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Jan 13, 2014

For sale? Tony Abbott's potential privatisation hit list

The Abbott government wants to sell off government corporations. Here's a list of 11 targets that might be ripe for privatisation. Will it be Australia Post, the ABC, the railways -- or none of the above?

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There’s sometimes a very good case for corporations to be in government hands. But does Treasurer Joe Hockey really need to offer pet insurance?

The Coalition government wants to enter into another round of privatisations to reduce public debt and has set up a fast-tracked Commission of Audit to tell it what to sell. So far, Prime Minister Tony Abbott has only said he’ll sell Medibank Private (which does indeed offer pet insurance). That’s likely to change when the commission — which has a very broad mandate — hands down its findings in March.

Crikey has drawn up a list of the government-owned corporations and services that could be put forward for privatisation. It’s striking how much has already been sold off and how little is left — gone are the days when the feds owned an airline, a bank, airports, pipelines and a shipping line.

About 50 Commonwealth assets have been sold since 1987, the lion’s share around 1995-1999. This is what’s left (most, but not all, are government business enterprises, or GBEs). The government will be looking at whether there’s a case to retain each corporation in public hands, what dividend it pays, whether there would be a buyer, what price it might fetch, and how much of a stink the public would kick up …

Medibank Private. The health insurance giant is the most likely candidate for privatisation; that’s been Coalition policy for some time, and a scoping study is underway. Set up by the federal government in 1976 to keep a lid on the cost of private health insurance, it’s now the largest health insurer, with 29% of the market (just over 3.8 million people). Medibank insures pets, travel and your life, but health is the big one.

Medibank is fully owned by the Commonwealth, is a sound business proposition, and is a nice little earner. Last financial year it paid a dividend of $150 million to the feds. Medibank told Crikey the dividend averaged $325 million per annum over the last three years (page 33 of the annual report has details). Revenue has been steadily rising to $5.86 billion last year (there’s a flip side — significant increases in the amount paid out to members). Post-tax profit was $232 million.

So what would Medibank fetch? The Howard government suggested more than $4 billion, and it’s believed the Labor government got a secret valuation of $3.5-5 billion in 2011. PricewaterhouseCoopers has won a Commonwealth tender to evaluate its price afresh. The most likely purchasers would be other health funds, possibly from overseas.

Finance Minister Mathias Cormann said last month there was no public interest reason for keeping Medibank in government hands:

“It is a business that operates in a highly competitive, commercial market where they’re competing with 34 health funds overall. There is no good reason on why the Commonwealth should continue to be involved in that business.”

But opponents of a sale argue that the existence of such a large market player backed by the government may have a dampening effect on the industry’s premiums (already rising steeply). Premium rises are regulated by the government.

Australia Post. This is trickier. There’s no money in delivering letters these days, but parts of the business are booming — CEO Ahmed Fahour’s salary for a start, but also parcels, retail and logistics (freight, etc). The Coalition has no mandate to sell AP, and regional communities would fight it because their (unprofitable) mail services would probably suffer. There are mixed messages from the Coalition; the official line is it’s waiting to see what the Commission of Audit says, but frontbenchers Malcolm Turnbull and Warren Truss recently said there were no plans to sell AP. The UK government recently sold off some of its Royal Mail.

Australia Post is a successful GBE with after-tax profit of $312 million last year. This shows how much non-mail services are bailing out letter delivery (which lost $218 million). AP paid a nice dividend of $244 million to the feds last year (the biggest dividend of any GBE). Competitors like Toll and FedEx could be tempted to buy the parcel and logistics sections.

Should AP be sold off, who would deliver those bank statements to the bush on the cheap at a significant loss? The government might have to retain that service, or pay new owners to do it, or force them to. Or, controversially, scrap that much-cherished service.

NBN Co. Hold on — the National Broadband Network isn’t even built yet. But NBN Co, which is charged with designing, building and operating the National Broadband Network, is a textbook case for privatisation: the government intervenes in a market to build major new infrastructure, then sells it off (see Qantas, Telstra, etc). It’s official government policy to sell it, but not for some time. Telstra might like to buy it, but would the telco pay the right price?

ABC and SBS. The Institute of Public Affairs has called for it, state Liberal parties have considered it, and GetUp is in a lather about it, but the Coalition has hosed down talk of selling off all or part of Aunty. Last May Abbott said “we won’t go down the path”.

The ABC costs the government a fair bit, and it’s hard to see how much of what it does could turn a profit. Saul Eslake, chief economist at the Bank of America Merrill Lynch Australia, said the case to sell was not strong because “it’s doing things that are legitimately the business of government, and would probably not be done if the ABC wasn’t doing them”. Eslake told Crikey it might be feasible to sell off sections like merchandising.

However, with the conservatives in the ascendancy and some Coalition figures on the warpath against the ABC’s perceived Left bias, this is one to watch.

SBS is in some ways more commercial than the ABC because it carries advertising. There have been suggestions the SBS could be sold or merged into the ABC.

Australian Rail Track Corporation. This runs much (but not all) of the interstate train network, which it variously owns and leases. It ferries coal through the Hunter Valley. The ARTC was set up by governments in the ’90s as a “one-stop shop” for rail operators. The Commonwealth owns the ARTC’s shares but received no dividend last year after the corporation posted an after-tax loss of $202 million.

Eslake told Crikey he had an “open mind” on privatising the ARTC and asked whether the government needed to run railways — but said there might be no buyer. Chris Aulich, professor of public administration at the University of Canberra, warned Margaret Thatcher’s privatisation of the UK railways did not work.

Defence Housing Australia. Has slipped under the radar, but one to watch. DHA is a GBE that provides pretty good housing to Defence Force members and their families. It buys land and builds homes, and buys and leases existing homes (and flogs some off). DHA housed 16,000 families last year and funnelled rent assistance to 14,500 people in the private market. Net profit after tax was $85 million, and the dividend to the feds was $50 million.

“There are plenty of other organisations around that can do that,” Eslake said of DHA — but Aulich said there had long been a “hands-off” approach to Defence (apart from some materiel work). “It’s possible, but I would be surprised,” he said of privatising DHA.

Airservices Australia. Airservices Australia has 4000 staff who manage air traffic operations around the country, provide aeronautical data and run aviation rescues and firefighting. So you certainly don’t want a cowboy buying them out.

The feds have sold off Qantas and airports, so there is a precedent for privatisation in aviation. But Eslake told Crikey there might a public-interest case for retaining Airservices in public hands.

Snowy Hydro. It’s hidden on the website and the annual report, but yes, the Commonwealth owns 13% of Snowy Hydro (the Victorian and New South Wales governments own the rest). Snowy Hydro owns various dams and power stations and is a poster child for renewable energy (as well as for bold nation-building infrastructure). Net profit after tax was $280 million last year. It’s not technically a GBE.

There was a serious but failed push to sell off the Snowy in 2006. The Australian reports former Victorian premier Steve Bracks recently called for the Snowy to be privatised, but quoted unnamed government sources saying it’s not going to happen. The Snowy is used for irrigation and recreation as well as electricity, which means more people opposed to a sale.

The ASC. This used to be called the Australian Submarine Corporation. Now it’s not, but it’s still the prime contractor delivering and maintaining those highly expensive Collins Class submarines (it builds warships too). The ASC is wholly owned by the government and paid a rather feeble dividend of $9 million last year. Those at Adelaide HQ, watch out — the government has hired consultants to estimate the ASC’s value.

HECS debt. The government has floated the prospect of selling off the massive HECS debt — about $26 billion — to private investors. Economic hardheads say it’s just a parcel of debt that could be sold, and Britain has done something similar. But the ALP has promised to fight such a move, warning ex-students would pay more. HECS is already a form of privatisation in that students pay for some of their education.

Cathy Alexander —

Cathy Alexander

Freelance journalist and PhD candidate in politics at the University of Melbourne

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30 thoughts on “For sale? Tony Abbott’s potential privatisation hit list

  1. Jimmyhaz

    The government exists to increase the quality of life for all member of its electorate, not just those who can afford it. The private sector is something the government allows to exist for this end, and if it cannot provide essential services at an affordable price for everyone, or provide these services to everyone at an equal price, then the government must step in.

    Privatisation of the NBN and AP is fundamentally wrong, this would see the lions share of funding and infrastructure go to those areas that will turn the greatest profit, while those areas that would never turn a profit (such as everywhere outside major cities) would never see anything. Internet and mail are essential services, and the government must provide them to everywhere, regardless of how much meaningless debt this would rack up.

    Even though this government believes in bunk economics, I don’t understand how privatising HECS will reduce debt at all, does it not count as an asset on the budget sheet every year? The only benefit I can see coming from privatisation of HECS is to the lucky few ultra-wealthy that purchase the lion’s share of it.

    Medibank private is something that should stay within the public hands as well, as it is the only thing currently providing downward pressure upon the prices within the health insurance market. We have a perfect case study of an essential market in which there is no downward forces acting upon prices in our nation’s electrical grids, and taking this into account, I would argue that there is significant public interest in keeping this publicly owned.

    Also, don’t privatise the ABC or the SBS, if only to annoy Rupert.

  2. David Hand

    The main reason why it’s good to sell these assets is that the bottomless pocket of the taxpayer enables weak managers to make poor commercial decisions with no negative consequences. It is most likely that taxpayers will get more out of a privatised Australia Post in tax on profits than they would ever get as dividends from a bunch of public sector managers.

    The possibility of going out of business focuses the mind and drives much better decisions for the enterprise and its customers.

    It also protects an organisation like the NBN being forced by Senator Conroy to roll out fibre in Armidale as a bribe in exchange for Tony Windsor’s vote in the hung parliament.

    The main objection to privatisation that has merit is the natural monopolies that many government trading entities are. The absence of a market and genuine competition would require a heavy regulatory regime that would make innovation and flexibility hard. The NBN falls into this category, though notions of fairness to the bush simply expose the whole Conroy fiasco as the socialist experiment most of us believed it to be.

    If the NBN is the vital enabling infrastructure that will drive Australia’s economy in the future it is brain-dead to start in Armidale, Kiama and a few villages in rural Tasmania. Adam Bandt’s electorate in Melbourne makes more economic sense though we all know why he got it first.

    The first railways were built by private enterprise between Liverpool and Manchester and New York and Baltimore. They were not built between Alice Springs and Adelaide because politicians at the time though it fair that Alice residents should have better access to the beach.

  3. magoo

    Privately owned doesn’t preclude bad management and lack of accountability is not a purely government problem.

    Privatization is not itself a worthwhile goal without a larger purpose. The short term focus on money without any talk of what regulation would be applied or other impacts it would have is short sighted.

  4. Ian

    I have yet to be convinced that society is any better off as a result of the privatization of inherent monopolies like Australia Post or state services like prisons and refugee camps. In fact I believe the opposite is true on many counts.
    1) The so-called efficiencies claimed of private industry are not proven and insofar as they may be achieved they are largely at the expense of labour and for the benefit of profit much of which, like our natural resources, are exported overseas.
    2) Reduced wages or reduced employment resulting from privatizations have a detrimental multiplier effect throughout the rest of the economy and in some (many?) cases trigger unemployment benefit payments from the state. Often too efficiencies come at the expense of services.
    3) Large corporations benefiting from privatizations wield increasing amounts of influence on the very governments who granted them their monopolistic privileges. They use this power to obtain benefits at the expense of the rest of society; aka as rent seeking behavior.
    4) Governments are hollowed out and become less able to deal with real crises, economic and otherwise when they occur. Strategic assets are lost to outside powers.
    5) With the decreasing role of community appointed bodies (our governments) in controlling our assets and community services, comes an increasing advance in selfish individualism at the expense of community co-operation.
    6) Once an asset or service has been sold off it is nigh impossible to re-national that industry especially when the proceeds of sales have been spent. Also powerful corporations and their international servants such as the WTO, IMF and tribunals established under free trade agreements make life very difficult for governments wanting to take back their assets. Try and imagine Australia re-nationalizing the Commonwealth Bank or the other state banks that have been privatized.
    7) Claims that privatizations actually work to improve overall services are dubious at best. Most often the reverse is true as for example the case of the manipulated Californian electricity market by Enron and more recently by JP Morgan and also the break-up and privatization of British Rail that has ended up as one of the most expensive and inefficient public transport services in the world.

  5. Brendan Jones

    What about privatising the DSTO (Defence’s own version of the CSIRO)?

    The DSTO’s $440M budget could be offered to the private sector. The Libs claim to be committed to the free enterprise system. Privatising the DSTO could deliver far more innovative and a better outcomes on that investment than a public bureaucracy. DSTO scientists, the good ones, could actually do better under this, and wouldn’t have to carry organisational deadwood. It’ll also give better value for money to the taxpayer and the ADF would get better advice, independent of the DSTO’s (in their own words) “wealth creation” role.

    Currently the DSTO are both a supplier to and an evaluator for the Department of Defence; Outside innovators are expected to hand their technology to a competitor(!) to evaluate. That conflict of interest has lead to DSTO scientists passing confidential IP to their own business partners (repaid as royalty kickbacks) and questionable evaluations conducted for the ADF favouring the DSTO’s own products and business partners. A Senior ADF officer told me the DSTO gives their own interests priority over those of the ADF, and incredibly DSTO lawyers Clayton Utz say the DSTO has no duty of care to provide the ADF with evaluations that are either fair, proper and accurate, nor to respect confidential information. One executive at a large defence company said: “Australia is a really bad place to do business because your biggest competitor is the DSTO, and they have a monopoly.” http://www.crikey.com.au/2013/12/02/revealed-the-government-agency-stealing-ideas-from-businesses/

    Labor’s draconian Defence Trade Controls Law made the situation even worse. It makes IP theft by public servants even easier, and wraps the university and private high-tech sectors in public service red tape. University of Sydney DVCR Jill Trewhella warned: The Australian government worries about a brain drain in advanced technology, but is poised to pass legislation that could force our best and brightest offshore … they’re definitely telling me that they’re going to have to assess the impact of this regulatory regime on their ability to be competitive and to do their work in Australia. They’re definitely worried that it is going to have a big impact and they’re concerned that they may have to go elsewhere to do their research.” Labor passed that law regardless. They wouldn’t even agree to some very reasonable changes to allow basic research; It was sheer arrogance by the public service and Labor. http://victimsofdsto.com/dtca

    Meanwhile Australia’s high-tech industry is currently packing up and heading off shore. The US also has better access to talent, connections and venture capital. The mining sector is doing well for us, but if the Libs don’t move we won’t have a high-tech sector left. http://www.smh.com.au/business/too-expensive–tech-startups- move-overseas-20140108-30g4u.html

    In case there are the Liberal Party socialists (LOL) who don’t want to privatise defence research because of “National Security”, the US has been doing it for a long time through DARPA and their US DoD Small Business Programs. Australia has nothing like these.

    (AFAIK Last review of the DSTO was done by Robert Trenberth in 2004. He was scathing of their commercialisation efforts – money-losing spinoffs and shareholdings, except for one which he said should be studied to see what factors made it so successful (which turned out to be stolen IP. Oops.) Industry and the ADF had complained the DSTO suffered from “Not Invented Here Syndrome”, and was unfairly turning private-sector innovators. Funds were set aside for industry projects but the DSTO ended up awarding those to its own scientists. Industry complained but Trenberth claimed this wasn’t due to conflict of interest, but because the DSTO was better. This was very weakly argued in his review but even if it’s true, then good scientists have nothing to fear. Right? http://www.dsto.defence.gov.au/publications/6871/trenberth_review%5B1%5D.pdf )

    IMO Government shouldn’t compete with business, using their own taxes against them. It’s also too easy for government to abuse it’s power, and that harms business and the citizenry. SCOTUS Justice Brandeis: “The objections to despotism and monopoly are fundamental in human nature. They rest upon the innate and ineradicable selfishness of man. They rest upon the fact that absolute power inevitably leads to abuse.”

    Many examples, but if you’d like one more: The US DoD used to distribute a free worldwide aviation database; every airstrip and navigation aid on the planet. But they dropped it up after our own Airservices Australia whined it was competing with their “business.” Now no one outside of the US military can get it. And all to mollycoddle the egos of Australian public servants who think they’re there to cash in.

  6. Jimmyhaz


    The problems that Europe faces at the moment have nothing to do with regulations or lack-thereof, in fact, the problems that they face can be tied down to one specific area, that none of the countries within the Eurozone have control over their own currency, significantly limiting the fiscal policies that they can enact.

    I personally don’t see neo-liberalism as a real economic theory, it’s more of an excuse thought up by those born into power and wealth to keep themselves there. There is no academia backing it up, no studies affirming that deregulation has any net positive effect on a society, the only real data that I have seen on the subject has posited that it exacerbates the normal boom/bust cycle of economies, making the booms massive, and the busts spectacular.

    The stupid law change that you spoke of was part of this wider goal of deregulation in the US, and it would suggest that deregulation is in fact not something that we should strive for, but rather that we should look at each and every law on its merits, and dismantle them if their is more negative than positive to keeping it in place. After all I don’t see many people advocating for a return to when we could dump in the Brisbane river, however doing so would definitely give us some deregulation brownie points.

    Also, given that 10% of our society currently holds 50% of our net assets, and that the gap between rich and poor is getting larger, I would suggest that the revolution is definitely coming our way.

  7. Jimmyhaz

    The thing with income tax is that it doesn’t actually go to pay for anything (after all we have control of our own currency, and are therefore non-revenue dependant), the reason it exists is to reduce inequality, and to drive demand for the Australian dollar. The rich paying a vast majority of the taxes means that it is doing exactly what it is supposed to do.

    Following on from that, I don’t agree with your point that the rich create all the wealth, I would actually suggest that this is in fact baseless propaganda distributed by the wealthy to affirm their elite status. Like it or not (and I really don’t, my ego always gets in the way here) the government is the sole creator of wealth in any country with its own currency, it chooses how this wealth is deployed, how it interacts with our sovereign currencies, and of course how this wealth is taxed. Any inequities, any poverty, and any extreme concentration of wealth is something that the government can do something about (I’m not saying they should, merely that they can).

    People being on welfare payments tells me that the welfare is doing its job, I’m not a fan of welfare, and campaign for a basic income in place of the patchwork rubbish currently implemented, however expanding welfare is the best form of economic stimulus that the government has in its arsenal (funnily enough tax cuts to the rich and quantitative easing actually slow down the economy, and yet the LNP campaign for these?). Welfare dependency also seems like a symptom rather than a cause, a fraud rate of ~1% in welfare payments (this is for the US and the UK, but I’m going to extrapolate it to Australia), would suggest that this money is going to those who genuinely need it.

    Also I’m not a fan of Hollande’s tax, especially in the way it is currently implemented, either implement it fairly or don’t do it all. That government should really reconsider renaming itself as well, if it isn’t going to give the power of production to the workers then it isn’t a socialist government.

    Finally I would like to see Reinhart’s wealth taken away, however I’d then set it on fire in front of her eyes and leave her in the mining towns with the workers that she wants to pay $2 an hour to. She is a terrible human being that has done absolutely nothing to deserve the enormous amount that she owns.

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