PRIVATIZATION STUDY
Forms of Privatization: excerpted from Government Privatization: history, Examples, and
Issues issued by the Commission on Government Forecasting and Accountability, Springfield,
IL; October 2006
Forms of Privatization
Five forms of privatization are identified by Richard C. Brooks in his paper “Privatization
of Government Services: An Overview and Review of the Literature.” These five forms of
privatization are:
Complete Privatization
Privatization of Operations
Use of Contracts
Franchising
Open Competition
Complete Privatization
Complete privatization is the outright sale of government assets to the private sector. This type
of privatization not only confers assets but also related responsibilities of ownership to the
private sector. Government run industries and assets have generally been completely privatized
through one of three main ways. The first way is share issue privatization. The government sells
shares of the government run company which can then be traded on various stock markets. Share
issue privatization has been the most prevalent method used, though a developed secondary
market is necessary. The second method is through asset sale privatization. In this method, the
whole firm or asset is sold to an investor. This is usually done by auction. The final method is
voucher privatization in which shares of ownership are distributed to all citizens for free or for a
very low price. Complete privatizations have been seen mostly in the transition economies of
Central and Eastern Europe in recent years.
Complete privatization has been somewhat rare in the United States due to the market driven
economy and federal regulations associated with the sale of public assets that were built using
federal grants. An example of this kind of transaction in the U.S. can be seen in the sale of the
Fairbanks Municipal Utilities System for $R100 million in 1996. The company was sold by the
City of Fairbanks under provisions that kept utility rates within certain ranges and provided for
stable employment.
Privatization of Operations
The privatization of operations is the turning over of managerial and operational responsibilities
of publicly owned facilities to private sector firms. This kind of privatization is often seen with
the running of sports and concert venues. Under this arrangement, the private sector firm
generates revenue through the collection of fees from individual customers of the government
asset. For example, the sports stadiums in New York City are managed by the baseball teams
that use the facilities during the baseball season but are run by the New York City Department of
Parks during the off season. This kind of arrangement can also be seen in transactions
concerning the operation and maintenance of toll roads and toll bridges.
Contracting Out
Contracting out is the production of designated services by a private firm under a contract.
Under this scenario, the private sector firm is paid directly by the government for their services.
The government finances these services through the taxes of the collection of user fees. This
type of arrangement is commonly used for the collection and disposal of solid waste. Other
types of services that have been privatized through this type of agreement include security
services, data processing services and consulting services for numerous professions.
Franchising
Franchising is the awarding of exclusive rights to perform services within a specific geographic
area to a private firm by a governmental unit. The private firm generates revenue by collecting
user fees. Cable television is the most common example of this kind of privatization. Utilities
such as electricity, gas, and water service could also fall under this category.
Open Competition
Open competition is the last form of privatization under this classification. Open competition is
similar to pure competition as many private firms are allowed to compete for customers within a
governmental jurisdiction. This type of privatization can potentially be seen in telephone and
internet service providers. This type of privatization is not appropriate for some services as it
most likely would not be efficient to have multiple suppliers of electricity, gas or water service.
