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Tag Archives: Medibank Private

Short term sugar hit

When even the experts disagree, it’s not surprising that the electorate are divided on privatisation.  The only say that Australians get in the sale of the assets we jointly own is at election time but I sometimes wonder if voters fully consider the ramifications of privatisation and asset recycling.

Joe Hockey and Tony Abbott are both determined to use their time on the Treasury benches selling every Commonwealth asset they can and, by making funding dependent on it, they are forcing state premiers to do the same.

Joe wants to follow the Costello fire sale approach to fixing his budget while Tony wants roads, roads, and more roads to be his legacy.

Last year the Productivity Commission released a report into the provision of public infrastructure which concluded that there is “an urgent need to improve how public infrastructure projects are selected, funded, financed and delivered.”

“There are many examples of inadequate project selection that have led to costly outcomes for users and taxpayers. …poorly chosen infrastructure projects can reduce productivity and financially burden the community for decades with infrastructure that is unnecessary and expensive to maintain… The costs of poor project selection and delivery will be exacerbated if governments decide to increase their infrastructure investment programs without reforming their governance regimes…

To sum up, governments are sometimes weak at determining what, where and when infrastructure projects should be scoped and constructed. This stems from deficiencies in using coherent decision-making frameworks to assess the portfolio of potential projects.”

The PC argues that it is critical that governments build a “credible and efficient governance and institutional framework for project selection”, since “selecting the right projects is the most important aspect of achieving good outcomes for the community”.

“Properly conducted cost–benefit studies of large projects, and their disclosure to the public” is seen as key to guide project selection and improve the transparency of decision making and they recommend public disclosure of CBAs for any project over $50 million.

The report mentions the ACT Light Rail Project as an example of poor decision making.

“The ACT Government’s decision to proceed with a light rail project appears to be an example of where the results of cost–benefit analysis have been ignored without a valid explanation…

In a submission to Infrastructure Australia in 2012, the ACT Government analysed a number of options including bus rapid transit (BRT) and light rail rapid transit (LRT). The analysis estimated that the upfront capital costs for the BRT and LRT would be $276 million and $614 million respectively (on an undiscounted basis) (ACT Government 2012).

In its economic appraisal (which is essentially a cost–benefit analysis), the ACT Government found net present values of $243.3 million for BRT and $10.8 million for LRT. The benefit–cost ratio for BRT was estimated at 1.98, with 1.02 for LRT. In the assessment, the benefits of BRT and LRT were similar ($491.8 million against $534.9 million respectively), but the cost of BRT was less than half that of LRT ($248.5 million against $524.1 million, when discounted by 7 per cent). The cost–benefit analysis took into account a range of factors including journey times, and avoided environmental impacts and accidents (ACT Government 2012)…

In summary, a cost–benefit analysis showed BRT to be a greatly superior option than LRT…”

It also warns against the view that private sector provision is necessarily best, noting instead that it brings “additional risks and costs, which need to be weighed against the benefits”, and “only if well-designed and executed does a PPP agreement offer the potential for efficiency gains compared with traditional public procurement”.

– Private financing is not a ‘magic pudding’ — ultimately users and/or taxpayers must foot the bill.

– Government guarantees and tax concessions are not costless and often involve poorly understood risks.

The “poles and wires” are a prime example of this.

Every five years, the federal energy regulator grants the distribution and transmission network companies an allowance to spend on capital and operating costs. In 2009, the networks claimed to need billions to build new infrastructure to meet soaring demand and the Australian Energy Regulator approved a staggering $45 billion of spending.

Not only that, they ruled that the NSW distribution networks could claim an astonishingly high cost of capital of 10.02% per annum, which it said was equal to the borrowing costs of a private company at that time.  In fact, they borrow from a triple A–rated state treasury at rates of around 4–5%.

This meant that, for every billion dollars they borrowed to spend on infrastructure, the NSW networks were now able to charge their customers an extra $100 million every year (decreasing over time as the loan was paid off). Gerard Brody, an advocate from the Consumer Action Law Centre, said “This was just pure profit coming from consumers’ hip pockets. There’s no rational, economic reason for consumers paying that sort of money.”

According to the Australian Bureau of Statistics, the electricity industry’s profits rose by 67% between 2007–08 and 2010–11. In this same period, electricity bills rose 40%.  With tacit approval from the federal government, they carried on spending billions of dollars on new infrastructure we didn’t need, based on projections that were obviously wrong.  According to the federal treasury, 51% of your electricity bill goes towards “network charges”.

The PC report also warns that Abbott’s bribes to the states, otherwise known as asset or capital recycling,

“could act to encourage privatisation in circumstances that are not fully justified and encourage the selection of new projects that do not have demonstrable net benefits. Already, examples of promises to reinvest have emerged in regions where assets are being sold. Tying funds to particular regions is no assurance that the highest net benefit investments are being considered.”

On Tuesday, the head of the NSW state government’s infrastructure advisory criticised the Abbott government’s refusal to fund public transport projects.

“I can’t really understand the logic of saying we will only invest in a transport project if it involves bitumen as opposed to one that involves steel rails,” said Jim Betts, the chief executive of Infrastructure NSW.

“It seems to be arbitrary,” he said of Mr Abbott’s stance.  “I can’t understand how public transport is somehow beyond the pale.  It’s a shame because particularly I would like to see bodies like Infrastructure Australia able to give modally agnostic advice.”

As a short term budget fix, Hockey is also considering selling six government-owned buildings in Canberra, including one that houses the Treasury Department.

The scoping study will look at options for the John Gorton and Treasury buildings, as well as East and West block and Anzac Park East and West, which are in Canberra’s Parliamentary Triangle.

As Peter Martin points out

“Once sold, they would be leased back to the departments of Treasury and Finance and whoever needed to use them. For the next four years (as far out as the budget’s detailed forecasts go), Hockey’s accounts would look good. He would have raised serious money. Beyond that, his successors would be paying out serious rent.

The Howard government sold the purpose-built Foreign Affairs headquarters to the to the Motor Traders’ Association super fund for $217 million in 1998. By 2017 it will have paid out $311 million in rent. Foreign Affairs can’t move out, and what dressed up the budget nicely in 1998 will cost $20 million or more per year in rent forevermore.”

Medibank Private has already been sold, raising $5.679 billion which will be invested in roads.

In the four years after the Rudd ­government converted Medibank Private into a profit-making insurer, the Commonwealth collected $1.366 billion in dividends and taxes.  This amounts to a 16-fold return on the $85 million it put into Medibank.

The federal government is studying whether to sell the Royal Australian Mint, hearing-aid provider Australian Hearing, Defence Housing Australia and the Australian Securities & Investment Commission’s corporate register, according to its budget papers.

The national commission of audit also recommended selling assets including Australia Post, power generator Snowy Hydro Ltd. and Australia Rail Track Corp., the main interstate rail network.

Not to be left out, Christopher Pyne has refused to rule out selling the HECS debt.

The Commonwealth would sell the rights to its $30 billion stream of long-term debt repayments at a reduced price of, say, $15-$20 billion today.  While the Government would receive some funds up-front, it would lose the ongoing cash flow as loans are repaid – in effect substituting a future income stream for a much smaller lump-sum.

To make Hockey’s budget look better temporarily, and to pay for Tony’s road fetish, we are selling off assets that would provide a future revenue stream.  What will our children do with less revenue, no assets to sell, and increased costs to pay the private sector for what used to be ours?

Selling the Golden Geese

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Roll up, Roll up, Round two of the Great Howard Fire Sale is here!

We’re under New Management, so let’s have a look at what we have on the block today.

We’ve got Medibank, ACS, AGS (don’t worry about acronyms, we’ll get to them later), Australia Post, Australian Rail and state power companies.  Get your bargains here!

The Liberals and Nationals have wasted no time setting up shop again in the temple.  Apparently not satisfied with the billions of public assets sold under the Howard/Costello stewardship, the new government is looking at selling off anything that even appears to compete with private businesses, regardless of any contribution to the public good or the public purse.

Sales of public assets are often touted as solutions to a debt crisis.  The reality is they are a sugar hit for politicians to improve their numbers, and corporations to receive handouts from the public purse.

One thing always missing from the conversations about debt and privatisation is the public interest. For example, was it truly in the public interest to sell Telstra’s copper infrastructure, our major airports, or most of our gold reserves?

Public assets are historically undervalued, and when sold often undergo massive downsizing and service retractions.  In the brave new world of asset stripping and collateralized debt obligations the Australian public needs to take a closer look at what Public Corporations are, what services they provide, what they represent, and what impact their sale would have on the current shareholder… the Australian public.

ACS pty ltd
Formerly known as the Australian Submarine Corporation, this is the primary naval defence contractor for the nation, responsible for the ongoing maintenance of the Collins class submarine fleet, and is currently building our next generation Air Warfare Destroyers.

The company engages thousands of people and businesses, mainly in South & Western Australia, and took many years and billions of tax-payer investment to build it to its current capability.

A quick look at the annual report for 2013 shows that in addition to maintain and building our defence capabilities it made a reasonable return and now holds over $619 million in assets:

Return on equity         4.2%
Dividend                      $8.9 Million
Paid taxes worth         $3.2 Million

This company is a monopoly.  It is the only company in the nation capable of building military class naval vessels and the only one who can service our submarines.  This means any changes of ownership will have a direct impact on our national security.

No other company will ever be able to compete with ACS due to the massive infrastructure investment required.  How can a government put a sale price on that kind of leverage?

If the sale does go ahead, how convenient that ex-Indi rep Sophie Mirabella has been given a golden parachute to corporate boardship.   One wonders which of the large foreign defence contractors would end up owning our naval fleet capabilities, and what Mirabella’s position would be on national security versus company profits.

AGS
The Australian Government Solicitor provides legal advice to the government; it was established at Federation and set up explicitly to act in the national interest.

This is a legal practice wholly owned by the commonwealth, which has access to some of the deepest policy secrets of the government.

The AGS website proudly proclaims that it beats private firms due to its knowledge and experience of government work. The sale of the firm would be a wholesale delivery of a huge amount of expertise and knowledge into private hands.  How can there be a meaningful price tag attached to the information bank, integrity & goodwill belonging to this firm?

The high potential for conflict of interest or corruption gives pause enough.  And given that the beneficiaries would only be lawyers able to charge the tax-payer higher rates for their services; how would it be in the public interest to sell?

Australian Rail Track Corporation Ltd
Responsible for over 8 thousand kilometres of interstate rail, the ARTC was established as a single entity for business to contact to arrange freight by rail throughout Australia.  Such was the importance placed on the rail that carries our mining and farming products to port, that both state and federal governments agreed to establish the integrated body.

Privatisation of rail has failed in the UK, with service cuts, fare hikes, and under-investment in infrastructure.  A situation many in Australian urban centres would be familiar with.

Similar stories of sales or deregulation of freight & mass transit exist all over the world.  In the USA the iconic Greyhound bus service now completely gutted thanks to deregulation and forced to cut services to thousands of rural towns.  The cities fare no better, with large cuts to bus & rail that disproportionally impact on low-pay workers.

Land and agricultural resources are vital to the Australian economy, this puts rail infrastructure into the ‘national security’ category.  To sell the ARTC, most likely to a foreign multinational, is to put our future prosperity up for ransom.

Medibank Private
The sale of Medibank is apparently justified by the fact that it is competing with private businesses.  The same argument could be made that Police are competing with private security firms, so should we be selling the police as well?
Medibank covers 29% of the Australian market, or approximately 3.8 Million people.  There are few health insurers who would not want a piece of that pie.  The annual report is positively glowing:

Return on equity         15.4%
Dividend                      $450 Million
Paid taxes worth         $82 Million

As part of servicing a public need Medibank launched AHM, the only insurance that actually spells out (literally in black & white) what cover you need to avoid the Medicare levy, and to stop the Lifetime Health Cover age tax.

Medibank is not a drain on the public purse; it is a leader and award winner in promoting community health; and a leader in the insurance community for high standards.

Finally, it is paying millions of dollars every year in dividends into the public purse.  Given the constant cat-calls for government to be run like a business, it is surprising that there should be opposition to a government property that is making money… for the government.  The only argument for selling Medibank is ideological, as there is no benefit to the public interest.

Australia Post
On the one hand the Liberals and Nationals want the local postie to process your Centrelink forms, on the other they want to sell it.

Given that the coalition wants to shut down the Clean Energy Finance Corp, which is currently earning the tax-payer $200 million per year. It is perhaps unsurprising that they also want ape their UK Tory counterparts who forced a partial privatization of the Royal Mail in the UK in spite of increasing profits.

Some articles are already inserting misinformation about Australia Post having an “ailing bottom line”, the same tactic used by the UK Tories.  The reality is Aus Post paid a massive 18.5% return on equity last year, all “during a period when addressed letters are declining”.

Compare this to the struggles of U.S. Mail.  Some have been arguing that the problems at U.S. Mail are due to unions and no lay-off clauses.  The reality is that the organisation has been reliant on low-skill, low-pay workers to keep overheads down and failed to automate or innovate. In addition U.S. Mail has to contend with government laws that prevent managers making sensible business decisions to restructure or diversify their business base.

This is the success of the Australia Post Corporation; it continues to deliver it’s regulated community service obligations while turning a profit. It has shaken off the assumption that it was an out-of-date institution and built itself into a truly modern business that is making serious money for the tax-payer:

Return on equity         18.5%
Dividend                      $243.7 Million
Paid taxes worth         $447.3 Million

Australia Post is another huge monopoly, with massive infrastructure and service commitments. Regional Australia and many urban communities rely heavily on their post office for far more that buying stamp or sending parcels.

When you read current CEO Ahmed Fahour commenting that community service obligations are ‘stifling’ business, it is easy realise that after privatisation regional and ‘unprofitable’ services would be the first items to be stripped bare.

As illustrated above, ideologically driven arguments for privatisation do not balance when weighed against the Public Good.  Interest rates for government loans are at historical lows so debt hysteria is completely invalid.  And why sell money-making enterprises that will assist in paying back the debt?  Why sell the golden geese?

An interesting attribute that is common across all of these commonwealth companies is that they are flagships in their arenas.  This is because they serve a public need and are capable of having long-term goals beyond mere money making.  These public bodies create new markets and build new products & innovations that private enterprise does not have the courage or resources to accomplish.

The entire premise of establishing a public corporation is to allow essential services like remote mail services, or secure rail transport, to be funded by the profits from the corporation’s unregulated activities.  Australia Post is a classic example; in 2013 regulated services lost money, other services covered the loss and made a profit overall.  The original NBN Co was another; it planned to use profits from urban areas to subsidise connectivity in Regional Australia.

Far from being a two-step process toward privatisation, public corporations need to be maintained as fiscally responsible ways for government to provide for the needs of the nation and spurring innovation, while giving private businesses the opportunity to benefit from new markets and reliable delivery infrastructure.

The corporations and political enablers that prey on these public assets do not care about the base-line services that they provide, only in the short-term profits that they can cleave.

Before Australia sells off its hard-bought Tax-Payer assets, perhaps we should take a closer look and see why private corporations are so eager to get their hands on them.

History. And why our grandchildren should be paying off debt!

Image by usapostweek.com

Image by usapostweek.com

  1. Victoria. Kennett has been elected, and his main platform was that the State was “broke” and that we were in so much debt that our grandchildren would be paying it off.

Slash, burn, cut the public service! INCREASE taxes – not because he wanted to, but because it was necessary. You see, Labor enjoys increasing taxes so we should criticise every single increase or new taxes, but Liberals only do it out NECESSITY. Some argue that Kennett didn’t have to move so quickly. Some find his cuts to services while spending money on improving the dining in Parliament House or bringing “Sunset Boulevard” to Melbourne offensive.

But whether Kennett moved too quickly or cut too deeply, he DID pay off Victoria’s debt. And it doesn’t take several generations. It takes less than the seven years he’s in office.

Of course, the asset sales and the lower interest rates probably helped, but the point is: Whatever was said before he was elected, our great-grandchildren weren’t paying for the debt. Neither, for that matter, were our children.

Although, it could be argued that these ARE the people who paid for the debt. The ones who missed out on educational opportunities. Or the people who died waiting for an ambulance – although it was considered bad form to try to make political capital out of that, unlike these days when the Liberals suggest that Labor have blood on their hands over the Pink Batts. (“Should have been more regulated! Because private industry needs regulation, although once we’re in power we can cut red tape because as with the economy, it’ll all be ok then!”) And of course, the generations who are told that power prices have to go up because the private companies that Kennett sold our assets to haven’t spent money on infrastructure and that the public transport system can’t be improved because the private companies can’t afford to.

Liberals are fond of using household budgets as an analogy, and I suspect that my son would rather be left with a small mortgage on a house that was safe for him to live in than being debt free but homeless. That’s the thing with debt, it’s always relative to assets. The Australian Government – or the taxpayer – may be $300 billion in debt, but servicing that debt is only costing $2 a week for every working Australian (my source is a Murdoch paper!) And as for assets, well the $300 billion is less than a quarter of our Superannuation. Or about equivalent to what the Government spends in a year.

Basically, the debt isn’t that bad. We can pay it back over ten years by just a small increase in tax.

Or we can say it’s out of control. Sack half the public service. Cause a recession. And spend the next ten years blaming Labor for our inability to deliver a surplus. The Kennett option isn’t possible because there’s nothing left to sell. Apart from Medibank Private.

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