Renationalization

What Is Renationalization?

The term "renationalization" refers to the process of bringing assets or industries that were previously privatized back into government ownership. Renationalization often occurs in sectors that are required for the country to operate smoothly or where monopolies must occur. Although the reasons why governments renationalize tend to vary, they are almost always based on economic or political factors. Renationalization is common with utility and transportation companies.

How Renationalization Works

Governments often take over private companies for economic or political reasons. This process is known as nationalization. At times, the nation's leaders may decide to revert these companies back into private entities in order to save money, increase operational efficiencies, and help provide the public with goods and services at a much faster rate. This is referred to as privatization.

But there comes a time when these private companies — that were once public — are taken over by the government again. The industry calls this renationalization.

Renationalization takes place for several different reasons. As noted above, governments may take back privatized corporations to help streamline operations. They may also take back these entities if a monopoly develops.

When a company becomes so big, it dominates the sector, giving it nearly full control of the market. This stifles competition, keeping other companies out of the market. The dominant company can then boost prices at their own discretion.

When a government resumes control over a private company, it assumes responsibility for everything including its profits and its debts. The profits are directed toward creating and financing new research, social services, and other government programs. If the company being taken over is publicly traded, it must first be delisted before it can be taken over by the government.

Expropriation is the process of nationalization or renationalization in times of war or revolution without any compensation given to the previous owners.

Renationalization can be a risk for investors who buy shares in the industries of a developing country. Developing countries may begin to privatize industries and assets previously under national control and allow foreign investment for the first time.

Renationalization may take place should the privatization not work or if political instability prevails. In such a case, the largest risk would be that little or no compensation would be given to the previous owners, such as shareholders.

Real-World Example

The experience in Argentina serves as a prime example of renationalization. Under President Juan Perón, many of the nation's industries were nationalized. Starting in the 1990s, the government embarked on a program to privatize a host of national assets including radio, television, telephone, tolls, roads and railways, the national airline, steel, petrochemicals, shipbuilding, electricity and hydroelectric plants, oil and gas, mortgage lending, and its public pension system.

The process of renationalization commenced on a piecemeal basis with new political leadership in the early 2000s and after poor management in some of the privatized industries. Argentina’s postal service and radio service were renationalized, followed by the country's water supply, sanitation system, and shipyards. The national airline — Aerolíneas Argentinas — the pension fund, the national oil company, and the railway went the same route a little later.

The results of these moves have been traumatic for shareholders, to put it mildly. Argentina took 51% of the shares of its biggest oil producer, YPF, under an expropriation law in 2012 in the public interest. These shares were owned by Spanish oil company Repsol S.A. Shares of YPF and Repsol were disrupted, though the Spanish oil company did later receive a financial settlement from the Argentine government.

The benefits of the renationalization of YPF can be debated. In 2012, the company had revenues of $14.8 billion. Since then, revenues have stayed fairly stable at that level, peaking at $17.6 billion in 2017, and dropping to $14 billion in 2019.