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Benefits of Privatisation: A Case Study

Benefits of Privatisation: A Case Study

Julius Zondag

Benefits of Privatisation: A Case Study

With economies around the world struggling from the COVID-19 pandemic, several private businesses turn to the government for support. Scott Morrison recently commented on the idea of nationalising business, “We have no plans along those lines. What we are seeking to do in a number of cases where we have provided great assistance to private companies to support important supply production in Australia”. Typically, government listed companies offer political constraints and lower incentive to improve efficiency. On the other hand, they often provide higher dividends and are less likely to become insolvent. Australian companies that were previously privatised include Telstra (TLS), Sydney Airport (SYD), Qantas Airways (QAN) and CSL Limited (CSL).

Telstra Corporation Limited (TLS)

Privatisation was implemented to enable Telstra to improve responsiveness towards consumers and the rapidly changing telecommunications market. With market competition, Telstra would be transformed into a modern and lean enterprise. This was constrained as Telstra had a monopoly over telecommunications infrastructure and was not incentivised to improve efficiency. In August 2011, Telstra’s privatisation process was complete. Despite EBITDA only growing 0.8% from 2011 to 2012, the rollout of 4G increased EBITDA by 42.7% in 2013. This resulted in a significant increase in the share price, before falling again in later years due to structural inefficiencies of the NBN project.

Figure 1 TLS Chart, source: TradingView

Sydney Airport Holdings (SYD)

The privatisation of Sydney Airport in 2002 led to a significant improvement in infrastructure. This gave passengers access to travel to more locations across the globe whilst supporting local tourism. After privatisation, the government was unable to regulate fees on airlines or intervene when price disputes occurred, leading to an improved competitiveness for Sydney Airport. Prior to being listed, revenue was growing steadily at $290m in 1999, $310m in 2000, $375m in 2001 and $450m in 2002. Similarly, EBITDA stood at close to $190m in 1999 and 2000, $220m in 2001 and $315m in 2002. Once listed, revenue continued to grow standing at $490m in 2003 and $540m in 2004. EBITDA also grew at a similar pace at $375m in 2003 and $440m in 2004. This was accurately reflected in the stock price, where Sydney Airport experienced a continual surge since the initial IPO.

Figure 2 SYD Chart, source: TradingView

Qantas Airways Limited (QAN)

The privatisation of Qantas Airways forced the business model to adapt to a low operating cost model. This allowed savings to be invested into a value-based marketing, the buying of more Boeing 717s and the acquisition of Impulse Airlines. Prior to IPO, profit in 1994 was at $155.9m. Since IPO, profit continued to rise at $180.1m in 1995, $246.2m in 1996, $252.7 in 1997 and $304.8m in 1998. This was not correlated to the share price as stock price declined in 1996 and 1998. Qantas was privatised in 1993, with British Airways buying a 25% stake. In 1996, investors outside Australia took strong interest, buying a further 20% of stock. Due to the rise in foreign ownership, the share price declined in 1996. In 1998, Qantas made a strategic decision to re-deploy capacity from Asia to Argentina through an agreement with Aerolineas Argentinas. The market reacted negatively to this decision. Despite share price volatility, Qantas is considered a privatisation success story as there has been increasing staff numbers, flights and revenue growth, as well as an improved share price from $2 to a peak of $7.

Figure 3 QAN Chart, source: TradingView

CSL Limited (CSL)

CSL was sold by the government as a bundle of assets, rights and obligations. The new owners were secured against legal liability for claims resulting from the use of blood products manufactured by CSL in the past. The success CSL experienced from privatisation stemmed from the increase in risk appetite, leading to significant advancements and several acquisitions. Pre-IPO, revenue stood at US$122m in 1992 and US$120m in 1993. Since IPO in 1994, revenue jumped to US$136m, then to US$191m in 1995. Revenue and share price has continued to follow a similar pattern. The share price was issued in 1994 at $2.30 and has grown at a compound average annual rate of 25.2%.

Figure 4 CSL Chart, source: TradingView

It is clear several businesses have benefited from privatisation through improved efficiencies and higher risk appetite. Others took advantage of their strong market position with little incentive to improve.

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