tip off

Keane: time to sell at least part of Medibank Private

The government is obtaining a valuation of Medibank Private. It should put it to good use and sell off at least part of the company, because the Coalition’s policy is right.

For a government hell-bent on a surplus and running out of ways to secure it, it could do worse than sell a partial stake in its most successful company, Medibank Private.

The Howard government began the preparations for selling the company in 2006, even passing legislation to permit the sale, but failed to undertake it (and take advantage of a strong pre-financial crisis equities market) before the election in 2007.

The Coalition’s policy ever since, wisely, has been to sell it.

Medibank Private has grown and changed since 2006. As well as being the country’s biggest health insurer, it has dramatically expanded its role in healthcare services through a now-completed acquisitions program. This means it has greater opportunities to control costs by, for example, offering a suite of preventative health programs for its members.

The Labor case for retaining ownership of a $5 billion-plus company has officially centred around the capacity of a government-owned private health insurer to force down premiums in that industry. It has always been an absurd argument given that private health insurance is a hybrid industry that would be in crisis without extensive government support and regulation. The Minister for Health vets premium increases each year to ensure they are the minimum necessary to meet legal requirements such as solvency, while the government has pumped upwards of $25 billion into the industry in the form of subsidies for those premiums.

And in the last three years, Medibank Private has only delivered premium rises fractionally lower than the industry average.

The government obtained a confidential valuation for Medibank Private at the start of 2011. Back then, industry valuations ranged from $3.5 billion to $5 billion. Earlier this year, however, the government commissioned PriceWaterhouseCoopers to again prepare an evaluation, along with one for the Australian Submarine Corporation.

If the government was genuinely concerned about its capacity to maintain pressure on industry premiums it could sell off 49%, maintaining control of the company. That might also enable it to prevent the purchaser from slashing costs, buying up smaller competitors and using industry consolidation to drive up premiums.

Voters, as we’ve seen again and again, can’t stand privatisation. They believe, and often not incorrectly, that privatisation is code for reduction in services and increases in costs, with the private sector benefiting and the public losing out. Labor also has the additional problem that the Australian Services Union, which is a regular source of Labor senators, will strongly oppose privatisation.

The other Labor argument against privatisation is that the company provides a regular source of dividends for the budget. Labor has used the company as an ATM for the last three years, extracting more than $800 million worth of dividends from it.  A properly-managed sale process — not necessarily a given — should capture the future value of those dividends. A part-sale would also give nervous Labor types the safety of an ongoing, though reduced, dividend stream.

The Coalition has the sensible policy on the future of Medibank Private. Assuming Labor won’t come at that, a part-sale would be more politically achievable for the government, and enable it to maintain its preferred policy settings. Time to put that PWC valuation to good use.

11
  • 1
    SBH
    Posted Friday, 12 October 2012 at 12:42 pm | Permalink

    so the smart thing would be to sell it and then neck the private health insurance subsidy and funnel the money back into actual health care rather than rent seekers

  • 2
    Hunt Ian
    Posted Friday, 12 October 2012 at 12:46 pm | Permalink

    I find Bernard’s article confusing. The only consistent thread in it is that Liberal Party policy on Medibank private is correct. It is not clear to me why this is so. As Bernard points out, the government earns $800 a year from Medibank Private dividends. It’s sale price would have to deliver that guaranteed stream. After all, as Bernard points out, the private insurers are propped up artificially to provide “contestability” for corporatisation of Medibank. The whole artificially supported industry would then supply cream to private investors at the expense of the public. In these circumstances, the future earnings stream of Medibank Private is unlikely to be capitalised in its sale price. Let’s face it. The public is right to oppose privatisation, which has so often been an offer of a bottle to private investors to support the massive shift from wages to profits over the last twenty years up to the GFC.

  • 3
    ianjohnno1
    Posted Friday, 12 October 2012 at 1:55 pm | Permalink

    Sell a good profitable concern?
    Privatise the profits and socialise the losses!
    When did you turn into a rabid capitalist, BK?

  • 4
    fredex
    Posted Friday, 12 October 2012 at 2:07 pm | Permalink

    Bernard just go and join the Liberal Party or get on Murdoch’s staff at Ltd News because this charade that you are part of a team pushing “independent media independent minds’ is past tiresome.

  • 5
    paddy
    Posted Friday, 12 October 2012 at 2:44 pm | Permalink

    I’m beginning to wonder what they’re putting in your drinks these days Bernard. You say
    ‘Voters, as we’ve seen again and again, can’t stand privatisation.’
    Which sort of suggests, that a Govt struggling in the polls 12 mths out from an election, might be wise not to cheese off the voters even more.

  • 6
    John Bennetts
    Posted Friday, 12 October 2012 at 3:14 pm | Permalink

    How is a valuation of 3.5 to 5 billion dollars adequate compensation for the loss of an $800M per year cash flow? After 4 or 5 years and for ever thereafter, it would be a negative result.

    At the Government’s current cost of borrowings at just above 3%, that $800M compares with returns from $20+B.

    Chalk and cheese, Bernard.

  • 7
    fredex
    Posted Friday, 12 October 2012 at 3:44 pm | Permalink

    Bernard has doubled up on his dubious claims.

    It seems the Press Gallery [all hail the Press Gang]is confident that the economy can be seen as a negative for the government and a postive for the COALition. They are of course partly right - it can be seen thus. Particularly if you ignore the economic realities and only see and hear the Press Gang and related cronies version and what they pass off as anal -ysis.

    So a new article is up on Crikey.

    RBA now contols the next election [something like that].”

    No, it doesn’t.

  • 8
    beachcomber
    Posted Friday, 12 October 2012 at 7:13 pm | Permalink

    Selling the banks, the airlines, the power companies, the water, etc has seen prices escalate, reliability and service fall. Why make the same mistake again?

  • 9
    floorer
    Posted Friday, 12 October 2012 at 7:42 pm | Permalink

    Propaganda fed to me as a child/youth, Australia, the land of the fair go (more like be on your toes). Privatisation (amongst other things) flattened that little fairy tale.

  • 10
    luc Anthony
    Posted Saturday, 13 October 2012 at 2:51 pm | Permalink

    You must be high Bernard! To trade a short term gain for the loss of a never-ending and quite high income stream, that also has the benefit of creating a counter weight to potential price gouging by private providers is stupidity, and very poor government policy. (And we all know the gouging WILL happen: you need only look to the unit/housing insurance market in QLD).

  • 11
    moe hassan
    Posted Monday, 15 October 2012 at 1:21 pm | Permalink

    Privatising medibank is the the dumbest idea, there’s really no need to do it, the exigency is not there.

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