Market based solutions
After considerable privatisation activity from 1990 through to 2006 (including the Commonwealth Bank, Qantas, Telstra, the Commonwealth Serum Laboratories and National Rail), the issue of privatisation has been largely dormant at the federal level. There has, however, been an increase in privatisations at the State level including QR National, some electricity generators and retailers and port sales in New South Wales.
There is significant capital locked up in Commonwealth commercial or semi-commercial businesses and bodies that could be put to better use if private ownership is suitable. The Commonwealth currently holds around $13 billion of equity in government business enterprises.
Twenty years ago, the Hilmer Report highlighted significant gains to the community from opening up government enterprises and other areas of the economy to competition. The Commission considers that Commonwealth bodies that operate and compete in contestable markets should be considered for their privatisation potential.
The starting point of any programme would be those bodies, such as government business enterprises, that operate commercially and are ready for sale. Other bodies with potential for sale may first need to be put on a more commercial footing.
Planning should also consider whether a privatised entity should have ongoing community service obligations where businesses operate with cross subsidies, such as Australia Post and the Australian Rail Track Corporation.
Other Commonwealth assets, including land and buildings, also have potential for sale. This issue is addressed in the next section.
In terms of a broader privatisation agenda, the minimum timeframe generally required to progress the sale of a major entity is 12 to 18 months, although for complex sales, particularly where legislation is required, the timeframe is likely to be longer.
Established practice is for the privatisation process to progress in two phases.
- Phase 1: a scoping study to consider the objectives for a sale, including: any community service obligations; regulatory or legislative requirements; actions required to prepare the business for sale; the industry in which the entity operates; and preferred method of sale.
- Phase 2: proceeding with implementing the sale, subject to the findings of the scoping study, prevailing market conditions and obtaining policy approval.
Medibank’s potential sale is already announced and a scoping study commenced in October 2013.
The Commission considers a modest privatisation agenda for Commonwealth assets (and interest in assets) should be pursued across the short, medium and longer term. Entities considered suitable for privatisation are identified below.
Short term (2014 to 2016)
Australian Hearing – as a regulator, funder and owner of Australian Hearing, the Commonwealth plays a significant role in the hearing services market. The Government could examine the potential to increase contestability in markets where Australian Hearing has a monopoly and allow, through privatisation, it to compete in markets where it is currently precluded.
In addition, a scoping study could examine the future of the National Acoustics Laboratory and the appropriate model of industry regulation to preserve the intent of existing community service obligations.
Snowy Hydro – Snowy Hydro operates in the highly contestable National Energy Market and is the third largest electricity generator by installed capacity. The public interest case for ongoing government ownership is not strong. The Commonwealth is a minority shareholder in Snowy Hydro, with a 13 per cent share compared with the 58 per cent stake owned by New South Wales and Victoria’s 29 per cent.
The New South Wales Commission of Audit’s 2012 report also recommended considering Snowy Hydro’s divestment.
A scoping study could examine the potential benefits of a sale for the operation of the National Electricity Market and implications for the management of water resources.
Defence Housing Australia – the property ownership and management industry is a competitive and commercial market. It is highly likely the private sector can meet the housing needs of the Australian Defence Force and members’ families.
A scoping study could examine Defence housing policy and the ability of the private sector to meet the requirements of Defence personnel while also meeting the Defence Force’s operational requirements.
ASC Pty Ltd – formerly the Australian Submarine Corporation, ASC is a supplier of naval combat vessels as well as being a specialist submarine provider. It competes against domestic and international shipbuilders and is currently involved in the Air Warfare Destroyer Alliance arrangement.
ASC’s recent financial returns have been poor and the company is heavily dependent on future submarine projects. Existing government policy is to ensure work on a replacement submarine fleet is centred on the South Australian shipyards. While ASC is the only South Australian based shipbuilder with experience in submarines, this does not assure it of a leading role.
Notwithstanding the challenges facing the company, the Commission believes there would be merit in selling ASC as soon as is practicable.
Medium term (Post 2016)
Australia Post – the majority of Australia Post’s business is in the competitive retail, parcels and logistics markets. Due to the increased use of e-mail and other forms of electronic communication, Australia Post is facing a rapid decline in its letter volumes. While this same trend has led to an increase in online shopping and growth in Australia Post’s parcels business, it only partly offsets the costs of the decline in letter volumes.
The scoping study would need to examine community service obligations in letter delivery and other ‘reserved’ services.
The Moorebank Intermodal Company – the company’s role is to develop and operate an intermodal terminal as a flexible and commercially viable common user facility available to rail operators and other terminal users. Moorebank Intermodal Company intends to achieve this by leasing land that the Commonwealth owns and acquires for the intermodal terminal, gaining relevant environment and planning approvals, undertaking a request for tender for the intermodal terminal’s development and operation and then managing the funding required for its development.
The Commonwealth’s ongoing support of the Moorebank Intermodal Company supports the project to deliver upon its objectives of improving national productivity through an efficient supply chain, increased freight capacity and better rail utilisation. Then, subject to market conditions, the Commonwealth intends to privatise its interest in the project.
Australian Rail Track Corporation (ARTC) – the Commonwealth could privatise either all of ARTC, or just the Hunter Valley network. The monopoly characteristics of ARTC’s network can be adequately managed and regulated in the public interest, much the same as airport and electricity distribution monopolies.
A scoping study could examine an appropriate access regime, implications for ARTC’s leases and wider considerations stemming from the intergovernmental agreement that established the ARTC.
Royal Australian Mint – the Royal Australian Mint manufactures Australia’s coins while Note Printing Australia, a subsidiary of the Reserve Bank of Australia, prints Australia’s notes and competes internationally for note printing contracts. As there is an international market for manufacturing currency, there is merit in reconsidering the public interest case for retaining the Royal Australian Mint as a government body and its potential for privatisation.
COMCAR – the Department of Finance provides the Commonwealth’s car-with-driver service (COMCAR) to parliamentarians and other high level officials and dignitaries. COMCAR also provides transportation services for guests of government and major events, such as the forthcoming G20 programme. Many of these services are provided in competition with the private sector and there is merit in considering privatisation options.
A scoping study could examine issues including legislative requirements relating to entitlement to the service and maintaining appropriate security arrangements.
NBN Co – provisions for the eventual privatisation of NBN Co and the National Broadband Network are already in place. The existing legislation governing NBN Co requires the Commonwealth to maintain ownership of the company at least until the network is built and fully operational, which according to NBN Co’s recent strategic review will not be before the end of 2020.
The revenue achieved from a potential future sale of NBN Co is included in the projected internal rate of returns contained in the six scenarios outlined in the review. The Government has not yet responded, but it is likely that the long-term future of NBN Co will include an eventual privatisation.
Recommendation 57: Privatisations
Twenty years ago, the Hilmer report highlighted the gains to the community from opening up government enterprises to competition. The Commission considers that Commonwealth bodies that operate in contestable markets should be privatised. The Commission recommends that the following 10 bodies be privatised over the short, medium and long term, in accordance with established practice.
- Australian Hearing Services.
- Snowy Hydro Limited.
- Defence Housing Australia.
- ASC Pty Ltd.
- Australian Postal Corporation.
- Moorebank Intermodal Company Limited.
- Australian Rail Track Corporation Limited.
- Royal Australian Mint.
- NBN Co Limited.