Privatization is the process of transferring ownership of a business, enterprise, agency, charity or public service from the public sector (the state or government) or common use to the private sector (businesses that operate for a private profit) or to private non-profit organizations. In a broader sense, privatization refers to transfer of any government function to the private sector - including governmental functions like revenue collection and law enforcement.
The term "privatization" has also been used to describe two unrelated transactions. The first is a buyout, by the majority owner, of all shares of a public corporation or holding company's stock, privatizing a publicly traded stock, and often described as private equity. The second is a demutualization of a mutual organization or cooperative to form a joint stock company.
Privatization can be accomplished through various methods, including: Private provision of various services and supplies such as laboratory work, meter reading, and supplying chemicals; Private contracting for operation and maintenance of public assets like water utility. (both 1 and 2 are often referred to as “outsourcing”); Negotiating a contract with a private firm for the design, construction, and operation of new facilities (this option is referred to as design, build, and operate, or DBO); and Outright sale of public assets to a private company.
In the United States, the contracting of management and operations to a private provider (outsourcing) has been more common than the sale of utility assets to private companies. No major U.S. city has sold its utility assets in recent decades, although some smaller water utilities have done so.
Major areas of privatization in the US
Medicare and Medicaid managed care
In the United States, under the Medicare managed care the government pays a managed care organization (MCO) a fixed amount called the "capitated rate" for all medical services received by a beneficiary in a given period. Enrollment in the programs has increased substantially since 1990; in 2002 60% of Medicaid beneficiaries and 12% of Medicare beneficiaries were being treated by MCOs. Private sector involvement in Medicare and Medicaid is not limited to MCOs; private doctors, hospitals, nursing homes provide medical care; reimbursement claims are processed by private intermediaries; and peer review organizations, utilization review committees and accreditation organizations like JCAHO are staffed by private medical personnel.
One of the primary recipients of U.S. outsourcing contracts is Maximus Inc., which administers Medicaid and Medicare, as well as the Children's Health Insurance Program (CHIP), welfare-to-work, child support enforcement, and other government programs.
Welfare privatization
Homeless shelters and food banks are run by private organizations, who also provide treatment services, operate Head Start programs and work with child welfare agencies. Privatization of welfare system expanded in 1996, when the Aid to Families with Dependent Child (AFDC) program was replaced with the Temporary Aid to Needy Families (TANF) program. Welfare services that are often privatized include workforce development, job training and job placement are often privatized.
Public education
There is also some private sector involvement in the public education system including charter schools, Educational Management Organizations (EMOs), and school voucher programs. EMOs are usually for-profit and manage charter schools and sometimes traditional public schools as well. The United States Supreme Court upheld school voucher programs against an Establishment Clause challenge in Zelman v. Simmons-Harris.
Private prisons
In the US, private prison facilities housed 12.3% of all federal prisoners and 5.8% of state prisoners in 2001. Contracts for these private prisons regulate prison conditions and operation, but the nature of running a prison requires a substantial exercise of discretion. Private prisons are more exposed to liability than state run prisons.