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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?

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.

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

  1. Philip Bond

    I agree with most, (not the ABC/SBS) the NBN was always going to be privatised and as Kerry Packer had his Alan Bond, Telstra will have their NBN. The remainder can and will be sold.

  2. David Hand

    Australia Post should be sold as soon as possible, as an entire business to protect the taxpayer from the collapse of latters revenue.

    I realise those in the bush will complain that they might have to pay to get their bank statements delivered but they might also want to find out a bit more about that interwebby thingy that is perfectly capable, even at pre-NBN speeds of delivering such a service.

    After all, the internet is the main reason why letters are in long term decline and parcels are in long term growth.

    Privatising the NBN will be smart as well. It will finally stop roll outs in obscure uneconomic towns with 7 subscribers that happen to be in marginal electorates.

  3. 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.

  4. MJPC

    I just cannot understand the voodoo economics of the taxpayer funding the creation of an public infrastructure (such as AP) which turns a profit in the parcels area (and in turn subsidises the LCOA- letters delivery)then it is good economics to flog it off (and it will only be the parcels area, leaving rhe Govt with the libility for losses in the LCOA side) so the Govt ends up with a loss making enterprise and a relatively small amount which, it is the Libs, will be blown on payments to the big end of town for having time off to have babies (or, in the case of the Howard Govt-the baby bonus).
    If an entity if making a profit, don’t sell it-look to the long term viability/ profits not short term, momentary gain; revolution now!

  5. 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.

  6. drmick

    If the sale of Telstra is any example, these idiot hypocrites should get out of the game immediately. Gee they did well selling off the Commonwealth Bank didnt they? Selling the farm to pay what? Their friends? Sold to businesses and companies that don’t even pay tax because they have moved the company off shore to avoid having to contribute, then complain about the high wages and the “competition destroying work practices” ruining the country and stifling investment. They need a bit of trickle down economics themselves, and the trickle wont be jobs or wealth.

  7. Jimmyhaz

    @David

    There is no evidence to suggest that the government is strangling free enterprise and creativity. I would actually argue the opposite, shareholders are far more informed than taxpayers, and given the nature of the stock market, long-term propositions are basically out of the question.

    Also, the purpose of the government is not to make a profit, the decisions of government-owned enterprises have to take the interests of the constituents over making money, something that private interests never do. This is the real argument against privatisation.

  8. Roger Clifton

    Come on Auntie! If you are in need of some extra friends now, it might be time to ditch those dreadful British regional accents. Are you Australia’s national broadcaster, or an enclave of expatriates pushing British values at our expense?

    That would be a relief to those of us who are trying to teach our children that there is only one true(*) accent for the spoken language in Australia. It will also allow New Australians of non-British background to understand the mangled narrations in the ABC News. They don’t need that insult – after all, many of these people have strived to escape the parochial traditions of Europe.

    (*) Or get your ears boxed.

  9. CML

    I don’t suppose “About 50 Commonwealth assets have been sold since 1987…” has anything to do with the structural deficit in the current federal budget, does it??? It is all very well getting a sugar hit to the government finances when these things are sold, but then there is no further income. If you think the ‘carbon tax’ raised the price of electricity to the average punter, you ain’t seen nothing yet!
    In order to maintain essential services, the government will have to raise taxes at the same time that prices for EVERYTHING from private health insurance to postage will rise. Why? Because once something is privatised, the company that bought it has to make more profit to satisfy the never ending greed of its shareholders. Where does that profit come from? The consumer/customer, of course.
    Yes, David Hand, for people like you and your mates, who appear to have an unlimited money supply, all this is good news. For the vast majority of us who will have to pay more to fill your pockets, it is definitely not on!!

  10. Cathy Alexander

    Very good point CML. Quite a lot of those 50 assets were not huge, but some were – CBA, Qantas, Telstra, and some of the airports earned pretty big money (Sydney, Brisbane, Melbourne). Now the government does not earn a dividend from these assets – and finds itself in a debt hole (or that’s the message from the current government, anyway).

    Then of course there’s the hefty privatisations by state governments, which are not covered in this story. Power stations, banks, electricity retailers, pipelines, QR National – plenty of these were $5 billion or more, and that’s in the old money (ie not in today’s dollars). The question is did state governments use this money to secure some kind of long-running public benefit? Or did they spend it on recurrent expenditure and pork barrelling?

    If you’ve travelled on Melbourne’s train network, you’ll know the privatisation of power stations and electricity companies wasn’t used to improve access to trains.

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