Privatization

Privatization is a transfer of management, ownership, and/or control of any aspect of an enterprise from the public (governmental) sector to the private (nongovernmental) sector. The term (spelled privatisation in the United Kingdom and most Commonwealth countries) is very broad, encompassing a wide range of activities and/or assets and methods of transferring those activities from public to private entities.

Privatization runs a gamut from large scale to small scale and from full public transfer to the private sector to more limited partial transfer. The purest example of privatization is the outright sale of a governmental asset or operation to a private corporate entity. Infrastructure assets such as roads and power-generating facilities are often in this category, having in many cases been built, owned, and operated by the government, which then decides, perhaps many years later, to sell the asset to a private operator. The asset may be directly sold, in which case the method of transfer is referred to as an asset sale; alternatively, the shares of an incorporated entity that holds the asset for the government may be floated on public share markets, or those shares may be sold to selected private entities, in which case the method of transfer is referred to as a trade sale.

An alternative method of public-to-private transfer is the concession or lease arrangement. For example, suppose a government decides to transfer a public commuter rail to a private entity. As noted above, the government could sell the rail line directly (an asset sale) or sell the shares of a governmental corporate entity that owns the rail line (a trade sale). A third alternative is for the government to retain ownership of the rail line but lease the line to a private entity for some period of time, after which the line reverts back to public ownership. This arrangement would constitute a lease or concession agreement. If the lease term is long enough (20 years or more; 75- or 99-year leases are quite common in the infrastructure field), the government has de facto (i.e., in fact), though not de jure (i.e., by law) transferred ownership because of the long-term control exercised over the asset by the private entity through the lease. Leases and concession agreements can have many different legal provisions, and through these provisions, the degree of privatization can be modified. For example, shorter or more-limited lease terms can allow the governmental owner to retain more management control over the privately managed asset.

Leasing is an example of a widely used method of privatization known as contracting out. In contracting out, a service or activity (as opposed to an asset) is paid for by the government but is provided, by means of a service agreement, through a private entity. Almost any conceivable example of public service has been provided in this way, though some, such as garbage collection and information technology services, are more widely contracted out by governments than others, such as police protection. Outsourcing is another label often used to designate contracting out, though the former term is broader in that it is used [Page 1306]for both public-to-private transfers of responsibility as well as private-to-private transfers. If the service is outsourced to a provider in another country, then it is sometimes referred to as offshoring.

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