Privitization – Definition

Cite this article as:"Privitization – Definition," in The Business Professor, updated March 30, 2019, last accessed May 25, 2020,


Privatization Definition

Privatization explains the transfer of ownership of a property, assets, or company from government ownership to private ownership. This means, a property formerly possessed by the government has been transferred to private individuals. When we talk of corporate privatization, it occurs as a result of transfer of a company formerly owned by the government to private owners.

There are quite a number of meanings attached to privatisation, aside from being the transfer of ownership of a company or an entity from public sector to private sector, it could also mean the transfer of just a part of a company. Privatisation could also mean deregulation in certain discussions, this happens when a company under heavy regulations becomes less regulated.

Also, when a company is privatised, it drops the name ‘limited company’ and takes up the name ‘private limited company’. Privatisation has contributed immensely to an improved economy and efficiency of service. A historic act is that of privatisation in India in 1991 as budget reforms.

A Little More on What is Privatization

There are two major sectors of the economy in any country of the world, these are public (government) sector and private sector. At certain periods, the government relinquishes ownership of some of its operations to the private sector for effective control of resources and the economy.

In many countries such as the united states, public sector runs operations public schools and universities, public electricity companies, healthcare, postal service, water corporations, and many others. However, it is vital to know that the private sector can still have operations similar to those of the government. The government can, however, decide to transfer public operations to private sector for profit.

The private sector is profit motivated, it is gain-oriented. Private owners create business and services to cater for people’s needs in exchange for money. Although, government-owned establishments are not profit-oriented, their bureaucratic nature may impede their efficiency, this is why the government privatise some of its operations to improve efficiency and reduce cost.

However, there is opposition against this privatisation as some people argue that basic necessities like education, water, electricity should not be left in the hands of private sector.

Also, some states such as the state of Washington, have control of liquor stores in order to regulate how liquor is being sold.

The transitioning of a company from being a public-owned to a private-owned is corporate privatisation. In this setting, a company can decide to reshuffle its operations or make structural changes in its system without consulting the shareholders. For instance, if the structural changes to be made would affect shareholders, their opinions would not be considered. Nevertheless, for a company to be fully private-owned, none of its funds or finance should come from public trading. The company must also pay off all debts to shareholders before it can be regarded as privately-held.

Economic Theory and Privatization

This paper presents an economic theory on the potential benefits of privatising public-owned companies. It also considers the simplicity or complexity of contractual arrangements that occur in privatisation. In a complete contract situation, institutional structure has less importance in the contractual arrangement unlike in incomplete contracts where institutions are highly significant. In a 1997 model by Hart, Shleifer and Vishny, in the context in incomplete contracts, a manager make certain decisions about investments and this depends on the situation of the desirability of private or public ownership. The Hart-Shleifer-Vishny model also incorporated endogenic assignments of the investment tasks to aid development for mixed public-private ownership.

This is an evaluation of privatisation and a highlight of its potential benefits as well as downsides. The evaluation of privatisation was carried out based on the type of industry and how the industry is regulated. The underlying benefits of privatisation are;

  1. Reduction in level political inference.
  2. Efficient delivery of services.
  3. Creation of short-termed entities.
  4. Well-incorporated shareholders.
  5. An increased profit margin for both the government and private sector.

Below are the downside of privatisation;

  1. Monopoly.
  2. Loss of dividends by the government.
  3. Difficulty in regulating private monopolies.
  4. Fragmentation of industries.
  5. Lack of public interest.

References for Privatization

Academic Research on Privatization

Privatization and public-private partnerships, Savas, E. S., & Savas, E. S. (2000). This paper discusses the type of privatisation transaction carried out in public-private partnerships using the India’s proposed public–private partnership (PPP) strategies in education. This paper analyses the strategies used by the government of India with the aim of pegging the roles of the state. The state can fund, manage or regulate this public-private partnership strategies. The analysis reveals that the strategies are linked with privatisation of PPP in education leading to a decrease in the roles of the state. This implies that the proposed strategies lead in a decline in the roles of the state which includes financing, regulation and control of education.

Economic perspectives on privatization, Vickers, J., & Yarrow, G. (1991). Journal of Economic Perspectives, 5(2), 111-132. This paper seeks to find answers to these vital questions after examining privatization Britain, Chile, and Poland ; How does ownership impact enterprise performance and efficiency? What is the role for privatization in financing public debts and deficits? What are the distributional and political implications of privatization? This paper presents economic perspectives on privatisation as elementary issues on privatisation are discussed which include ownership reforms and a clear distinction between public-owned and private businesses. The need to have a fine line between public and private enterprises has received less attention in political economy analysis. However, in 1980, the concern received attention but these reforms did not stand the test of time as they were overturned in 1990 by a greater privatization in the reforming socialist economies.

Privatization: a theoretical treatment, Bos, D. (1991). Privatization has become a global trend between 1980s and 1990s which a rise in the private takeover of many public utility companies such as telecommunications and electricity in countries like UK and Germany. Germany however, is a step above Uk in terms of privatisation as the entire economy was privatised. This paper empirically examines privatisation, its problems, approaches to deal with the problems, and other central issues vital to the discussion of privatisation. The paper also takes into consideration full and partial privatisation and regulations peculiar to these forms. How to deal with issues of privatisation and the roles of trade union s in privatisation are considered.  

Privatization, information and incentives, Sappington, D. E., & Stiglitz, J. E. (1987). Journal of policy analysis and management, 6(4), 567-585.People express diverse preferences in terms of who should provide certain goods and services, whether the government is suitable or private sectors. This paper considers the choice exhibit as regards public or private provisions of goods and services. However, in any of the sectors chosen, delegation of production activities occur. This paper however reveals that in the two modes, there are always transaction costs faced by either the public or private sector. Although, the intervention of the government in delegated production activities is beneficial but a absence of intervention under private production is also beneficial in terms of incentives.

Credible privatization, Perotti, E. C. (1995). The American economic review, 847-859. This paper present an intellectual discussion around credible privatisation. When privatisation occurs, all residual income and control are transferred to private investors alongside the entity that is privatised. Although, this study finds it that the transfer of ownership from public to private requires a gradual process, the transfer of residual income or net income and control limit adjustment and improvement of incentives. When government opposes redistribution or adjustment, it maintains a passive stance in the firm. This study also shows that when the stance of the government is not in agreement with transfer of control, there tend to be underpricing which might cause separation.

Partial privatization in mixed duopoly, Matsumura, T. (1998). Journal of Public Economics, 70(3), 473-483. This journal on public economics treats as a subject matter partial privatisation in mixed duopoly. Unlike monopoly, duopoly exists when two sectors manage or own a company alongside its products and services. Partial privatisation on the other hand is seen when a public-owned enterprise is not fully privatised, the government might still be providing financing in such a case. This paper investigates private firms jointly owned by the public and private sectors in cases of mixed duopoly. This paper considers the amount of shares the government should have in partially privatised firms under moderate conditions or whether the governemnt holds all the shares.

The meaning of privatization, Starr, P. (1988). Yale Law & Policy Review, 6(1), 6-41. This paper presents a holistic definition of privatisation with all its indices, technicalities, problems and impacts discussed. This paper is a 1988 definition of privatisation by Starr, P. and it describes the processes involved before privatisation can take place. This paper also includes the laws, strategies and policies of privatisation as they are vital for a holistic definition of privatisation.

Privatization in theory and practice, Yarrow, G. (1986). Economic policy, 1(2), 323-364. Privatisation of public-owned ventures usually lead to the pursuit of profits by managers. This paper examines the theory and practise of privatisation. The availability of a regulatory and competitive environment is also vital in determining how much privatisation will benefit the society. The study shows that private entities tend to blossom in competitive markets. However, in a natural monopoly, regulation is required to manage the market. The improved performance of firms in privatization practise was examined using some British firms.Although, privatisation helps to reduce trade Union power, redistribute wealth and public finances, this study identifies that there are other policies that can achieve the above objectives.

On insider privatization, Blanchard, O., & Aghion, P. (1996). European Economic Review, 3(40), 759-766. This paper examines insider privatisation and its impact in European economy. Insiders refer to those who have control rights over a company but do not have property rights. These insiders form opposition for outsider privatisation and this has resulted in the retardation of privatisation in these European countries. There are two strong arguments for insider privatisation, one is that insider privatisation provide incentives for insiders through the alignment of control and property rights. The second is that if insiders are unable to do the job themselves, right incentives will encourage them to give the firms to those outsiders who can. This paper reveals that both outsiders and insides have specific values they benefit from firms.

Privatization and incentives, Laffont, J. J., & Tirole, J. (1991). JL Econ. & Org., 7, 84. This paper studies privatisation with a view to identify the interplay between this mode of ownership and incentives. The study aims to examine the effects of privatisation on managerial incentives. Ordinarily, the decision to privatise a firm is usually based on the underlying incentives, profits and economic gains. However, this study aims to find out whether privatisation affecf managerial decisions such as giving incentives to managers or not.

Partial privatization and firm performance, Gupta, N. (2005). The Journal of Finance, 60(2), 987-1015. Partial privatisation is one in which there is no full private a ownership of a film as the governmet still performs some roles such as funding the firm. This paper aims to examine the impacts private privatisation on the firm’s performance. In partial privatisation, there is no transference of managerial control to private owners. In this type of privatisation also, non‐controlling shares of firms are sold on the stock market, however, it is often argued that partial privatisation has little impact on managerial control. With the data gathered from state‐owned enterprises in India, this study reveals that. partial privatization has  positive impacts on firm’s performance.

China share issue privatization: the extent of its success, Sun, Q., & Tong, W. H. (2003). Journal of financial economics, 70(2), 183-222. This paper examines the rate of success and privatisation of privatisation in China owing to share issues. This paper evaluates 634 public enterprises which are on China’s share issue privatisation lists between 1994 and 1998. This study highlights the negative impacts of state ownership on firm’s performance while private ownership exhibit positive impacts. Furthermore, the study finds out that Share Issue Privatisation, SIP has proven to be effective means of enhancing the earning abilities, and workers’ productivity. However, SIP does not improve leverage and profits returns after privatisation. This study considers the wholesome impact of SIP on firm’s performance and productivity.

Privatization matters: Bank efficiency in transition countries, Bonin, J. P., Hasan, I., & Wachtel, P. (2005). Journal of Banking & Finance, 29(8-9), 2155-2178 This study examines the efficiency of foreign banks and governments owned banks through empirical studies. It also investigates the effects of bank privatisation in transition economies. A transition country is a country that was formerly a centrally planned economy changing to a market economy. Using data from banks in Bulgaria, the Czech Republic, Croatia, Hungary, Poland and Romania, this paper measures the efficiencies of the banks based on their ownerships. The result shows that foreign owned banks are more efficient that government owned banks. To increase efficiency, the study highlights the importance of attracting efficient foreign owners in privatisation process.


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