Denationalization

What Is Denationalization?

Denationalization, which is a form of privatization, occurs when a national government sells an asset or operation such as a large government-owned firm to private investors.

How Denationalization Works

Denationalization is the process of transferring an asset from public ownership — specifically ownership by a national government — to private ownership and operation. The term is broadly synonymous with privatization, although "privatization" could also apply to ownership by a local, state, or provincial government, in which case "denationalization" would not be a strictly accurate description.

For the most part, denationalization occurs when a government sells a controlling stake of a state-owned enterprise — often in the energy, banking, telecommunications, or transportation industries — to private investors.

Reasons for Denationalization

The rationale for a particular denationalization depends on the firm and the country, but a few general themes apply. State-owned firms are often uncompetitive. At times their management is heavily influenced by politicians, who may or may not have business experience and are likely to be focused on political, rather than business, goals.

A state-owned firm might hire large numbers of unnecessary staff as a form of political patronage, for example. If it is a bank, it might lend unprofitably for much the same reason. Governments may be unwilling to let a state-owned firm fail, so it might continue to labor under a growing debt load indefinitely. Since state-owned firms are often monopolies, they can harm consumers even if they are relatively well run. 

At the same time, critics of denationalization argue that private interests often pursue profit at the expense of the society's overall wellbeing, which may be harmful if the firm provides an essential good or service such as energy, transportation, or telephone service. Privatization naysayers believe necessities like electricity, water, and schools shouldn’t be vulnerable to market forces or driven by profit. In certain states and municipalities, liquor stores and other nonessential businesses are run by public sectors, as revenue-generating operations.

Examples of Denationalization

A number of countries have divested themselves of firms and other assets in recent decades. The U.K. denationalized its railroads from 1994 to 1997. Japan is in the process of denationalizing Japan Post. Mexico — which expropriated all foreign oil companies, facilities, and reserves in 1938 — opened the sector back up to private investment in 2013, though the former monopoly Pemex remains state-owned. Saudi Arabia is considering floating part of the kingdom's oil company, Saudi Aramco, on an international bourse, though the government plans to retain ownership of the large majority of shares.