What is PRIVATIZATION? What does PRIVATIZATION mean? PRIVATIZATION meaning, definition & explanation

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Published at : 22 Dec 2020
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Source: Wikipedia.org article, adapted under https://creativecommons.org/licenses/by-sa/3.0/ license.

Privatization, also spelled privatisation (in British English), may have several meanings. Primarily, it is the process of transferring ownership of a business, enterprise, agency, public service, or public property from the public sector (a government) to the private sector, either to a business that operates for a profit or to a nonprofit organization. It may also mean the government outsourcing of services or functions to private firms, e.g. revenue collection, law enforcement, and prison management.

Privatization has also been used to describe two unrelated transactions. The first is the buying of all outstanding shares of a publicly traded company by a single entity, making the company privately owned. This is often described as private equity. The second is a demutualization of a mutual organization or cooperative to form a joint-stock company.

There are five main methods of privatization:

1. Share issue privatization (sip) – selling shares on the stock market.
2. Asset sale privatization – selling an entire organization (or part of it) to a strategic investor, usually by auction or by using the Treuhand model.
3. Voucher privatization – distributing shares of ownership to all citizens, usually for free or at a very low price.
4. Privatization from below – Start-up of new private businesses in formerly socialist countries.
5. Management buyout or Employee Buyout (MEBO) – distributing shares for free or at a very low price to workers or management in the organization.

Choice of sale method is influenced by the capital market, political, and firm-specific factors. SIPs are more likely to be used when capital markets are more developed. Share issues can broaden and deepen domestic capital markets, boosting liquidity and (potentially) economic growth, but if the capital markets are insufficiently developed it may be difficult to find enough buyers, and transaction costs (e.g. underpricing required) may be higher. For this reason, many governments elect for listings in the more developed and liquid markets, for example Euronext, and the London, New York and Hong Kong stock exchanges.

As a result of higher political and currency risk deterring foreign investors, asset sales occur more commonly in developing countries and transition countries.

Voucher privatization has mainly occurred in the transition economies of Central and Eastern Europe, such as Russia, Poland, the Czech Republic, and Slovakia. Additionally, Privatization from below is/has been an important type of economic growth in transition economies.

A substantial benefit of share or asset-sale privatizations is that bidders compete to offer the highest price, creating income for the state in addition to tax revenues. Voucher privatizations, on the other hand, could be a genuine transfer of assets to the general population, creating a real sense of participation and inclusion. If the transfer of vouchers is permitted, a market in vouchers could be created, with investors offering to pay money for them.

Some privatization transactions can be interpreted as a form of a secured loan 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 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.
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