Medibank: a few winners, many losers

At first glance the privatisation of Medibank might look like a good deal but on closer inspection it's actually a bit of a shocker for taxpayers.

It seems like a pretty good deal -- some taxpayers paying all taxpayers $5,679 million for Medibank Private -- until you look more closely. And when you do that, it’s not a good deal at all.

Finance Minister Mathias Cormann was able to declare it a win, win, win yesterday: 1. for retail shareholders, who get a 7 per cent discount to institutions, 2. for policyholders, because “they will have a company providing services to them that will be able to perform even better”, and 3. for taxpayers, who “have been able to release the capital that was tied up in Medibank and we are in a position now to be able to reinvest that capital in job creating, productivity enhancing infrastructure to grow a stronger and more prosperous economy”.

All good. And what’s more the share price will be supported initially by index fund demand.

Based on the float price, Medibank will be the 51st largest listed company, which means index funds, which didn’t participate in the float, will need to buy about $500m worth of shares on-market. They might even end up in a nice vicious cycle: driving the price higher and making it a larger proportion of the index so they have to buy even more.

In fact, it’s a wonder the Prime Minister didn’t take over the press conference yesterday and have a much needed bask.

Except that someone might have pointed out (but didn’t) that taxpayers are forgoing a dividend of $231m that grows each year, and could have borrowed that $5.7 billion for $185.4m in interest, fixed for 10 years.

But that would be debt, wouldn’t it, and we can’t have that.

Mathias Cormann said yesterday the money would not go into general revenue but would be spent on infrastructure via the “Asset Recycling Initiative”.

Except that all asset sales are booked as cash revenue in the budget, whatever happens to the money, and this one is unlikely to be any different.

And this time it will, in effect, be booked twice: the Asset Recycling Initiative is an existing five-year program in which the Federal government has promised to pay states and territories 15 per cent of the price of any asset they sell if all the proceeds are allocated to new infrastructure investment.

It’s a partial return to the State or Territory of the company tax that the Australian Taxation Office will start collecting once the state-owned enterprise is privatised -- recycling money from general revenue.

By using the proceeds of the Medibank float instead, the Federal government gets to keep all the tax revenue from privatised SOEs as well as book the $5.7bn cash in the May budget.

Smiles all round. Except that with the bond rate at 3.2 per cent, taxpayers would be better off keeping Medibank and borrowing the money for infrastructure rather than selling a growth asset.

Ah, but Medibank will be much better run in private ownership, won’t it?

Theoretically that’s true, except that in reality over the past 10 years, in government ownership, the company’s profit has grown from $10.4m to $232m. That’s a compound annual growth rate of 36 per cent, and a real credit to George Savvides, who has been chief executive for 12 years.

It hasn’t been slowing down either: last year’s profit growth was 84 per cent.

Can he achieve better than 36 per cent profit growth with private owners and a bigger salary and bonus incentive?

Maybe, but I doubt it. He certainly has ideas for reducing costs and claims that political owners would find uncomfortable.

Anyway, it’s done now. No point grumbling. And retail investors will almost certainly be winners, at least over time if not tomorrow, and therefore the politicians will be too.

The investment bankers are big winners too, and, even though the institutions paid a bit more, they have another health stock in which to invest.

And of course it will be happy days for management. Poor Savvides has had to get by on a base salary of $831,001, and his direct reports are scrimping and scrounging on wages of less than $600,000. George goes straight to $1.2m salary next year and everyone gets a cash bonus as well as a pay rise.

The only losers are taxpayers -- for them it’s a shocker. But they won’t notice, and in any case they’re used to it.