Privatization

Privatization, also spelled privatisation, (사유화/私有化) refers to the process of transferring ownership of a business, enterprise, agency, public service or public property from the public sector (a government) to the private sector. Privatization in the transition economies (체제전환국) takes place either to a business that operates for a profit or to a non-profit organization.

Privatization (민영화/民營化) also mean government outsourcing of services or functions to private firms, e.g. revenue collection, law enforcement, and prison management.

Key words
privatization, transition economy, asset sale, voucher, corporate governance

Types of Privatization
Privatization policy may be implemented either with a Big Bang (shock treatment) or on a gradual basis. While Big Bang transition took place in the Eastern and Central Europe, gradual privatization strategy was preferred in China and Viet Nam.

There are five methods of privatization:
 * 1) Share issue privatization (SIP): Selling shares on the stock market
 * 2) Asset sale privatization: Selling an entire organization (or part of it) to a strategic investor, usually by auction or by using the Treuhand model
 * 3) Voucher privatization (Mass privatization): Distributing shares of ownership to all citizens, usually for free or at a very low price.
 * 4) Free transfer of ownership: Transfering the ownership of state-owned enterprises to their employees and affiliated entities in most transition economies to stalilize the livelihood of common people.
 * 5) Privatization from below: Start-up of new private businesses in formerly socialist countries.

Analysis
Choice of sale method is influenced by the capital market, political and firm-specific factors.

SIPs are more likely to be used when capital markets are less developed and there is lower income inequality. Share issues can broaden and deepen domestic capital markets, boosting liquidity and (potentially) economic growth, but if the capital markets are insufficiently developed it may be difficult to find enough buyers, and transaction costs (e.g. underpricing required) may be higher. For this reason, many governments elect for listings in the more developed and liquid markets, for example Euronext, and the London, New York and Hong Kong stock exchanges.

As a result of higher political and currency risk deterring foreign investors, asset sales occur more commonly in the developing countries.

Voucher privatization has mainly occurred in the transition economies of Central and Eastern Europe, such as Russia, Poland, the Czech Republic, and Slovakia. Additionally, Privatization from below is/has been an important type of economic growth in transition economies.

A substantial benefit of share or asset-sale privatizations is that bidders compete to offer the highest price, creating income for the state in addition to tax revenues. Voucher privatizations, on the other hand, could be a genuine transfer of assets to the general population, creating a real sense of participation and inclusion. If the transfer of vouchers is permitted, a market in vouchers could be created, with companies offering to pay money for them.

Country-by-country Developments
Experiments in privatizing enterprises in transition economies abound, from extensive efforts at sales to strategic owners (as in Estonia and Hungary), to programs based primarily on insider buyouts (as in Russia and Slovenia), to innovative mass privatization programs involving the creation of large and powerful new financial intermediaries (as in the Czech and Slovak republics and Poland).

Each approach has inherent strengths and risks. But if the objectives are to sever the links between the state and the enterprises, to school the population in market basics, and to foster further ownership change, the initial weight of evidence seems to favor significant reliance on voucher privatization, especially given the difficulty most countries have finding willing cash investors.

Czech Republic
Most of the economy has been privatised, including the banks and telecommunications by two phases. During the period from 1992 to 1993, 8.5 million citizens of 15.5 million population became to hold shares of privatized companies. In 1993-1995, more than 70 percent joined the share purchase funds in exchange for the said shares. The share certificates are traded in cash, and the ownership of privatized companies belong to large shareholders, external investment funds or national investment Funds. The current centre-right government plans to continue with privatization, including the energy industry and the Prague Airport. As a result, the share of ordinary citizens has been on the increase since privatization. Generally speaking, corporate management performances depend on the progressive management strategy, centralized ownership, efficient organization, effective quality control and consistent training of employees.

Poland
Poland was forced to suggest various provatization methods to overcome the organized resistance of employees of the targeted state-owned enterprises (SOEs). By means of the sale and purchase of company itself, transfer of shares, 15 National Investment Funds, etc., large-scale privatization took place up to 25 percent of the previous SOEs.

Russia
The privatization process in Russia was quite different from that of Czech and Poland. 1500 medium-sized and large companies employing more than 70 percent of labor forces were privatized by voucher program, which encouraged ordinary workers and managers. Thus 50 percent laborers came to hold shares on average. As a result, the role of top management was reinforced, with the government function growing passive.

However, the privatization process in Russia could not lead to the prompt corporate restructuring, as witnessed in Czech Republic. It resulted from the frailty and distortion of the banking system, immature infrastructure of markets and largely regulated commercial activities, etc. in Russia.

Hungary
The privatization of Hungarian SOEs was staged by investors at home and abroad. Accordingly, huge amount of foreign capital flew into Hungary.

United States (secured borrowing)
Some privatization transactions can be interpreted as a form of a secured loan and are criticized as a "particularly noxious form of governmental debt". In this interpretation, the upfront payment from the privatization sale corresponds to the principal amount of the loan, while the proceeds from the underlying asset correspond to secured interest payments – the transaction can be considered substantively the same as a secured loan, though it is structured as a sale.

This interpretation is particularly argued to apply to recent municipal transactions in the United States, particularly for fixed term, such as the 2008 sale of the proceeds from Chicago parking meters for 75 years. It is argued that this is motivated by "politicians' desires to borrow money surreptitiously", due to legal restrictions on and political resistance to alternative sources of revenue, viz, raising taxes or issuing debt.

Importance of Corporate Governance
Corporate governance issues are especially important in transition economies, since these countries do not have the long-established financial institution infrastructure to deal with corporate governance issues.

Before the fall of the Berlin Wall and the collapse of the Soviet Union, there was no need to discuss corporate governance issues because all enterprises were owned by the state and there were no shareholders. All that has changed since 1989. Transition economies were dealing with corporate governance issues based upon their own corporate culture and practices. Also they had to overcome extra obstacles due to a lack of established financial institution infrastructure.