Why a public asset sell-off is on the money

The Australian Competition and Consumer Commission’s Rod Sims has set the scene for what will be a significant and contentious discussion point in 2014: the potential privatisations of Medibank Private and Australia Post.

In Sims’ interview with the Australian Financial Review he also urged the sale of state government-owned energy companies and predicted that the federal government’s root-and-branch review of competition laws would recommend the sale of government-owned enterprises.

The government also, of course, has created an independent commission of audit, which may well also advocate the privatisation of government enterprises. Australia Post and Medibank, both of which compete with private operators, are the most obvious candidates.

The sale of Medibank Private would be the less contentious of the two, although it would no doubt still draw fire from those who oppose any instance of privatisation.

There have been a number of scoping studies conducted for its sale over the life of several parliaments, with governments recognising that it operates in purely commercial markets against privately-owned competitors.

There is no obvious public interest for it to remain in public ownership, particularly as its premiums (along with its competitors) are regulated by the government. There is a conflict of interest, and a potential distortion of private markets, when governments act as both regulator and as an owner of a competing business.

While Malcolm Turnbull last year said the Abbott government had no plans to privatise Australia Post, there is a sense of inevitability that some aspects of what it does today will eventually be privatised.

In the past, Australia Post has been regarded as too politically sensitive to sell. But most of its operations today – and its entire profits – are in competitive markets. Its regulated mail services businesses lost $218 million last year while its non-regulated businesses generated a profit of $648 million.

With the group delivering a billion less letters than it did only five years ago, its losses from those regulated services continue to grow, creating a major challenge for the business and government and complicating any privatisation.

So far, Australia Post’s successful drive into parcels and retail services, which has expanded aggressively under former National Australia Bank senior executive Ahmed Fahour, has been sufficient to offset the decline in the traditional ‘snail mail’ services.

Fahour has, however, warned that the increasing losses from that service and Australia Post’s community service obligations would eventually “stifle” the development of its unregulated businesses.

“Despite our very strong financial and operating results, Australia Post has hit a turning point in its business trajectory where strong cost management and our $2 billion investment in our national logistics network will soon not be enough to compensate for the losses we make in our traditional mail business,” he said last year.

Last year the UK bit the bullet on privatisation of mail services, selling 62 per cent of the near 500-year-old Royal Mail Group.

While the privatisation has generated some controversy – the shares were sold at 300p each but hit a high of more than 600p not long after the group was listed – it raised about £2 billion for the stretched UK government’s finances. The government retains a 32 per cent stake.

The performance of Australia Post under Fahour has been such that it would be worth several billions of dollars to the Australian government if the growth in the losses from the regulated services could be slowed (and a lot more if they were distanced from it) – perhaps by an explicit on-budget subsidy.

Australia Post’s management and the government would no doubt be conscious that Australia Post’s dominance of parcel deliveries – and its value – are likely to be challenged as competitors like Toll and overseas-owned international parcel giants like FedEx and DHL try to share the explosive growth occurring as a result of the rising tide of online shopping.

Despite its public ownership, Australia Post has been able to invest heavily in its logistics network and digital platforms. It has also bought Qantas out of the StarTrack express freight joint venture and is at the leading edge of the digital environment, with innovations like 24/7 parcel lockers and trials of digital mailbox services.

Those are, of course, services that are contested by privately-owned companies. The further Australia Post pushes into those areas, the weaker the arguments for public ownership and the stronger the case for giving the group the freedom and access to capital to pursue the returns and accept the risks that are inherent in private and competitive markets.

• The ACCC issued a clarifying statement this afternoon in which it said that in the AFR interview, Sims had said the competition review was likely to address the role of government in markets and that generally the private sector would run commercial enterprises more efficiently than government. He had made no reference to the privatisation of any specific Commonwealth-owned entity.