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.

Peter Fray

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