Privatising Medibank: good business hamstrung by bad politics

There’s a strong financial case to selling Medibank Private, but politics has made privatisation an unpopular choice. AAP/ Joel Carrett

At first sight it is surprising that neither the government nor the opposition, both seeking budgetary savings, is proposing to sell Medibank Private.

When retiring Medibank Private chairman Paul McClintock called for privatisation, Finance Minister Penny Wong said that the Government had “no plans” to privatise it, and opposition leader Tony Abbott simply said that he didn’t see “any reason in principle” for keeping it in public hands, without committing to a sale. In a rare political alignment, Greens health spokesperson Senator Richard Di Natale echoed Abbott’s statement when he questioned the idea that the government should be a player in the private health insurance industry.

The budgetary case for a sale is an attractive deal.

In the 2010 election campaign, the Coalition was firmly committed to selling Medibank Private. Shadow treasurer Joe Hockey claimed it would raise $4.5 billion if privatised – an amount well in excess of its book value of $1.6 billion, but realistic enough for a business which, for the last few years, has recorded an annual operating profit of around $200 million, most of which has been paid as dividends to the Government. By way of comparison, NIB, which is only a quarter the size of Medicare Private, has a shareholder capitalisation of almost $1 billion.

In pure financial theory, the decision whether or not to sell a profitable enterprise should be a neutral one, for such a sale deprives the shareholder of an ongoing dividend stream. But public finance — particularly in an election year — is also guided by the immediate budget impact and projections, which go out only for three subsequent years. (That’s why almost all discussion on election promises is about their four-year costs.)

To make a back-of-the-envelope calculation, based on a realisation of $4 billion, the four-year budgetary contribution of a Medibank Private sale would be $1.6 billion (4.0 realisation - 1.6 book value - 0.8 book value). That’s a great deal more than the $0.4 billion saving resulting from recent superannuation changes, which have cost the government so much political pain.

The economic case also makes sense.

In economic terms, Abbott and Di Natale are right. While there are many situations where governments should be active players in markets, when a checklist of those reasons is run on Medibank Private, there is no reason why it should remain in government hands.

There is a strong economic case for public ownership of a European-style single national health insurer, a topic on which many, including myself, have written, but that is not Medibank Private’s function. It is simply one of 35 competing health insurers.

It is the largest health insurer by a small margin, but that doesn’t mean it dominates or even leads the market. There was a time when governments engaged in what some call “benchmark competition” with a publicly-owned business operating alongside privately-owned businesses. The Commonwealth Bank and Trans Australia Airlines were prime examples. Indeed, the idea that a government insurer could bring some discipline to the other funds was one of the two main reasons the Fraser government established Medibank Private in 1976. But that form of intervention has given way to national competition policy, and in any case, the government has the strong regulatory mechanism of capping health insurance premium increases.

The other reason behind the establishment of Medibank Private was a political one, in that the Fraser government realised that Medibank, in its original inception as a single public insurer was a popular scheme, and it believed that at least some of the voting public would be appeased by retaining the name “Medibank” and keeping it as a publicly-owned entity, even though its role had changed entirely.

The political problem is opposition to privatisation.

There is strong community opposition to privatisation. That opposition was one of the factors leading to the defeat of the Keneally Government in New South Wales and the Bligh government in Queensland. Public opinion polling shows strong resistance to privatisation – even a majority of Coalition voters are opposed.

Political parties have undoubtedly done their polling, and it’s reasonably certain that they find opposition to privatisation extends to Medibank Private. It’s probable that public attitudes to privatisation are more a visceral response, rather than a rational consideration of economic reasons why some activities should be in the public sector and why some should be in the private sector.

That public/private division should be based on established economic criteria to do with what economists call “public goods”, where the market cannot provide efficiently, and “natural monopolies”, where there is room in the market for only one supplier. These considerations provide strong cases for ongoing public ownership of roads, power and water providers, public transport and many other utilities. There are similarly strong arguments for the government to be an initial monopoly investor in networks such as the National Broadband Network and high-speed rail, although these may pass to private ownership once established.

But those arguments, while familiar to economists, are not in our public discourse. Rather, the case for privatisation has been based on simplistic ideas about reducing public debt and on bringing the supposed efficiency of the private sector to improve the performance of overstaffed or undercapitalised government business enterprises – without any explanation why governments cannot reform their own enterprises.

The public have been patronised by these weak arguments, and they don’t need a course in economics to know that there is something distortionary with having a toll road in the middle of an otherwise “free” network, or that there is a conflict between the incentives for water utilities to make a profit while we are all urged to save water. And they know that there is something wrong in selling assets, particularly those assets they own collectively through their governments, to finance current outlays.

What this means, in simple terms, is that “bad” privatisations have driven out the opportunities for “good” privatisations, such as Medibank Private. It’s the price we pay for a dumbed-down public discourse.