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Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector (government) to the private sector (business). In a broader sense, privatization refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement.
The term "Privatization" also has been used to describe two unrelated transactions. The first is a buyout, by the majority owner, of all shares of a public corporation or holding company's stock, privatizing a publicly traded stock. The second is a demutualization of a mutual organization or cooperative to form a joint stock company.
There is a long history of privatization dating from Ancient Greece when the government 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. Some scholars suggest that the cost of bureaucracy was one of the reasons for the fall of the Roman Empire .
In more recent times Winston Churchill's government privatized the British steel industry in the 1950s, and West Germany's government embarked on large-scale privatisation, including selling its majority stake in Volkswagen to small investors in a public share offering in 1961 . However, it was in the 1980's under the leaderships of Margaret Thatcher in the UK and Ronald Reagan in the USA, that privatization gained its real momentum in the modern era.
There are three main methods of privatisation:
Share issue privatisation is the most common type of privatisation.
Share issue 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. Euronext, and the London, New York and Hong Kong Stock Exchanges are popular because they are highly developed and sophisticated.
As a result of higher political and currency risk deterring foreign investors, asset sales are more common in developing countries.
A very substantial benefit to share or asset sale privatisations is that bidders compete to offer the state the highest price, creating revenues for the state to redistribute in addition to new tax revenue. Voucher privatisations, on the other hand, would be a genuine return of the assets into the hands of the general population, and create a real sense of participation and inclusion. Vouchers, like all other private property, could then be sold on if preferred by what companies are offering.
Proponents of privatisation believe that private market factors can more efficiently deliver many goods or service than government due to free market competition. In general, it is argued that over time this will lead to lower prices, improved quality, more choices, less corruption, less red tape, and quicker delivery. Many proponents do not argue that everything should be privatised. According to them, market failures and natural monopolies could be problematic. However, some Austrian school economists and anarcho-capitalists would prefer that everything be privatised, including the state itself.
The basic economic argument given for privatisation is that governments have few incentives to ensure that the enterprises they own are well run. One problem is the lack of comparison in state monopolies. It is difficult to know if an enterprise is efficient or not without competitors to compare against. Another is that the central government administration, and the voters who elect them, have difficulty evaluating the efficiency of numerous and very different enterprises. A private owner, often specializing and gaining great knowledge about a certain industrial sector, can evaluate and then reward or punish the management in much fewer enterprises much more efficiently. Also, governments can raise money by taxation or simply printing money should revenues be insufficient, unlike a private owner.
If there are both private and state owned enterprises competing against each other, then the state owned may borrow money more cheaply from the debt markets than private enterprises, since the state owned enterprises are ultimately backed by the taxation and printing press power of the state, gaining an unfair advantage.
Privatising a non-profitable company which was state-owned may force the company to raise prices in order to become profitable. However, this would remove the need for the state to provide tax money in order to cover the losses.
Opponents of privatisation dispute the claims concerning the alleged lack of incentive for governments to ensure that the enterprises they own are well run, on the basis of the idea that governments are proxy owners answerable to the people. It is argued that a government which runs nationalized enterprises poorly will lose public support and votes, while a government which runs those enterprises well will gain public support and votes. Thus, democratic governments do have an incentive to maximize efficiency in nationalized companies, due to the pressure of future elections.
Opponents of certain privatisations believe certain parts of the social terrain should remain closed to market forces in order to protect them from the unpredictability and ruthlessness of the market (such as private prisons, basic health care, and basic education). Another view is that some of the utilities which government provides benefit society at large and are indirect and difficult to measure or unable to produce a profit, such as defense. Still another is that natural monopolies are by definition not subject to competition and better administrated by the state.
The controlling ethical issue in the anti-privatisation perspective is the need for responsible stewardship of social support missions. Market interactions are all guided by self-interest, and successful actors in a healthy market must be committed to charging the maximum price that the market will bear. Privatisation opponents believe that this model is not compatible with government missions for social support, whose primary aim is delivering affordability and quality of service to society.
Many privatisation opponents also warn against the practice's inherent tendency toward corruption. As many areas which the government could provide are essentially profitless, the only way private companies could, to any degree, operate them would be through contracts or block payments. In these cases, the private firm's performance in a particular project would be removed from their performance, and embezzlement and dangerous cost cutting measures might be taken to maximize profits.
Furthermore, large corporations can pay public relations professionals to convince decision-makers that privitazation is a sensible idea, whether or not this is actually the case. Corporations typically have far more resources for expert testimony, advertisements, conferences and other propaganda efforts than anti-privatisation advocates. Of course, this fact has no bearing on the merits of privatisation itself.
Some would also point out that privatising certain functions of government might hamper coordination, and charge firms with specialized and limited capabilities to perform functions which they are not suited for. In rebuilding a war torn nation's infrastructure, for example, a private firm would, in order to provide security, either have to hire security, which would be both necessarily limited and complicate their functions, or coordinate with government, which, due to a lack of command structure shared between firm and government, might be difficult. A government agency, on the other hand, would have the entire military of a nation to draw upon for security, whose chain of command is clearly defined. Opponents would say that this is a false assertion: numerous books refer to poor organization between government departments (for example the Hurricane Katrina incident).
Furthermore, opponents of privatisation argue that it is undesirable to transfer state-owned assets into private hands for the following reasons:
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Literature reviews  find that in competitive industries with well-informed consumers, privatisation consistently improves efficiency. Such efficiency gains mean a one-off increase in GDP, but through improved incentives to innovate and reduce costs also tend to raise the rate of economic growth. The type of industries to which this generally applies include manufacturing and retailing. Although typically there are social costs associated with these efficiency gains, many economists argue that these can be dealt with by appropriate government support through redistribution and perhaps retraining.
In sectors that are natural monopolies or public services, the results of privatisation are much more mixed, as a private monopoly behaves much the same as a public one in liberal economic theory. In general, if the performance of an existing public sector operation is sufficiently bad, privatisation (or threat thereof) has been known to improve matters. Changes may include, inter alia, the imposition of related reforms such as greater transparency and accountability of management, improved internal controls, regulatory systems, and better financing, rather than privatisation itself.
Regarding political corruption, it is a controversial issue whether the size of the public sector per se results in corruption. The Nordic countries have low corruption but large public sectors. However, these countries score high on the Ease of Doing Business Index, due to good and often simple regulations, and for political rights and civil liberties, showing high government accountability and transparency. One should also notice the successful, corruption-free privatisations and restructuring of government enterprises in the Nordic countries. For example, dismantling telecommunications monopolies have resulted in several new players entering the market and intense competition with price and service.
Also regarding corruption, the sales themselves give a large opportunity for grand corruption. Privatisations in Russia and Latin America were accompanied by large-scale corruption during the sale of the state-owned companies. Those with political connections unfairly gained large wealth, which has discredited privatisation in these regions. While media have reported widely the grand corruption that accompanied the sales, studies have argued that in addition to increased operating efficiency, daily petty corruption is, or would be, larger without privatisation, and that corruption is more prevalent in non-privatised sectors. Furthermore, there is evidence to suggest that extralegal and unofficial activities are more prevalent in countries that privatised less.
The enterprise can remain as a public utility.
The enterprise could be managed by a private non-profit organization.
Transferring control to municipal government
It is possible that national services may sub-contract or out-source functions to private enterprises. A notable example of this is in the United Kingdom, where many municipalities have contracted out their garbage collection or administration of parking fines to private companies. In addition, the British government has involved the private sector more in the workings of the National Health Service principally through outsourcing the construction and operation of new hospitals to private companies. There are also moves to refer patients to private surgeries to ease the load on existing NHS human resources, and covering the cost of this.
An enterprise may be privatised, with a number of shares in the company being retained by the state. This is a particularly notable phenomenon in France, where the state often retains a "blocking stake" in private industries. In Germany, the state privatised Deutsche Telekom in small tranches, and still retains about a third of the company. As of 2005, the state of North Rhine-Westphalia is also planning to buy shares in the energy company E.ON in what is claimed to be an attempt to control spiraling costs.
Whilst partial privatisation could be an alternative, it is more often a stepping stone to full privatisation. It can offer the business a smoother transition period during which it can gradually adjust to market competition. Some state-owned companies are so large that there is the risk of sucking liquidity from the rest of the market, even in the most liquid marketplaces, and thus must be sold off bit by bit. The first tranche of a multi-step privatisation would also in the first instance establish a valuation for the enterprise to mitigate complaints of under-pricing.
In some instances of partial privatisation of contracted services, provision of some portion(s) of the state-owned service are provided by private-sector contactors, but the government retains the capacity to self-operate at contract intervals, if it so chooses. An example of partial privatisation would be some forms of school bus service contracting, such as arrangements where equipment and other resources purchased with government capital funds and/o those already owned by a governmental entity are used by the contractor for a period of time in providing services, but ownership is retained by the governmental unit. This form of partial privatisation eases concerns that once an operation is contracted, the government may be unable to obtain sufficient competitive bids, and be subjected to terms less desirable than the prior operation under state-ownership. Under that scenario, a reverse privatisation would be more feasible for the government. (see section below)
The largest privatisation in history was Japan Post. It was the nation's largest employer and one third of all Japanese government employees worked for Japan Post. Japan Post was often said to be the largest holder of personal savings in the world.
The Prime Minister Junichiro Koizumi wanted to privatise it because it was thought to be an inefficient and a source for corruption. In September 2003, Koizumi's cabinet proposed splitting Japan Post into four separate companies: a bank, an insurance company, a postal service company, and a fourth company to handle the post offices as retail storefronts of the other three.
After privatisation was rejected by upper house, Koizumi scheduled nationwide elections to be held on September 11, 2005. He declared the election to be a referendum on postal privatisation. Koizumi subsequently won this election, gaining the necessary supermajority and a mandate for reform, and in October 2005, the bill was passed to privatise Japan Post in 2007.
Nippon Telegraph and Telephone's privatisation in 1987 was the largest share offering in financial history at the time. 15 of the world's 20 largest public share offerings have been privatisations of telecoms.
The United Kingdom's largest public share offerings were privatisations of British Telecom and British Gas. The largest public share offering in France was France Telecom. Privatisation in Europe has led to genuine competition: the former state-owned enterprises lost their monopolies due to legislation and technological change, competitors entered the market, and prices for broadband access and telephone calls fell dramatically.
Privatisation proposals in key public service sectors such as water and electricity are in many cases strongly resisted by opposition political parties and civil society groups. Campaigns typically involve demonstrations and democratic political activities; sometimes the authorities attempt to suppress opposition using violence (e.g. Cochabamba protests of 2000 in Bolivia and protests in Arequipa, Peru, in June 2002). Opposition is often strongly supported by trade unions. Opposition is usually strongest to water privatisation — as well as Cochabamba, recent examples include Haiti, Ghana and Uruguay (2004). In the latter case a civil-society-initiated referendum banning water privatisation was passed in October 2004.
A reversion from contracted ownership of an enterprise and/or services to governmental ownership and/or provision is called reverse privatisation or nationalization. Such a situation most often occurs when a privatisation contractor fails financially and/or the governmental unit has been unable to purchase satisfactory service at prices it regards as less than state-ownership or self-operation of services. Another circumstance may occur when greater control than viable under privatisation is determined to be in the governmental unit's best interest.
National security concerns may be the source of reverse privatisation actions when the most likely providers are non-domestic or international corporations or entities. For example, in 2001, in response to the September 11th attacks, the then-private airport security industry in the United States was nationalized and put under the authority of the Transportation Security Administration.
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privatization (plural privatizations)