Paying for what we used to own: The strange case of CSL
Australia will be paying nearly $1 billion to a privatised company providing pharmaceutical products that were developed when we owned it, writes Professor John Quiggin.
AS WE WAIT anxiously for the arrival of a COVID-19 vaccine, which will be made overseas, most Australians will welcome the news that a new vaccine manufacturing plant will be built in Melbourne to produce vaccines for influenza and Q fever (and possibly for future pandemics), as well as antivenenes for snake and spider bites.
The plant is the result of a deal between the Commonwealth Government and Seqirus, a subsidiary of global biopharmaceutical firm CSL. Under the deal, the Commonwealth commits to pay $1 billion over ten years for a variety of products including antivenenes.
At this point, those with long memories might recall that the "C" in CSL once stood for "Commonwealth" and that the Commonwealth Serum Laboratories began producing vaccines and antivenenes more than 100 years ago. Under public ownership, CSL developed both polyvalent antivenene against all the major Australian land snakes and the first Q fever vaccine. Why then, are we paying nearly $1 billion to a company we once owned to provide pharmaceutical products that were developed when we owned it?
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The story begins in 1994 when the Keating Government privatised Commonwealth Serum Laboratories (with the name reduced to a set of initials) through a public float. The share price of $2.30 was a spectacular bargain for investors, who ended up getting their money back 500 times over. That beat even the massively oversubscribed float of the Commonwealth Bank, where investors got about 50 times their money back.
The reason the price was so low was partly that (unlike the Commonwealth Bank and Telstra) CSL was not a household name and partly because CSL benefited from a set of favours of which many potential investors were unaware. When Clive Hamilton and I investigated the sale for the Australia Institute, we found it was one of the worst privatisation deals ever entered into by an Australian government.
The sale was motivated by the fact that CSL needed a new fractionation plant to treat plasma products. Pathologically averse to public debt, the Keating Government decided to recoup the cost of the plant by selling off the laboratory. Having already sweetened the deal by paying for the fractionation plant and throwing in land previously rented from the Government, it was made irresistible by the Government agreeing to a massive increase in the price paid for blood products.
At this point, for the insiders who understood the deal, CSL was an irresistible buy. Its main input was blood, donated by ordinary Australians (few of whom understand that they are enriching a global corporation by doing so) and supplied free of charge by the Red Cross, whose costs are met by the Australian Government. At the higher prices embodied in the sale agreement, Hamilton and I estimated the extra payments would fully offset the sale price within six years.
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This estimate was proved correct in spectacular fashion. Having recouped their entire investment by 2000, the new owners of CSL had an income flow so strong, they were able to buy out a large foreign competitor, ZLB Bioplasma. That acquisition was followed by the takeover of Behring in 2004. CSL's growth has been spectacular indeed, but it has been paid for, in large measure, by the Australian public.
The pattern has continued with the latest deal. The Australian Government has committed, on our behalf, to a stream of payments sufficient to cover the majority of the costs CSL will incur in building its new factory while securing only ten years' supply of the products we need.
This is a classic privatisation story. The privatisation of Telstra followed a similar pattern. Having sold off our national phone network in 2000, the Howard Government was faced with the refusal of Telstra to build a national broadband network other than on extortionate terms. The Rudd Government bit the bullet and re-established a publicly-owned NBN Co, but still had to pay massive amounts for access to the network built under public ownership and sold off for a fraction of its true economic value.
In 30 years of privatisation in Australia, there has not been a single case where the public would not have been at least as well off if the asset had remained in public ownership. Turning this around, there is now a strong case for renationalisation of a wide range of private assets, including roads, electricity transmission and distribution network and airports. It is time to call the failed experiment of privatisation to a halt.
John Quiggin is Professor of Economics at the University of Queensland and the author of 'Zombie Economics and Economics in Two Lessons'. You can follow John on Twitter @JohnQuiggin.