16/09/2014 - 05:46

Asset sales more than a cash cow

16/09/2014 - 05:46


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Selling assets needs careful management and is much more than just an opportunity to fill the coffers.

Asset sales more than a cash cow
COMPLEX DELIVERY: The sale of Medibank Private offers the federal government a good opportunity, and a challenge to maximise the sale’s potential. Photo: Attila Csaszar

The impending float of Medibank Private offers the federal government an opportunity to lead the way in privatising a major business.Typically, privatisations are handled in a way of maximising the price for the government, often misunderstanding that cash in the coffers of Treasury is only one of the benefits of cutting an agency loose from the public sphere.

The implied assumption is that the higher the selling price the government gets, the more money it has to splash around – and therefore the better off the community is. In many cases this is dead wrong.

The example of Telstra is probably the best. In my opinion, preserving the entity as a private monopoly that controlled the infrastructure and sold directly to consumers did untold damage to the economy, and has held back efficient investment in communications for decades.

Telstra should have been broken up and sold in parts. It would have netted the governments of the day – it was sold in tranches – less hard cash up front, but it would have been less of a drag on the development of the internet services sector. It may also have meant that the outrageously expensive concept of the National Broadband Network would never have been required.

Medibank is, thankfully, a different beast. It is not a monopoly but a very strange concept in the world of state ownership – a retail-focused entity that competes in a broad market against privately operators. The government could therefore set a high price without stymying any markets at the same time.

The intriguing thing about this sale is that the government appears to have done the opposite, setting the price lower than the maximum attainable (presumably to gain an economic benefit through the sale by doing exactly what it didn't do with Telstra).

So how is there an economic benefit?

The share market float's retail focus means that institutions are going to be underweight in the $4 billion company when it joins the ASX. Assuming that many funds will need to have shares in Medibank to meet their requirement to represent the index or be adequately represented in that sector, there is likely to be a stag profit for retail investors that sell out in the short term.

Such a windfall is likely to flow into the market and the broader economy.

As with Telstra, no doubt every man and his dog will be seeking to ensure they get their allocation and a bit more. I am not joking about the dog, either. You may recall that there were plenty of stories about family dogs ending up with shares in the telco as retail punters sought to increase their shareholding.

This of course also represents a political benefit for the coalition government. Those with the means and inclination to buy Medibank shares are more likely to be conservative voters. If not, they may well look favourably on the Tony Abbott-led government for putting more money in their pockets.

You could argue this is inappropriate and that the government, unrestricted by monopoly issues, should sell Medibank to the highest bidder and avoid this kind of silly shenanigans from stag-profit-seeking retail investors; but that is missing two key elements of the big picture.

Firstly, equity markets have been starved of a good product for a while and the government is wise to inject a bit of life into them with this float. Of course more money could be achieved in more buoyant times, but in my view that is not the government's job and doesn't suit its existing needs. Like building infrastructure, it ought to look for opportunities that are counter-cyclical in order to benefit the market and not compete with the private sector – especially if it isn't an artificial stimulus but a necessary activity such as this.

Secondly, the consumers most likely to be retail Medibank investors are also, as it happens, likely to be the ones that have been the policy holders (like me, I should disclose) that created the value in the first place. In many cases, those insured by Medibank are legacy policyholders from earlier times when the government made people earning above a certain income pay a Medicare levy unless they had private health insurance.

Medibank was a big beneficiary of that policy and remains so, even though those taxpayers now pay the levy whether or not they have their own healthcare. These people have, in fact, saved the government huge sums by initially moving off the public system and then, subsequently, by remaining private and paying extra for everyone's universal healthcare.

In many ways these people are the equivalent of a members of a mutual who receive a windfall when it privatises. Of course, they won't get the full benefit, just a marginal one based on a stag profit for receiving an allocation.

And the focus on policyholders has an additional benefit. The government can allocate shares to real people rather than dogs, cats or other members of a family's menagerie.

Now you might think that, as a policyholder, I would say this; but this sounds like a win-win, a rare outcome for this federal government negotiating the tricky waters of budgetary constraint.

The Western Australian government could learn a thing or two about this. WA Premier Colin Barnett clearly knows that the value in some assets goes well beyond the cash he could receive; but state control isn't always a benefit for the wider economy either.


Mark Pownall, Head of Content at Business News

Twitter: (@MarkPownall)


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