Deprivatization

What Is Deprivatization?

Deprivatization is the act of transferring ownership from the private sector to the public sector. Governments may do this for a variety of reasons, such as attempts to maintain the stability of critical infrastructure during periods of economic distress. This can occur in various segments of the economy.

Also known as "nationalization," deprivatization often (but not always) refers to the re-nationalization of a previously privatized public entity or industry. However, deprivatization is also sometimes simply used as a synonym for nationalization for strategic or political reasons, to avoid the connotations and historical associations of the word "nationalization" when nationalizing a business, industry, or resource.

Understanding Deprivatization

Deprivatization generally occurs in the areas of transportation, electricity generation, natural gas, water supply, and healthcare because governments want to ensure these sectors are functioning properly so that the country can continue to run smoothly. In addition, electrical, natural gas, and hydro companies tend to be natural monopolies, where economies of scale lead to a single producer in a given geographic area or market. Governments will often heavily regulate or nationalize such industries because they want to have control in these areas or to ensure that consumers have access to these essential services at a reasonable cost.

As a special case of nationalization, deprivatization often involves an industry or entity that was previously operated by the government or other public enterprise and was at some point privatized. In many cases, deprivatization involves public dissatisfaction with the outcome of the prior privatization and alleged or actual corruption in the operation of the private entity or the process by which it was privatized. 

Nationalization and Investing

Nationalization is one of the primary risks for companies doing business in foreign countries due to the potential of having significant assets seized without compensation. This risk is magnified in countries with unstable political leadership and stagnant or contracting economies. Businesses can purchase insurance covering nationalization and expropriation by foreign governments from the U.S. government. The key outcome of nationalization is the redirection of revenues to the country's government instead of private operators, who are often alleged to export funds with no benefit to the host country.

In recent decades, cases of deprivatization have been rare. Argentina, for example, under an expropriation law in 2012, took 51% of the shares of its biggest oil producer, YPF, which was established as a state owned enterprise in 1922 and later privatized in 1993. At the time of deprivatization, YPF was owned by Spanish oil company Repsol. Shares of YPF and Repsol were disrupted, though the Spanish oil company later sought a financial settlement from the Argentine government and received $5 billion in compensation. 

During the financial crisis of 2008–09, the U.S. government deprivatized the home mortgage finance agencies the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Both were originally public sector entities established by law during the Great Depression and the 1970's, respectively, who could then issue stocks and other securities on private markets as shareholder-owned, private, government-sponsored enterprises. In the wake of the 2008 financial and foreclosure crisis, the U.S. federal government took effective ownership and deprivatized both Fannie Mae and Freddie Mac. Each of these interventions was successful in as much as the businesses were saved from liquidation. Results for the U.S. Treasury and shareholders were a mixed bag at best.