Privatization


Privatization can mean several different things, most commonly referring to transitioning something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when a heavily regulated private company or industry becomes less regulated. Government functions and services may also be privatised ; 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, water supply, and prison management.
Another definition is that privatization is the sale of a state-owned enterprise or municipally owned corporation 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. This type of privatization can include the demutualization of a mutual organization, cooperative, or public-private partnership in order to form a joint-stock company.
Separately, privatization can refer to the purchase of all outstanding shares of a publicly traded company by private equity 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 Before and after this process the company is privately owned, but after the buyout its shares are withdrawn from being traded at a public stock exchange.

Etymology

The term privatizing first appeared in English, with quotation marks, in the New York Times, in April 1923, in a translation of a German speech referring to the potential for German state railroads to be bought by American companies. In German, the word Privatisierung has been used since at least the 19th century. Ultimately, the word came to German through French from the Latin privatus.
The term reprivatization, again translated directly from German, was used frequently in the mid-1930s as The Economist reported on Nazi Germany's sale of nationalized banks back to public shareholders following the 1931 economic crisis.
The word became common in the late 1970s and early 1980s as part of UK prime minister Margaret Thatcher's economic policies. She was drawing on the work of the pro-privatization Member of Parliament David Howell, who was himself drawing on the Austrian-American management expert Peter Drucker's 1969 book, The Age of Discontinuity.

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. 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 provide 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.
Privatization can also refer to the transfer of something out of other forms of collective or communal ownership besides state ownership, such as occurs in enclosure of manorial land.

History

Pre-20th century

The history of privatization dates from Ancient Greece, when governments contracted out almost everything to the private sector. In the Roman Republic private individuals and companies performed the majority of services including tax collection, army supplies, religious sacrifices and construction. However, the Roman Empire also created state-owned enterprises—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.
Perhaps one of the first ideological movements towards privatization came during China's golden age of the Han dynasty. Taoism came into prominence for the first time at a state level, and it advocated the laissez-faire principle of Wu wei, literally meaning "do nothing". The rulers were counseled by the Taoist clergy that a strong ruler was virtually invisible.
During the Renaissance, most of Europe was still by and large following the feudal economic model. By contrast, the Ming dynasty in China began once more to practice privatization, especially with regards to their manufacturing industries. This was a reversal of the earlier Song dynasty 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. Significant privatizations of this nature occurred from 1760 to 1820, preceding the Industrial Revolution in that country.

20th century onwards

The first mass privatization of state property occurred in 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 privatized its steel industry in the 1950s, and the West German government embarked on large-scale privatization, including sale of the majority stake in Volkswagen to small investors in public share offerings in 1961. However, it was in the 1980s under Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States that privatization gained worldwide momentum. Notable privatizations in the UK included Britoil, the radioactive-chemicals company Amersham International, British Telecom, Sealink ferries, British Petroleum, British Aerospace, British Gas, Rolls-Royce, Rover Group, British Steel Corporation, Girobank, and the regional water authorities of England and Wales. After 1979, council house tenants in the UK were given the right to buy their homes at a heavily discounted price; one million had purchased their residences by 1986.
Such efforts culminated in 1993 when British Rail was privatized under Thatcher's successor, John Major. British Rail had been formed by prior nationalization 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.
These privatizations received mixed views from the public and the parliament. Even former Conservative prime minister 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, transportation, and telecommunications were rapidly sold off to the private sector. In the 1990s, privatization revenue from 18 Latin American countries totaled 6% of gross domestic product. 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 U.S. Agency for International Development, the German Treuhand, and other governmental and non-governmental organization.
Nippon Telegraph and Telephone's privatization in 1987 involved the largest share offering in financial history at the time. 15 of the world's 20 largest public share offerings have been privatizations of telecoms.
In 1988, the perestroika policy of 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 countries followed suit after the Revolutions of 1989 introduced non-communist governments.
Freedom House's privatization index, 1998 and 2002
Freedom House's privatization index rated transition countries from 1 to 7. The table below shows the privatization index for various Eastern European countries in 1998 and 2002:
Privatization
index		19982002
'''Bulgaria

Reasons for privatization

There are various reasons why a government may decide to privatize; commonly due to economic reasons. The economic factors that influence a government's decision to privatize assume this will lower government debt. Studies have shown that governments are more likely to privatise with higher public debt, typically because governments do not have the needed time to wait for a return. Another economic factor that influences this area is the resulting efficiency of SOEs once privatised. Commonly, governments aren’t able to provide the required investments required to ensure profitability for various reasons. These factors may lead to a government deciding to privatize.