Government-Business Relations Essay Example

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8TO PRIVATISE OR NOT TO PRIVATISE MEDIBANK

TO PRIVATISE OR NOT TO PRIVATISE MEDIBANK

Introduction

Privatisation is the transference of ownership and operation of a business or property from the control of the public or the government to a private enterprise. Privatisation came prominently into worldwide focus in the 1980s when it begun in earnest in the United Kingdom (Ganesh, 2001, pg. 13). In the past two decades, privatisation as a way of improving the efficiency of institutions not performing to their full potential has been embraced internationally with different results. This essays looks at the proposed privatisation of Medibank, which is the largest provider of health insurance services in the country. It analyses the merits and the demerits of privatising the company using concisely developed arguments and provides an answer that will put to rest any further arguments.

TO PRIVATISE OR NOT TO PRIVATISE MEDIBANK

When the Federal government announced the sale of Medibank private in the financial year 2014-2015 there was a huge uproar from both sides of the divide. Those in support of the government’s decision went on and on about the advantages of the venture while the opposition pointed out the foolishness of the whole exercise (Griffiths, 2014, p 1). Reporting for the Macrobusiness, Onselen (2014) is one of the pro sale campaigners. He points out that the success of the whole privatisation exercise depends on two factors. The first factor, he points out, is the financial aspect of the transaction while the second factor is the equity and efficiency test.

The financial analysis of any business deal is paramount as no one would want to be on the losing end of the transaction. Dissecting the oppositions claim that the sale of Medibank is wrong due to the fact that the public stands to lose yearly dividends as high as 500 million dollars, Onselen argues that this figure is erroneous and misleading. In his article, he shows clearly that an annual analysis of Medibanks financial records are not as rosy as the opposition made it seem. The records show that Medibank had a mean profit of 330 million dollars before taxes. This becomes an average of 231 million dollars after the taxman cleaves off his share, assuming a tax rate of 30 percent.

Onselen argument holds water. Moran (2002) argues that the enthusiastic privatisation carried out by the Kennett government may have had a hand in the positive transformation of the economy of the state of Victoria. He points out that before 1992, Victoria was doing very poorly and ranked among the lowest in development among the Australian states. It had a minimal income growth rate coupled with economic mismanagement. However, privatisation is a major factor that enabled the turnaround of the fortunes of the state.

Even though the opposition would be inclined to argue against the financial benefits of privatising Medibank, as pointed out by Onselen, economists like Bourguignon and Pleskovic (2007, pg. 250) argue the case for Onselen. They argue that in most of the countries they had researched, privatisation had contributed 10 percent or more of their budgets. It had also accounted for the saving of around 10 percent by getting rid of subsidies that government owned enterprises are accustomed to.

Even though Medibank is a profitable organisation that contributes a steady stream of profit annually for the government, it would make far greater sense to sale if the price is right. Mcauley (2013) in his article for the business spectator observed that it was rather surprising that both the government and the opposition had seen it wise to propose the sale of Medibank. This, he pointed out, was at a time that both groups were looking for ways to make savings in their budgets. In the election campaigns of 2010, the opposition treasurer put out a tentative figure of 4.5 billion dollars if Medibank was to be sold. This amount is well above the book value of the company which stands at around 1.6 million dollars. By calculation, based on a four year period for a governments stay in power, the sale of Medibank would contribute 1.6 million dollars to the budget. This is a big improvement from the savings made from the superannuation adjustments of 0.4 billion dollars.

In the case of the expected increase in efficiency, once the company is privatised, Mcgrath (2014) of ABC news interviewed a share market analyst who agreed with the premise that privatisation will indeed improve the efficiency of the insurance provider. An explanation for the increased efficiency of privatised entities is that executives of the said entity would work harder because of increased incentives. Given a chance to earn bonuses, they will put in the maximum possible energy to deliver profits for the organisation (Gardner, 2014, pp. 10-12).

However, the sale of an institution as large as Medibank is not as simple as it seems. The financial and efficiency benefits in this case are not very clear. As gоvеrnmеnt businеss rеlаtiоns dictate, the government has a duty to balance its business transactions with its duty of care of its citizens. In this case, the government has to give an ear to the 3.8 million policyholders who are worried about the ramifications of privatization. This is in part due to the fact that the success of the privatization exercise can only be determined after the sale and not before it. This can be expounded on by looking back on the privatisation of Qantas and Telstra. While Telstra’s privatisation is considered a success, however Qantas has had many problems since its privatisation back in 1993. Its market share plummeted drastically leading to financial problems (Zhuang et al, 2014 pg. 1-2).

Other fears about the privatisation of medibank are from the ordinary Australian whose worry is that the premiums may not be affordable after its privatisation. This fear arises from the fact that once it has been privatised, the new owners of Medibank will demand higher profits which may necessitate the raising of premiums (Mason, 2013 pp. 5). Even as the debate on whether or not the premiums will be raised if Medibank is sold, the finance minister move tried reassuring the public that premiums will not be raised (Skelton, 2014 pp 1).

When Medibank was converted into a profit generating organisation in 2009, the government did so to enable it raise revenue from dividends. This made it possible to decrease taxation. If Medibank is privatised, the dividends will be forfeited. It is not farfetched to argue that the government, in a bid to make back the profits lost, will have to increase taxation. It goes without saying that increasing taxation will not go down well with the general public (Zhuang et al, 2014 pg. 3).

Another fear about privatisation is that the new owners might undertake staff cuts so as to maximise revenue. This will be attributed to changing business times, cost saving and process reengineering but after all is said and done, people would have lost their source of livelihood (McGrath, 2014 pp. 6-8).

For the analysts who put forward increased efficiency as one of the main reasons why Medibank should be privatised, it does not have to be so. It can be argued that privatisation is not always a necessity for increased productivity and efficiency in public enterprises. A business that is already well managed has a very small potential for improvement in efficiency (Brown, pg. 96).

Conclusion

The privatisation of Medibank has equal pointers if its merits and demerits are considered. It is very hard to predict if the advantages of privatisation will outweigh its demerits. Due to the fact that Medibank is a profit making organisation that provides a steady stream of revenue to the government among other factors pointed out above, it can be concluded that Medibank should not be privatised.

References

Bourguignon, F., Pleskovic B. (eds.). (2007).
Annual World Bank Conference on Development Economics Regional 2007: Beyond Transition. Washington D. C: World Bank Publications

Brown, A. (2002). The economics of privatisation: case study of Australian telecommunications. In M. Hossain & J. Malbon (Eds.), Who benefits from privatisation? (PP. 68-99). London: Routledge

Ganesh, S. (2001). Privatisation in India. New Delhi: Mittal Publications

Gardner, J. (2014, March 26). Medibank Private sale: investors eager for $4b IPO. The Sidney Morning Herald. Retrieved from < http://www.smh.com.au/business/banking-and-finance/medibank-private-sale-investors-eager-for-4b-ipo-20140326-35inr.html>

Griffiths E. (2014, March 27).
Medibank Private: Government announces sale through IPO, subject to market conditions. Seven News.pp 1. Retrieved from <https://au.news.yahoo.com/a/22182505/medibank-private-government-announces-sale-through-ipo-subject-to-market-conditions/>

Mason, M. (2014, December 24). Rise in premiums to fatten Medibank for privatisation. The Sidney Morning Herald. Retrieved from <http://www.smh.com.au/business/rise-in-premiums-to-fatten-medibank-for-privatisation-20131223-2zum7.html#ixzz303azcZqr>

Mcauley, I. (2013, April 23). Why privatising Medibank is good policy. Business spectator, pp. 1-pp. 6. Retrieved from <
http://www.businessspectator.com.au/article/2013/4/23/health-and-pharmaceuticals/why-privatising-medibank-good-policy >

McGrath, P. (2014, March 27). Investment analysts expect job cuts after Medibank privatisation. ABC news, pp. 4. Retrieved from < http://www.abc.net.au/worldtoday/content/2014/s3972589.htm >

Moran, A. (2002).The Financial Costs and Benefits of Privatisation. Energy Issue paper No. 25. Retrieved from <https://www.ipa.org.au/library/Energy25.pdf>

Skelton, R. (Ed). (2014, March 26). On the money: Mathias Cormann says Medibank Private sale will not raise premiums. ABC News. Retrieved from < http://www.abc.net.au/news/2013-11-05/matthias-cormann-medibank-private-sale-impact/5058346 >

Zhuang, J., Un, A., Tashkandi, A., Pranjoto, H., & Soputro, N. (2014, April 18). Is Medibank worth selling? Cainz Weekly Digest.