# Understanding Privatization: Process, Benefits, and Real-World Examples

## What Is Privatization?

Privatization involves transferring ownership of government-operated businesses, properties, or operations to private entities. Additionally, privatization can describe the process of a [publicly traded](https://www.investopedia.com/terms/p/publiccompany.asp) company transitioning into a privately held entity, often called corporate privatization.

Both forms aim to increase efficiency, reduce bureaucratic overhead, and potentially enhance profitability by leveraging the motivations and skills of the private sector.

### Key Takeaways

*   Privatization involves transferring ownership of a government-operated business or service to the private sector and can also refer to turning publicly traded firms into private companies.
*   This process aims to improve efficiency and reduce waste by leveraging the profit motivation found in private enterprises, distinguishing it from government-run operations.
*   While some argue privatization brings cost savings and innovation, critics warn that essential services should not be driven solely by market forces.
*   Examples of privatization range from the sale of state-operated liquor stores in Washington to large-scale shifts in post-Soviet Russia's economy, illustrating the varied global application and impact of this economic strategy.
*   In corporate privatization, companies aim to restructure or innovate away from the scrutiny of shareholders and public markets, but this often requires paying off existing shareholders at a premium.

![Privatization: The process by which a piece of property or business goes from being owned by the government to being privately owned.](https://www.investopedia.com/thmb/xqaSTO9jFLhCa6G87-gUoq22_EY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/privatization.asp-final-6d784cb82a86413b99c892a8618f2e75.jpg)

*— Eliana Rodgers / Investopedia*

## Understanding the Privatization Process

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](https://www.investopedia.com/government-and-policy-4689793) save money and increase efficiency.

An economy generally consists of two main sectors: public and [private](https://www.investopedia.com/terms/p/private-sector.asp). Government agencies typically manage operations and industries within the public sector. In the United States, the public sector includes the U.S. Postal Service, public schools and universities, the police and fire departments, the National Park Service, and the national security and defense services.

Enterprises not run by the government comprise the private sector. Most private companies operate in sectors like consumer goods, finance, technology, industrial, real estate, materials, and healthcare.

> **Important**
>
> There are two types of privatization: government and corporate. However, the term generally applies to government-to-private transfers.

## Comparing Public-to-Private and Corporate Privatization

Corporate privatization allows a company to manage its business or restructure its operations without the strict regulatory or [shareholders](https://www.investopedia.com/terms/s/shareholder.asp)’ 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](https://www.investopedia.com/terms/m/merger.asp) or following a [tender offer](https://www.investopedia.com/terms/t/tenderoffer.asp) to purchase a company’s shares. To be considered privately owned, a company cannot get [financing](https://www.investopedia.com/terms/e/equityfinancing.asp) 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](https://www.investopedia.com/terms/d/dividend.asp) as a way to buy back its stock and [delist](https://www.investopedia.com/terms/d/delisting.asp). 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 to being a public company ([DELL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=DELL)).

## Pros and Cons of Privatization

Supporters of privatization believe private companies are more efficient and cost-effective because they cut waste to increase [profits](https://www.investopedia.com/terms/p/profit.asp). Additionally, private companies often avoid the bureaucratic hurdles that government agencies face.

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 some areas, the public sector runs liquor stores and other nonessential businesses to generate [revenue](https://www.investopedia.com/terms/r/revenue.asp).

## Case Studies on 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](https://www.investopedia.com/how-costco-makes-money-5094774) and [Walmart](https://www.investopedia.com/articles/markets/092115/these-are-benefits-investing-walmart.asp) 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](https://www.investopedia.com/terms/c/communism.asp), 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. Following the Soviet Union's collapse, many state-owned enterprises became controlled by a small group of [wealthy Russians](https://www.investopedia.com/terms/o/oligopoly.asp), increasing national inequality.

## Institutions Commonly Subject to Privatization

Many institutions usually managed by the government [can be privatized](https://www.investopedia.com/ask/answers/040615/what-are-main-arguments-favor-privatization-public-goods.asp), such as prisons, schools, hospitals, highways, airports, utilities, waste disposal, mail delivery, and communications infrastructure.

## The Reasons Behind Prison Privatization

Prisons are typically government-run, but there's a trend to privatize them to reduce costs, raise [capital](https://www.investopedia.com/terms/c/capital.asp), and create local jobs. Proponents argue that specialist companies are better equipped and skilled at controlling prison populations. However, critics say for-profit prisons often face issues like scandals, cost-cutting, prisoner abuse, and ethical violations.

## Do Shareholders Get Anything If a Company Goes Private?

Yes. Shareholders first must agree to give up ownership in the company in exchange for some amount of money. If approved, all shareholders will receive a certain amount per share, often at a premium to the market price. Afterward, they are no longer shareholders and the company’s shares would be delisted from exchanges.

## 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.

> **Article Sources**
>
> 1.  Dell. “[Dell Is Now a Private Company](https://www.dell.com/learn/us/en/uscorp1/secure/acq-dell-silverlake).”
>     
> 2.  The Wall Street Journal. “[Dell Returns to Public Equity Markets](https://www.wsj.com/articles/dell-returns-to-public-equity-markets-11546011748).”
>     
> 3.  Washington State Department of Revenue. “[Spirits Sales Privatization Implementation Chart](https://dor.wa.gov/sites/default/files/2022-03/implementation_chart.pdf).”
>     
> 4.  Williams, Edwina et al., via National Center for Biotechnology Information. “[Price Changes in Washington Following the 2012 Liquor Privatization: An Update Through 2016 with Comparisons to California, Idaho, and Oregon](https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7018554/).” _Alcohol Clinical and Experimental Research_, vol. 44, no. 2, February 2020, pp. 501–510.
>     
> 5.  International Monetary Fund. “[Time to Rethink Privatization in Transition Economies?](https://www.imf.org/external/pubs/ft/fandd/1999/06/nellis.htm)”
>     
> 6.  Time. “[The True History of America’s Private Prison Industry](https://time.com/5405158/the-true-history-of-americas-private-prison-industry/).”