What Is Privatization?

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What Is Privatization?

Let me tell you directly: privatization is when ownership of businesses, properties, or operations that the government runs gets handed over to private entities. It can also mean a publicly traded company going private, which we call corporate privatization. In both cases, the goal is to ramp up efficiency, slash bureaucratic red tape, and maybe boost profits by tapping into private sector motivations and expertise.

Key Takeaways on Privatization

Privatization shifts government-operated businesses or services to the private sector and can also turn public firms private. This aims to improve efficiency and cut waste through profit motives that government operations lack. Some say it brings savings and innovation, but others warn that essentials shouldn't be profit-driven. You'll see examples from state liquor stores in Washington to Russia's post-Soviet economic overhaul, showing its global reach. In corporate cases, companies restructure away from public scrutiny, often paying shareholders a premium.

Understanding the Privatization Process

Privatization happens in various ways, but usually, the government hands over ownership of facilities or processes to a private, for-profit company. This helps governments save money and boost efficiency. Think about it: economies have public and private sectors. The public one includes things like the postal service, schools, police, parks, and defense in the U.S. The private sector covers consumer goods, finance, tech, and more. Privatization typically means government-to-private transfers, though there are corporate versions too.

Comparing Public-to-Private and Corporate Privatization

Corporate privatization lets a company run its business or restructure without the regulatory and shareholder oversight that comes with being public. This is appealing if leaders want changes that might upset shareholders. It often happens after mergers or tender offers to buy shares. A company isn't private if it finances through public stock exchanges. Take Dell: in 2013, it went private by buying back shares at a fixed price plus dividend, delisting from Nasdaq. Then in 2018, it went public again.

Pros and Cons of Privatization

Supporters argue that private companies are more efficient and cost-effective because they cut waste to maximize profits and dodge government bureaucracy. Critics, however, say necessities like electricity, water, and education shouldn't face market pressures or be profit-motivated. Sometimes, governments run nonessentials like liquor stores for revenue, and privatizing them changes that dynamic.

Case Studies on Privatization

Before 2012, Washington state controlled all liquor sales, regulating everything and keeping the revenue. Then it privatized, letting businesses like Costco and Walmart sell liquor. State stores were sold or closed, and the state stopped collecting sales revenue. A bigger historical example is post-Soviet Russia. Under communism, the state owned everything. Reforms under Gorbachev started handing enterprises to the private sector, and after the collapse, many went to wealthy insiders, spiking inequality.

Institutions Commonly Subject to Privatization

Prisons
Schools
Hospitals
Highways
Airports
Utilities
Waste disposal
Mail delivery
Communications infrastructure

The Reasons Behind Prison Privatization

Prisons are usually government-run, but privatization trends aim to cut costs, raise capital, and create jobs. Proponents say private firms are better at managing populations. Critics point to scandals, cost-cutting leading to abuse, and ethical issues.

Do Shareholders Get Anything If a Company Goes Private?

Yes, shareholders must agree to give up ownership for money. If approved, they get a per-share amount, often above market price, then the shares delist, and they're no longer owners.

The Bottom Line

Privatization means transferring government services to private businesses or making public companies private. Examples include privatized jails or varying state liquor sales. Some states control it all, others let private firms handle it.

What Is Privatization?

Highlights