Privatization: Classification, Advantages and Characteristics

Privatization: Classification, Advantages and Characteristics

We explain what privatization is, how it is classified and what are its advantages. In addition, its general characteristics, objectives, and more.

What is Privatization?

Privatization is the legal and economic process of transferring a public good of any nature to the private sector , which is equivalent to its sale by the State and subsequent purchase by private interests. The opposite of nationalization or expropriation is considered in this sense.

Privatization can take place in different ways, in whole or in part , and for various reasons, although it is often not viewed favorably.

By opening a public sector to private participation, the State allows non-governmental actors to take part in financing , producing goods or providing services, conducting and receiving dividends from said sector.

This, among other things, has the consequence of reducing the State’s control over privatized assets , which can be seen as an attempt to dismantle the State and leave what was previously regulated or controlled by public action in the hands of the market .

History of privatization

History of privatization
In the Argentina of the Menemism, privatization had disastrous results. 

Since the 1960s, privatization processes have been controversial , insofar as they have taken place in the world.

Despite its detractors, it is a procedure that continues and in 1994 reached the record number of sales of public assets in the world: around 60 billion dollars.

During the 1990s, in fact, privatization was a practice carried out in various Latin American countries , with disparate results, in some cases disastrous (such as Argentina ‘s Menemism), in an economic movement that advocated the return to classical liberalism , known as  neoliberalism .

Private property and public property

Private property and public property
Private property is an indispensable condition for economic growth.

Privatization involves the transfer of a good or a company from the public sector , administered by the State under conditions of protection and of social interest, to the private sector, mainly motivated by profit.

It is a typical procedure of liberal economic doctrines , which understand private property as an indispensable condition for economic growth and the generation of wealth.

On the contrary, it is highly criticized from the sectors of the left , whose social interests are constrained by the passing into private hands of assets that previously belonged to everyone.

Types of privatization

Broadly speaking, three types or modalities of privatization are distinguished:

  • Property transfers to the private sector. Permanent sales that give private interests full ownership of public goods.
  • Concessions and contracts. Through these processes, some good is granted to private interests for a certain period of time, being able to recover the public property of it after a time.
  • Shareholding. It occurs when a publicly owned company sells or auctions shares to recapitalize itself, thus allowing private actors to enter the business management.

Advantages of privatization

Advantages of privatization
Privatization aims to manage certain public goods and services. 

The virtues of privatization have to do with increasing the state’s liquidity and releasing it from debts and liabilities, which can be key in times of severe economic need.

On the other hand, State interference in economic matters is frowned upon by defenders of the free market , as they perceive it as a source of unfair competition, artificial monopolies and other forms of protectionism that impede the natural growth of the country’s economy .

At the same time, it is hoped that a private management of certain public goods (such as basic services: electricity , telephone, etc.) means an improvement in terms of effectiveness and service provision, since the company will want to increase its client portfolio and at the same time it may be regulated by the State.

Disadvantages of privatization

Privatizations usually involve a reduction in personnel and a rise in the prices of services or consumer goods , necessary to become competitive in the local market.

This has a negative impact, in general, on the most disadvantaged sectors, which lose their jobs or see their consumption capacity diminished , in the case of the increase in public services. All this has an impact, of course, on the local economy.

Furthermore, they weaken the State’s patrimony and make it weaker to face economic, social or political processes, since many of its primary assets will respond to private interests and power groups that, owners of large capital, can then influence the economy. political chore.

Stages of privatization

Stages of privatization
For sale, capital markets with strategic investors are considered. 

Commonly, privatization occurs in two phases:

  • Preparation of the sale. Where the necessary measures are taken to restructure, settle pending liabilities, and it is decided whether the State will bear certain reorganization expenses prior to the sale or whether they will be assumed by the private investor.
  • Sales method.  The mechanisms are available to carry out the sale and the capital markets with strategic investors are taken into account.
  • Buyer selection criteria.  Potential investors are discerned to ensure the best destination of the assets (judging by investment plans) and the best possible offer (recovered capital).

Goals of privatization

The objectives of privatization are clear: let the private administration take over the reins of some of the State’s assets and processes, betting that free competition forces these new interests to provide an organized, efficient and autonomous service.

Alternatives prior to privatization

In many cases, the reorganization of the State is referred to as a stage prior to privatization . This means that before selling public goods or auctioning shares of public companies, a review of the same could be undertaken with the task of making them more efficient, more profitable, applying within the same State some business slogans and thus preventing the need to privatize.

The dilemma of these intermediate solutions is that they burden the state with the political and social costs of reform , as it often involves laying off staff or cutting public spending.

Consequences of privatization

Consequences of privatization
The sale of State assets produces greater economic solvency. 

As seen before, the consequences attributed to privatization will depend on the perspective that one has regarding the economic needs of a specific country and the best method to solve them.

However, the immediate effects of the sale of State assets translate into greater liquidity, that is, greater economic solvency , since the State frees itself from the processes and obligations of the privatized asset and also receives compensation economical.

However, it also loses control of the asset sold and that may mean, from now on, higher expenses than those acquired through the initial sale.

 Examples of privatization

The following are some Latin American companies whose privatization cases have been emblematic:

  • Mexico . Telmex, TV Azteca, CFE and Elektra.
  • Colombia. RCN Televisión, Caracol Televisión, Colombia Telecomunicaciones and ISAGEN.
  • Argentina. Telefe, Telefónica Argentina, Ferrocarriles Argentinos, Segba.
  • Chile . National Radio of Chile, Entel Chile, Endesa Chile.
  • Venezuela . Cantv, Electricidad de Caracas.

The above content published at Collaborative Research Group is for informational and educational purposes only and has been developed by referring to reliable sources and recommendations from technology experts. We do not have any contact with official entities nor do we intend to replace the information that they emit.

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