Privatization Law and Legal Definition

Privatization is the transfer of some property or activity from public to private control. In the international context privatization typically refers to the denationalization of government-run industries. In the U.S. the term is used to denote activities of local government; the word, however, occasionally occurs in policy debates at the federal level as well. When a function has been performed or a service delivered by government employees and is then contracted out to the private sector, the result is partial privatization because government continues to control the activity. Most "privatized" municipal functions are, in fact, performed by private sector companies but controlled by the government. Environmental functions like garbage collection, sewage treatment, and drinking water provision are increasingly privatized in this sense. Outright transfer of ownership to the private sector has also taken place, usually in the context of toll roads.

Control is a fundamental aspect of ownership. Government control over activities and property tends to increase in troubled times and decrease in good times. During a war government frequently in effect takes over industries by regulatory control. After 9/11 government took over airport security, for instance, presently managed by the Transportation Security Administration. When private initiative does not spontaneously supply necessary functions, government will get involved and perform the function; later it may hand it over. Major sewer systems were built and operated by government; space exploration continues to be dominated by government enterprise although private sector ventures have appeared.

Privatization is thus one phase in a broader spectrum of control and its relaxation in response to external stimuli. Privatization is "kissing cousin" to deregulation, another instance of government relaxing its grip over functions. Government's exercise of control and its opposite are ultimately sanctioned by the public will brought to expression in politics. Government involvement must be paid for by taxes (or, in recent history, by borrowing). The public is more-or-less willing to let go of some functions or services. Attempts to privatize Social Security, for instance, by the institution of "private accounts" have failed; so have initiatives to privatize public education by the mechanism of "vouchers." In other areas privatization has gone forward side-by-side with deregulations more or less continuously since the end of World War II. When such efforts falter or fail, re-regulation is immediately in the news. Direct government control is the extreme form of regulation.

Promoters of privatization (and of deregulation) base their position on the greater efficiency of free markets and competition. They hold up consumer choice as a high value. But current events and history show that the population, expressing itself by means of government, will exert its power when it doesn't like the outcome of free market choices. Thus in the mid-2000s, sharp hikes in gasoline prices immediately led to demands for government intervention to control prices at the pump.

AREAS OF PRIVATIZATION

Municipal Services

Narrowly viewed, privatization has had its greatest impact at the local level as municipal services performed by city or township employees have been converted into operating contracts handled by the private sector. This activity has created opportunities for small business for many decades, primarily in solid waste collection and disposal, street repair, in recreational facility management like landscaping and groundskeeping services, and, in the 1990s and early 2000s, in the operation of water and sewer systems. Larger businesses have, of course, participated in this activity as well. They have taken on the operation of ports from port authorities, have purchased toll roads or taken on their management and maintenance, and taken over entire functions like the construction and operation of recreational centers and water systems.

As Public Works magazine has pointed out, privatization, reaching back decades, has not been without controversy. "Some cities proclaim major cost savings and efficiency improvements through private ownership and/or operation of [systems]," the magazine wrote. "Other agencies, citizen groups, and public employees are less convinced of the long-term benefits of turning over control of public services to private entities." Citing a survey of 125 municipal decision makers conducted for the Malcolm Pirnie organization, Public Works noted the following: "When asked about the challenges they face, 23 percent of drinking water utility participants said they needed to improve business practices to face the 'threat from the private sector.' As to the benefits of privatization, 28 percent mentioned increased efficiency and 23 percent cost savings. Disadvantages included loss of control (39 percent), private companies' profit motive (18 percent), and financial disadvantages (18 percent)."

Joshua Kurlantzick, writing for Entrepreneur (and highlighting opportunities for small business) provided reasons for privatization. "With state and local governments desperately short of revenue," he wrote, "the privatization of public services is likely to increase at a faster pace."

Areas of greatest opportunity for small business, Kurlantzick wrote, were drinking-water and wastewater management. "Many cities' water and wastewater systems are in dire straits, with pipes dating back 100 years…. Privatization allows city governments to have a contractor do the upgrade and manage the systems, often for far less, since private firms are given incentive-laden contracts that push them to work more cheaply, says Clay Landry, a principal at WestWater Research LLC, a water economics research firm in Laramie, Wyoming. 'The cities and states are in fiscal crisis, and the Bush administration's answer to them is to look to the private sector to handle services, so we'll see more of this,' Landry says. What's more, as water scarcity increasingly becomes an issue, privatization will become even more attractive, since handing water management to a private firm that can set market-oriented rates helps manage scarcity."

Looming Ahead: Education

Education is the largest public employer in the U.S. and enjoys substantial public support. The public does not view education as a consumable commodity, and for this reason it has thus far resisted the pressure to privatize it—although some observers foresee the intrusions of the free market into this realm as well. Governmental responses, thus far, chiefly at the state level, where education is controlled, have been characterized by pressures to reduce costs, shifting the tax burden from property to general taxes, and gradually pushing up tuitions for higher education. The advocacy of voucher systems—which would, in effect, commodify public education by making it more portable—has thus far not won much support. The No Child Left Behind legislation at the federal level represents a pressure for measuring performance, seen by some as a preliminary step towards commercialization. Whether or not this sector will also yield to market forces is as yet difficult to discern. Advocates of making schools compete for students anticipate both reductions in costs and increases in educational achievement. However, all currently available models open for comparison, including very-high-achieving foreign systems, are publicly staffed and administered.

Private Privatization

A curious aspect of the private-public debate is that a very large component of private industry, whether measured in dollars or employment, is called "public." These are, of course, the publicly traded corporations operating under the regulatory oversight of the Securities and Exchange Commission. When privately held corporations offer their stock for trade on open markets, they are "going public." When a group of investors buy up a sufficiently large portion of the publicly traded stock (the percentage varies based on state incorporation laws), they can "take the company private" as well—a form of privatization of the private sector. This normally happens as a stage in merger and acquisition activity in order to bring a company under control, transform it in various ways, e.g., by spinning off elements of it, prior to taking it public again. But the process is also becoming popular as a way of shielding corporations from federal oversight by the SEC, thus escaping many costly and administratively onerous reporting and accounting requirements, not least the requirements of the Sarbanes-Oxley Act passed by Congress to curb excesses revealed in the bankruptcy of Enron Corporation.

Privatization is a broad socio-economic phenomenon. As shown above, it can affect public bodies as well as those nominally in the private sector. Periods of privatization are followed by periods of regulation. As the old verse has it, "around and round she goes; and where she stops, nobody knows."

BIBLIOGRAPHY

Arndt, Michael, and Catherine Arndt. "Roads to Revenue." Business Week. 17 October 2005.

"Chicago May Privatize Midway." Airline Industry Information. 6 March 2006.

Davis, Kirby Lee. "Councilor Urges City of Tulsa to Privatize Golf Courses." Journal Record. 29 March 2006.

"Education Vouchers." School Administrator. April 2006.

Fung, Amanda. "Techs Seek Privacy; After Languishing as Public Companies, Many Dot-coms Eye Private Buyouts." Crain's New York Business. 29 August 2005.

Kurlantzick, Joshua. "Private Partners: Can the privatization trend help your company grow?" Entrepreneur. November 2003.

Lyall, Katharine C. and Kathleen R. Sell. The True Genius of America at Risk. Praeger Publishers, 2005.

Martin, James and Kames E. Samels. "Colleges, Companies Write a New Learning Chapter." Boston Business Journal. 25 May 2001.

Meckler, Laura. "Making Public Highways Private: More state, local governments consider handing toll roads to companies to aid budgets." The Wall Street Journal Eastern Edition. 18 April 2006.

Savas, E.S. Privatization in the City: Successes, Failures, Lessons. CQ Press, 2005.

Singh, Shruti Date. "Going Private Saves Firm a Cool $1 Million." Crain's Chicago Business. 19 September 2005.

                                               Darnay, ECDI