What is privatization?
Privatization occurs when a government-owned enterprise, operation or property becomes the property of a private non-governmental party. Note that privatization also describes the transition from a company from a publicly traded company to a private company. This is called the privatization of companies.
How privatization works
Privatization of specific government operations takes place in several ways, although in general the government transfers ownership of specific business facilities or processes to a private, for-profit enterprise. Privatization generally helps governments save money and increase efficiency. In general, two main sectors make up an economy: the public sector and the private sector.
Government agencies generally manage operations and industries within the public sector. In the United States, the public sector includes the United States Postal Service, public schools and university systems, as well as the National Park Service. Companies not managed by the government constitute the private sector. Private companies include the majority of companies in the consumer discretionary, consumer staples, finance, information technology, manufacturing, real estate, materials and healthcare industries.
There are two types of privatization – government and business, although the term generally applies to transfers from government to private.
Public-private privatization vs corporate privatization
Privatizing companies, on the other hand, allows a company to restructure its operations without having to consider shareholders. This often appeals to companies if management wishes to make structural changes that would have a negative impact on shareholders. Privatization of companies sometimes takes place after a merger or following a takeover bid for a company. To be considered private property, a business cannot obtain financing through public transactions via an exchange.
Dell Inc. is an example of a company that has grown from a publicly traded company to a private company. In 2020, with the approval of its shareholders, Dell offered shareholders a fixed amount per share, plus a specified dividend as a way to buy back and write off their shares. Once the company reimbursed its existing shareholders, it ceased all public trading and withdrew its shares from the NASDAQ stock exchange, thus completing the transition to a private company.
Key points to remember
- Privatization describes the process by which property or a business moves from government ownership to private ownership.
- It generally helps governments save money and increase efficiency, where private companies can move goods faster and more efficiently.
- Opponents suggest that basic services, such as education, should not be subjected to market forces.
Advantages and disadvantages of privatization
Proponents of privatization argue that private companies manage businesses more economically and more efficiently because they are incentivized to eliminate unnecessary spending. In addition, private entities do not have to deal with the bureaucratic bureaucracy that can afflict government entities.
On the other hand, opponents of privatization believe that necessities like electricity, water and schools should not be vulnerable to market forces or driven by profit. In some states and municipalities, liquor stores and other non-essential businesses are run by the public sector as income-generating operations.
Example of privatization
Prior to 2020, the state of Washington controlled all liquor sales within the state, which means that only the state could operate liquor stores. This policy allowed the state to regulate how and when alcohol was sold, and to collect all revenues from alcohol sales in the state. However, in 2020, the state decided to privatize alcohol sales.
There have been several attempts to privatize the social security system in the United States.
Once privatized, private companies such as Costco and Walmart could sell alcohol to the general public. All stores previously run by the state were sold to private owners or closed, and the state stopped collecting all revenues from alcohol sales.