and third in another two and fourth in three, coming top overall. Nonetheless, the impact of the privatisation of British Rail has been the subject of much debate, with the stated benefits including improved customer service, and more investment; and stated drawbacks including higher fares, lower punctuality and increased rail subsidies.Have train fares gone up or down since British Rail?
BBC News, 22 January 2013
Privatizations in Russia and Latin America were accompanied by large-scale corruption during the sale of the state-owned companies. Those with political connections unfairly gained large wealth, which has discredited privatization in these regions. While media have widely reported the grand corruption that accompanied those sales, according to research released by the World Bank there has been increased operating efficiency, daily petty corruption is, or would be, larger without privatization, and that corruption is more prevalent in non-privatized sectors. Furthermore, according to the World Bank extralegal and unofficial activities are more prevalent in countries that privatized less. Other research suggests that privatization in Russia resulted in a dramatic rise in the level of economic inequality and a collapse in GDP and industrial output. A 2009 study published in ''The Lancet'' medical journal has found that as many as a million working men died as a result of economic shocks associated with mass privatization in the former Soviet Union and in Eastern Europe during the 1990s, although a further study suggested that there were errors in their method and "correlations reported in the original article are simply not robust." Historian Walter Scheidel, a specialist in ancient history, posits that economic inequality and wealth concentration in the top percentile "had been made possible by the transfer of state assets to private owners." In Latin America, on the one hand, according to John Nellis's research for Center for Global Development, economic indicators, including firm profitability, productivity, and growth, project positive microeconomic results. On the other hand, however, privatisation has been largely met with a negative criticism and citizen coalitions. This neoliberal criticism highlights the ongoing conflict between varying visions of economic development. Karl Polanyi emphasizes the societal concerns of self-regulating markets through a concept known as a "double movement". In essence, whenever societies move towards increasingly unrestrained, free-market rule, a natural and inevitable societal correction emerges to undermine the contradictions of capitalism. This was the case in the 2000 Cochabamba protests. Privatization in Latin America has invariably experienced increasing push-back from the public. Mary Shirley from The Ronald Coase Institute suggests that implementing a less efficient but more politically mindful approach could be more sustainable. In India, a survey by the National Commission for Protection of Child Rights (NCPCR) —Utilization of Free Medical Services by Children Belonging to the Economically Weaker Section (EWS) in Private Hospitals in New Delhi, 2011-12: A Rapid Appraisal—indicates under-utilization of the free beds available for EWS category in private hospitals in Delhi, though they were allotted land at subsidized rates. In Australia a "People's Inquiry into Privatisation" (2016/17) found that the impact of privatisation on communities was negative. The report from the inquiry "Taking Back Control" made a range of recommendations to provide accountability and transparency in the process. The report highlighted privatisation in healthcare, aged care, child care, social services, government departments, electricity, prisons and vocational education featuring the voices of workers, community members and academics. Some reports show that the results of privatization are experienced differently between men and women for numerous reasons: when Public service, public services are privatized women are expected to take on the health and social care of Dependant, dependents, women have less access to privatized goods, public sector employs a larger proportion of women than does the private sector, and the women in the public sector are more likely to be unionized than those in the private sector. In Chile, women are disproportionately affected by the privatization of the pension system because factors such as “women’s longer life expectancy, earlier retirement age, and lower rates of labor-force participation, lower salaries” affect their ability to accumulate funds for retirement which leads to lower pensions. Low income, Low-income women face an even greater burden; Anjela Taneja, of Oxfam India says "The privatization of public services...implies limited or no access to essential services for women living in poverty, who are often the ones more in need of these services.” The increase in privatization since the 1980s has been a factor in rising Income inequality in the United States, income and Wealth inequality in the United States, wealth inequality in the United States.


Opinion

Arguments for and against the controversial subject of privatization are presented here.


Support

A number of studies have shown that private market factors can more efficiently deliver many goods or service than governments due to free market competition. Proponents of privatization argue that, over time, this can lead to lower prices, improved quality, more choices, less corruption, less red tape, and/or quicker delivery. Many proponents do not argue that everything should be privatized. According to them, market failures and natural monopolies could be problematic. However, anarcho-capitalists prefer that every function of the state be privatized, including Private defense agency, defense and Alternative dispute resolution, dispute resolution."Review of Kosanke's Instead of Politics – Don Stacy"
Libertarian Papers VOL. 3, ART. NO. 3 (2011)
Proponents of privatization make the following arguments: * Performance: state-run industries tend to be bureaucratic. A political government may only be motivated to improve a function when its poor performance becomes politically sensitive. * Increased efficiency: private companies and firms have a greater incentive to produce goods and services more efficiently to increase profits. * Specialization: a private business has the ability to focus all relevant human and financial resources onto specific functions. A state-owned firm does not have the necessary resources to Departmentalization, specialize its goods and services as a result of the general products provided to the greatest number of people in the population. * Improvements: conversely, the government may put off improvements due to political sensitivity and special interests—even in cases of companies that are run well and better serve their customers' needs. * Corruption: a state-monopolized function is prone to Political corruption, corruption; decisions are made primarily for political reasons, personal gain of the decision-maker (i.e. "graft"), rather than economic ones. Corruption (or Principal–agent problem, principal–agent issues) in a state-run corporation affects the ongoing asset stream and company performance, whereas any corruption that may occur during the privatization process is a one-time event and does not affect ongoing cash flow or performance of the company. * Accountability: managers of privately owned companies are accountable to their owners/shareholders and to the consumer, and can only exist and thrive where needs are met. Managers of publicly owned companies are required to be more accountable to the broader community and to political "stakeholders". This can reduce their ability to directly and specifically serve the needs of their customers, and can bias investment decisions away from otherwise profitable areas. * Civil-liberty concerns: a company controlled by the state may have access to information or assets which may be used against dissidents or any individuals who disagree with their policies. * Goals: a political government tends to run an industry or company for political goals rather than economic ones. * Capital: a privately held companies can sometimes more easily raise investment capital in the financial markets when such local markets exist and are suitably liquid. While interest rates for private companies are often higher than for government debt, this can serve as a useful constraint to promote efficient investments by private companies, instead of cross-subsidizing them with the overall credit-risk of the country. Investment decisions are then governed by market interest rates. State-owned industries have to compete with demands from other government departments and special interests. In either case, for smaller markets, political risk may add substantially to the cost of capital. * Security: governments have had the tendency to "bail out" poorly run businesses, often due to the sensitivity of job losses, when economically, it may be better to let the business fold. * Lack of market discipline: poorly managed state companies are insulated from the same discipline as private companies, which could go bankrupt, have their management removed, or be taken over by competitors. Private companies are also able to take greater risks and then seek bankruptcy protection against creditors if those risks turn sour. * Natural monopolies: the existence of natural monopolies does not mean that these sectors must be state owned. Governments can enact or are armed with anti-trust legislation and bodies to deal with anti-competitive behavior of all companies public or private. * Concentration of wealth: ownership of and profits from successful enterprises tend to be dispersed and diversified -particularly in voucher privatization. The availability of more investment vehicles stimulates capital markets and promotes liquidity and job creation. * Political influence: nationalized industries are prone to interference from politicians for political or Populism, populist reasons. Examples include making an industry buy supplies from local producers (when that may be more expensive than buying from abroad), forcing an industry to freeze its prices/fares to satisfy the electorate or control inflation, increasing its staffing to reduce unemployment, or moving its operations to constituency, marginal constituencies. * Profits: corporations exist to generate profits for their shareholders. Private companies make a profit by enticing consumers to buy their products in preference to their competitors' (or by increasing primary demand for their products, or by reducing costs). Private corporations typically profit more if they serve the needs of their clients well. Corporations of different sizes may target different market niches in order to focus on marginal groups and satisfy their demand. A company with good corporate governance will therefore be incentivized to meet the needs of its customers efficiently. * Job gains: as the economy becomes more efficient, more profits are obtained and no government subsidies and less taxes are needed, there will be more private money available for investments and consumption and more profitable and better-paid jobs will be created than in the case of a more regulated economy.


Opposition

Opponents of privatization in general — or of certain privatizations in particular — believe that Public good (economics), public goods and services should remain primarily in the hands of government in order to ensure that everyone in society has access to them (such as law enforcement, basic health care, and basic education). There is a positive externality when the government provides society at large with public goods and services such as National security, defense and disease control. Some national constitutions in effect define their governments' "core businesses" as being the provision of such things as justice, tranquility, defense, and general welfare. These governments' direct provision of security, stability, and safety, is intended to be done for the common good (in the public interest) with a long-term (for posterity) perspective. As for natural monopolies, opponents of privatization claim that they aren't subject to fair competition, and better administrated by the state. Although private companies may provide a similar good or service alongside the government, opponents of privatization are critical about completely transferring the provision of public goods, services and assets into private hands for the following reasons: * Performance: a democratically elected government is accountable to the people through a legislature, Congress or Parliament, and is motivated to safeguarding the assets of the nation. The profit motive may be subordinated to social objectives. * Improvements: the government is motivated to performance improvements as well run businesses contribute to the State's revenues. * Corruption: government ministers and civil servants are bound to uphold the highest ethical standards, and standards of probity are guaranteed through codes of conduct and declarations of interest. However, the selling process could lack transparency, allowing the purchaser and civil servants controlling the sale to gain personally. * Accountability: the public has less control and oversight of private companies although these remain answerable to various stakeholders, including shareholders, clients, suppliers, regulators, employees and collaborators. * Civil-liberty concerns: a democratically elected government is accountable to the people through a parliament, and can intervene when civil liberties are threatened. * Goals: the government may seek to use state companies as instruments to further social goals for the benefit of the nation as a whole. * Capital: governments can raise money in the financial markets most cheaply to re-lend to state-owned enterprises, although this preferential access to capital markets risks undermining financial discipline because of the assurance of a bailout from the government. * Cuts in essential services: if a government-owned company providing an essential service (such as the water supply) to all citizens is privatized, its new owner(s) could lead to the abandoning of the social obligation to those who are less able to pay, or to regions where this service is unprofitable. * Natural monopolies: privatization will not result in true competition if a natural monopoly exists. * Concentration of wealth: profits from successful enterprises end up in private hands instead of being available for public use. * Political influence: governments may more easily exert pressure on state-owned firms to help implement government policy. * Profit: private companies do not have any goal other than to maximize profits. * Privatization and poverty: it is acknowledged by many studies that there are winners and losers with privatization. The number of losers—which may add up to the size and severity of poverty—can be unexpectedly large if the method and process of privatization and how it is implemented are seriously flawed (e.g. lack of transparency leading to state-owned assets being appropriated at minuscule amounts by those with political connections, absence of regulatory institutions leading to transfer of monopoly rents from public to private sector, improper design and inadequate control of the privatization process leading to asset stripping). * Job loss: due to the additional financial burden placed on privatized companies to succeed without any government help, unlike the public companies, jobs could be lost to keep more money in the company. * Reduced wages and benefits: a 2014 report by In the Public Interest, a resource center on privatization, argues that "outsourcing public services sets off a downward spiral in which reduced worker wages and benefits can hurt the local economy and overall stability of middle and working class communities." * Inferior quality products: private, for-profit companies might cut corners on providing quality goods and services in order to maximize profit.


Economic theory

In economic theory, privatization has been studied in the field of contract theory. When contracts are complete, institutions such as (private or public) property are difficult to explain, since every desired incentive structure can be achieved with sufficiently complex contractual arrangements, regardless of the institutional structure. All that matters is who are the decision makers and what is their available information. In contrast, when contracts are incomplete, institutions matter. A leading application of the incomplete contract paradigm in the context of privatization is the model by Oliver Hart (economist), Hart, Andrei Shleifer, Shleifer, and Robert W. Vishny, Vishny (1997). In their model, a manager can make investments to increase quality (but they may also increase costs) and investments to decrease costs (but they may also reduce quality). It turns out that it depends on the particular situation whether private ownership or public ownership is desirable. The Hart-Shleifer-Vishny model has been further developed in various directions, e.g. to allow for mixed public-private ownership and endogenous assignments of the investment tasks.


Privatization of private companies

Privatization can also refer to the purchase of all
outstanding shares Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them. They are distinguished from treasury shares, which are shares held by the corporation itself, thus represent ...
of a publicly-traded private company by
private equity Private equity (PE) typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies that are not publicly traded. Private equity is a type of equity and one of the asset classes consisti ...
investors, which is more often called "going private". The buyout withdraws the company's shares from being traded at a public
stock exchange A stock exchange, securities exchange, or bourse is an exchange Exchange may refer to: Places United States * Exchange, Indiana Exchange is an Unincorporated area, unincorporated community in Green Township, Morgan County, Indiana, Green To ...
. Depending on the involvement of internal and external investors, it may occur through a leveraged buyout or a management buyout, tender offer, or Takeover, hostile takeover.


See also

* Corporatization * Equitisation * Deregulation * Private prison * Private sector development * Privately owned public space * List of privatizations by country * Marketization * Nationalization * Structural adjustment * Commodification


Notes


References

* * * * * * * ; Unindexed * * * Clarke, Thomas (ed.) (1994) "International Privatisation: Strategies and Practices" Berlin and New York: Walter de Gruyter, * Clarke, Thomas and Pitelis, Christos (eds.) (1995) "The Political Economy of Privatisation" London and New York: Routledge, * * von Hayek, Friedrich, (1960) ''The Constitution of Liberty'' * Kosar, Kevin R. (2006)
"Privatisation and the Federal Government: An Introduction"
''Report from the Congressional Research Service'' * Mayer, Florian (2006) ''Vom Niedergang des unternehmerisch tätigen Staates: Privatisierungspolitik in Großbritannien, Frankreich, Italien und Deutschland'', VS Verlag, Wiesbaden, * Megginson and Netter, From state to market: A survey of empirical studies on privatization, Journal of Economic Literature 39(2), June 2001, 321–89. * * * Nico Perrone (2002), ''Economia pubblica rimossa'', Milan, Giuffrè * Smith, Adam (1776) ''The Wealth of Nations'' * Jeb Sprague, 2007
Haiti: Workers Protest Privatisation Layoffs
Inter Press Service. * Stiglitz, Joseph ''Globalization and its Discontents'' * von Weizsäcker, Ernst, Oran Young, and Matthias Finger (editors): Limits to Privatisation. Earthscan, London 2005 * (Trad. esp.: ''Democracia S. A.'', Buenos Aires/Madrid, Katz editores S.A, 2008, ) * Zullo, Roland. (2009)
Does Fiscal Stress Induce Privatization? Correlates of Private and Intermunicipal Contracting, 1992–2002
Governance 22.3 (July): 459–481.


External links


Privatization's Rise
from th
Dean Peter Krogh Foreign Affairs Digital Archives

Reports of the Public Services International Research Unit at the University of Greenwich
Research database with many articles on the effects of privatization * {{authority control Privatization, Economics of regulation Market structure Monopoly (economics) Public economics