Government-Business and Privatization of Medibank - Case Study Example

Government-Business: Privatization of MediBank Name Course Institutional Affiliation Date Abstract Privatization of government Businesses is a move taken by various governments across the world as they look for additional funds to finance other public projects. The economic recession experienced in the year 2009, and 2012 affected the economy of various government entities. Privatization of government businesses especially in the health and finance sectors is on the rise especially in Europe and Africa. The Government of Australia also involves a series of privatization processes since the 2007 general election. Most governments argue on the basis of increasing the public funds. The Government of Australia recently proposed the sale of the major medical services provider, Medibank in early 2014. This essay will discuss the opinions raised for and against the privatization of the Medibank entity in Australia (Peter, 2014, 3). The essay will also give a brief description of Medibank on the introduction part and the process that led the proposal for its privatization. Further, it will analyze the reasons for and against its privatization and its financial effects on the taxpayer. Introduction Government businesses are organisations, fully owned by the government whose profits go to the government kit. The Government of Australia owns several businesses across the country. Medibank is the only medical insurance institution under full control of the government. The issue of privatizing Medibank was a main campaign agenda during the last general election. The current opposition was not for the privatization, but the current government insisted on its privatization. This issue is the most common debate across Australia given the fact that the institution provides medical care for most of the Australian population (Bhojani, 2003, 43). Medibank was established in 1976 by Ray Williams as non-profit entity, but currently operates as profitable Government Business whose dividends are paid to the national government. The process of converting the bank into a profitable organisation was completed in 2009 after it was approved by the Private Health Insurance Administration Council. This is an authority tasked with regulation of the private health insurance sector. Since its establishment, Medibank has acquired several other insurance companies in Australia such as the Australian Health Management (AHM) organisation and the HSA group. The AHM was acquired in January 2009 while the HSA group merged with Medibank in April 2009. The move enabled Medibank to create division for health solutions whose main focus was to provide occupational related health services. The health services are provided through Travel Doctors and Medibank Health solutions brands (Guido 2005, 709). The company solely provided health insurance services at reduced cost to Australian citizens. The company is also known for liberalizing the insurance industry in Australia through provision of cheap health covers. This forced other health cover providers to reduce the cost of their services. This has made health insurance accessible to the majority of the Australians. The government extracts dividends from the company implying that its profits take care of projects that would otherwise be paid using the taxpayers’ money. This has reduced the amount of taxes paid by Australians especially in the health industry. Privatization Proposals The Howard government announced its intention to privatize Medibank if re-elected in 2007 general elections. The opposing Labour Party led by Rudd was opposing this opinion. The opposition insisted that Medibank should be maintained as a government-Business operating under the ministry of finance (Michael, 2013, 3). The Labour Party eventually won the elections. Medibank management was ready to work with the Rudd Labour government which implied that the institution would remain as a Government entity as promised by the Labour Party during the campaigns. The issue of privatising Medibank was brought up again by the current Australian government in early 2014. The government argued that, through its sale, the government would increase funds that would benefit the taxpayers (Michael, 2013, 3). On the other hand, the management argues that the funds should benefit Medibank customers directly. In general, privatization of Medibank is expected to benefit and affect the public. The sale of Medibank is likely to affect the taxpayer negatively since they will have to pay extra taxes to compensate the earnings from Medibank (Michael, 2013, 3). This is clearly analysed later in this essay. Apart from the government, there are other authorities supporting the sale of Medibank such as the IPA and unionist Paul Howers. The issue has, however, been given minimal thought on whether its privatization would benefit the public or majority of the Australians will support the move. Impacts of Privatising Medibank Medibank promotes collective benefits since most of the Australian Citizens pay reduced taxes. The company’s dividends are channelled to finance other major government projects. The entity’s ability to offer affordable health insurance services is supported by the fact that most of the Australians are its customers (Peter, 2014, 3). These collective advantages may be lost once Medibank is privatized. This is because; its services will be aimed at maximizing profits that will result to high costs of the health insurance. The taxes that were reduced as a result of the profits earned by the government from Medibank will be increased since the government will not get revenue from the business. In general, once Medibank is sold; its will disappear with its benefits (Peter, 2014, 3). The sale of Medibank is also likely to increase the levels of wealth inequality in Australia. This is because, Medibank is one of the few businesses collectively owned by the public that reduces the tax burden to Australians. The sale of Medibank would increase the levels of wealth inequalities in Australia since it will lead to an increase in income to capital ratio. This implies that income inequality levels will rise (William, 2000. 40). Privatising Medibank implies that the government will have little control over the Health insurance industry. This is because Medibank, as a public Business provides affordable health insurance cover to the public. However, once privatized, most of its operation will be aimed at maximising profits leading to the high cost of health insurance. Medibank is also the largest health insurer in Europe by a small margin (William, 2000. 40). This implies that most of its competitors will overpower it in terms of market domination with the absence of government control. This might contribute to the downfall of the company (William, 2000. 40). The motive behind the sale of Medibank is political in nature. Some parts in Australia are backing the move since their politicians are supporting the proposal. The opposing politicians from such areas have lost their seats severally, since most political campaigns are based privatizing Medibank. Political instincts can be misleading to most Australians since they do not consider the long term effects of the sale. The country may benefit from the sale since it will get extra funds to pay debts and run election that solves short term problems. The citizens will either have pay extra taxes or get limited government services (Bhojani, 2003, 43). Regardless of the negative impacts of privatising Medibank, the move has several positive impacts in terms of short-term budget solutions. The sale of Medibank is expected to raise $4.5 billion. This is quite an attractive amount since it isin excess of the real value of the company by $1.6billion. This is, however, not the case when evaluated using pure financial theorems. Evaluating the sale of Medibank based on financial theory would result in a neutral decision. First, privatization of the company will eliminate the dividend stream given to the government. However, its sale would provide funds to finance elections and pay the high government debts. The impact of the funds on the budget should also be a key issue when deciding on its privatization (McAuley, 2005, 4). Most of the election agendas are based on privatization of Medibank. Evaluating the eventual effects of its privatization, it is clear that its sale will benefit the economy for a four year period. In four years, Medibank is expected to raise $1.6 billion which is given to the government as dividends (Rubinstein, 2005, 6). The Australian government should be active in the business market such as price control and elimination of monopolies. The health insurance sector is affordable in Australia, and it is very competitive. Looking at these factors closely; one will note that there is no need of keeping Medibank under government control. Medibank is also the largest insurer in Australia by a small margin. This implies that even though the government aim was to control the insurance industry, it would be futile since its market share is almost the same as that of its competitors. Medibank’s market share also limits the ability of government to control the insurance sector in Australia (Vishny. 2000, 450). Conclusion The proposal to privatize Medibank is a great move by the Australian government, but it is consequential. An analysis of the impacts of the sale of Medibank indicates that the privatization will not be the best option. This is because its long term effects on the general Australia population and revenue is not impressive. After privatization, of Medibank, citizens will either pay more taxes or government services will be highly reduced. Therefore, it is vital for the Australian government to consider the long term effect of privatising Medibank. It is also clear that Government-businesses can a good source of revenue if managed effectively such as Medibank. References Ben Woodhead, (2014). Spin doctors assembled for $4bn Medibank privatization. Fairfax Media Publications Pty Ltd. Pp. 23. Bhojani. S. (2003). ‘The sale of Medibank Private: gone but not forgotten,' Health Cover, 13:4, pp. 43. Coleman. E. (2006). ‘A prescription for competition: sell Medibank Private in pieces.' Australian. pp 9. Guido W, (2005). The Role of the Propensity Score in Estimating Dose Response Functions. Biometrika, Vol. 87(3), pp.706–710. Harvey. K. (2006), The sale of Medibank Private, New Matilda. Vol 1. Pp 3. Ian McAuley, (2013). Why privatizing Medibank is good policy. Business Specter PTY Ltd. Vol 1. Pp 4. La Porta, Rafael, F López-de-Silanes. , 2000. ‘The Benefits of Privatization: Evidence from Mexico, Quarterly Journal of Economics, vol 114(4), pp.1193-1242 López-de-Silanes., Florencio. A. Shleifer, R W Vishny, (2000), ‘Privatization in the United States,' RAND Journal of Economics, Vol. 28(3), pp.447–471. Megginson. L. William. (2000), The Financial Economics of Privatization. Oxford Press, New York. Michael Bennet, (2013). Medibank sale has adviser's circling, The Australian. Vol 10, pp 3. Peter Ryan. (2014). Medibank Private: long path to privatization for chief executive George Savvides. ABC. vol. 6. Pp 2-4. Rubinstein. E. (2005). ‘Unhealthy practices at health funds,' Australian Financial Review. Vol 2, pp. 6. Read More