Privatisation

Update on A4E. The Telegraph has obtained documents which were presented to the parliamentary committee, though the meeting itself was held in private. They include a statement from the Auditor of A4E attesting to widespread fraud within the company

http://www.telegraph.co.uk/news/politics/9...-Committee.html

You didn't realise The Office is a documentary?

www.guardian.co.uk/commentisfree/20...end-of-comments

This is an amazing article about companies such as A4E. It is written by one Ian Mulheirn and I have a horrible feeling he might have been paid for it.

Ian Mulheirn is the Director of the Social Market Foundation and he is an economist. The Social Market Foundation is a "think tank" (which is an interesting concept in itself and one which repays thought )

This is what they say they do:


As you can see from the article he has a rather curious interpretation of that, however. What he is saying is that folk who have set themselves up on the basis they can get the unemployed into work, and who get vast amounts of public money to do that, cannot be expected to do that. His vision of government's"role [..] in correcting market failures" is to pay companies when they should go bust. It seems he defines "market failure" as any failure to provide profit for any business, no matter how stupid or useless or even non existent that company's product. I think his ideal enterprise is the one by those blokes who make the emperor's new clothes.

www.carehome.co.uk/carehome.cfm/searchazref/10002512QUIA

This is the website of a care home for autistic adults, called Lammas Lodge. As with other care homes I have linked to, it sounds great. It is not to be expected that home sites will cry "stinking fish" but it does show how difficult it is for those who have to choose a care home for a relative: how is one to get good information? According to the neoclassical orthodoxy underpinning privatisation, all those in the market should have such information.

Part of the answer is supposed to be the regulator and once again, in this case, the regulator is CQC. To be fair to them, in this case they seem to have done some of their job. An inspection in 2011 was critical of Lammas Lodge and the press release about their findings is here:

www.cqc.org.uk/media/hereford-care-...-says-regulator

The home was said to have inadequate staffing; poorly trained staff; risk of abuse of residents; poor management of medicine and poor record keeping re significant incidents; and a general failure to provide adequate care. Lammas Lodge was told to make improvements on pain of closure if it did not. It has since made those improvements, apparently,and is now said to meet the standards required. Fair enough

What is missing from these reports may not strike other people as important. Arguably the regulator is solely concerned with the current standard of care provided and it has no wider remit in terms of ownership and financial structure: but that is rather weak given the experience with Southern Cross. Long term viability is dependent on such things and if the CQC is not to take account of that who is?

I raise this because in the CQC report the home is said to be run by Parkcare Homes Ltd. It has a number of care homes but on its website the e-mail address shows that it is a subsidiary of Craegmoor: and Craegmoor is in turn a subsidiary of the Priory. Both are ultimately owned by Advent International, and Advent is an American private equity firm.

The Craegmore site gives this information about Advent


Once again the actual quality of care is secondary: profit is the driver.

As noted above (https://thosebigwords.forumcommunity.net/?t...951&p=327445831), the Priory was owned by RBS, from 2007, and they have been trying to get rid of it for some time: Advent agreed to buy it for £925 million in January 2011. They acquired Craegnoor in April the same year.

According to the Priory it achieved "significant growth" since RBS acquired it, and obviously Advent must think it is going to make profit: which rather begs the question as to why RBS was so keen to sell: though that is probably explained by the need to repair the capital position of RBS, currently largely owned by the state and aiming to be fixed and then sold back to the private sector, in line with the mainstream view that nothing is worse than nationalisation.At the end of 2009 the Priory had £789 million in debt. RBS said that after the settlement of the debt it would receive only £133 million in cash from the sale to Advent. But at least the liability is gone, from RBS point of view: and Advent starts with a clean sheet, if you don't count the sale price itself. Why wouldn't you? Since this group was owned by the taxpayer through the "nationalised" bank, RBS, it is a mystery to me why this makes any sense at all. If it is going to generate all that profit, in a reasonable time frame, as Advent must believe, why not keep it in house?

Advent presumably agree with the Priory that the Priory groups is


It is obvious that these equity firms assume that privatisation is irreversible: and they can be forgiven for believing that, given government approaches to that issue here and in many countries. But as with homes for the elderly, any failure will have to be bailed out by the state: for these care facilities cannot be allowed to go bust: the people needing the care have to be cared for. But perhaps RBS don't agree? I doubt that is the explanation because if it were, RBS, at least while "nationalised" would be well placed whichever way that goes: and either way the state would benefit: or so it seems to me.

It seems that Advent believe that £925 million can be recouped, and that is presumably on top of operational profit to provide a return for investors. Most of their income will come from tax: because the care will be largely paid for by local authorities and central government.


It should also be noted that the CEO of Circle is one Philip Scott. He, it will be recalled, was the CEO of Southern Cross (see earlier posts), and sold his holding of that company just before it crashed, for the tidy sum of £11 million. Private Eye reports in its latest issue that he has announced that he is to leave his post at the Priory. The magazine also reports that Priory's earnings forecast has been reduced by 7% due, they say, to the squeeze on the NHS budget. This is also reported here:

http://www.healthinvestor.co.uk/%28A%28Rpn...CookieSupport=1

The daily telegraph reported, in January 2011, on the filings of a company called Priory Investment Holdings Ltd, based in the Cayman Islands. According to that report, Philip Scott has shares in two property companies called Zest, and Sistine properties, respectively. Zest owns three care homes and one facility for those with learning disabilities: and they were leased to the Priory for £1.33 million a year.

Sistine Properties is co-owned with Mr Scott's wife. They bought a school called Sheridan School in 2008 for £1.55 million and they lease that property to the Priory for £300,000 a year. So they will get the full sum back in 5 years if my sums are right.

RBS, who owned Priory at that time, said that this was not above a commercial rent: and you can believe that if you like. They assured that the CEO recused himself from all decisions about such agreements where he had a separate interest: the decisions were taken by the Priory Board, with full details disclosed to all "bidders", whatever that may mean.

Edited by FionaK - 7/8/2012, 12:14

Upthread I talked about the abuse at Winterbourne view. Last week 6 of the care workers involved were jailed and a further 11 were given suspended sentences for the abuse of residents. I have seen no report of charges brought against the company or its senior management, however: I wonder why not. There was clearly a culture of abuse at the care home. That does not arise from the actions of individual care workers alone and the management are quick to talk about "leadership" when justifying big remuneration packages for executives etc. The judge had this to say


It is also noticeable that the care workers who were jailed were mostly quite young: in their mid-20's. They are not kids: but neither are they the experienced and well trained workers who should be looking after very challenging people. And that is clearly a corporate failure. When will we see the company and its management held to account? Dream on.

Today Panorama is to air another programme which follows up the residents who were moved from Winterbourne. Of the 51, 19 have been subject to further substandard care in their new homes and in at least one case further criminal charges are to be brought. So far the response has been woeful. Lessons are being learnt, again. Apparently. One minister has said that most of the people in long term care do not need to be there. Orly? I wonder what research he bases that conclusion on. He has also said that the local authorities are responsible: well they used to be when they ran the homes: but it makes no sense to say that when the homes are private; and the regulation rests with the CQC, a national body; and the authorities are suffering really huge cuts in their budgets and struggle to fund the care itself, as well as the social workers who previously could at least visit regularly (see other posts on that subject). Pathetic!

www.corporatewatch.org.uk/?lid=4685

An account from Corporate Watch on the water industry, which was privatised in England and Wales in 1989. The summary includes a link to the full report. The main points are the usual ones:

1. The cost of water is far higher than it would be if the industry remained in public ownership.
2. Although the companies make profit they do not pay tax, because of interest payments on loans to related parties based in tax havens
3. The CEO's and senior management get huge sums in remuneration because they have to "attract the right people"

Corporate Watch estimates that one third of the water bills people pay goes to dividends and interest: and many people are not able to pay those bills and the number in that position is rising. One quarter of all the water is lost to leaks.

Corporate Watch estimates that there would be savings of £2 billion a year if the money borrowed was instead raised by government, even if that money had to be borrowed. Those savings do not include any reduction in the remuneration packages of senior executives currently running at £10 million a year for the CEO's of these 19 companies taken together

So far, so familiar. But this is water! It is the most essential thing we have apart from air.

[sings] They will privatise your hopes, they will privatise your fears/ if they catch your children crying they will privatise their tears...[/sings]

I always used to worry that the UK was about to become part of America. But now I can relax. We are to become part of Qatar, instead.

I have from time to time noted that Qatar has a big ownership stake in such things as care homes and in big british companies such as Sainsbury's. But although that has been sort of nagging at the back of my mind my attention was not really on the implications of that because I was thinking about the whole financial shenanigans which surround all of this privatisation. The actual nationality of the companies involved was of less importance to me. Not so sure about that now

http://www.ft.com/cms/s/0/0f6c15ca-8c07-11...l#axzz2NV8CoEoL

The link is to an article in the Financial Times and it reports that the UK government is in talks with the Qatar government and the aim is to set up a dedicated fund for the Qataris to invest in infrastructure in the UK. Qatar already owns a lot of things including Heathrow Airport and Harrods, but this proposal would take things much further. It is suggested that Qatar would get "first refusal" on major projects, particularly energy and transport investment. I had already commented on the fact that the government proposes to encourage the Chinese to invest in nuclear power in this country: and now they appear to wish Qatar to take over gas plants and wind power: so all our energy will be foreign owned, if this goes through, so far as I can see. Without wishing to sound xenophobic, is this a good idea?

http://www.tni.org/sites/www.tni.org/files...sing_europe.pdf

An article which provides something of an overview of the privatisation agenda in europe. Not much here that is new, but it does discuss some specifics in different countries and it certainly highlights the democratic deficit which has rendered the wishes of the people largely irrelevant and impotent.

The call is for grass roots movements, and indeed there seems to be little alternative given the power structures currently in place. What is concerning is that the ideological certainty of the very powerful means that they push ahead no matter how strong the opposition. When democracy dies what takes its place?

Until now part of the welfare benefits system in this country was The Social Fund. This had developed from earlier provisions which awarded (primarily) grants to meet exceptional expenditure as it was recognised that weekly benefits were to meet ordinary living expenses and there was no scope for savings nor any access to credit (with a few exceptions such as Provident cheques which we need not go into here). Over time that system has been altered and the end result to date was The Social Fund, which now makes very few grants but does give interest free loans for those same needs. Weekly benefits have been eroded wrt to median wages and are now about half of what they were in the mid 1970's because of those changes: and most claimants are reliant on those loans and are in debt.

Mr Duncan Smith does not object to claimants being in debt: he thinks you have to be in order to participate in society in a normal way: which tells you something. But he does not like the cost and so he has decided, as part of his "reforms" to transfer this function from the central government to the local authorities. He has not transferred all the money, however: the amount to be given to the local authorities is far less than what was paid out in loans last year.

IDS's pal, Lord Freud, has been warmly commending this idea and he justified it on grounds of "localism", saying that the local authorities will be free to create the kind of welfare provision they deem appropriate and necessary for their area.

Well that does not seem to be going to happen: guess what! Some of the authorities intend to outsource this. A notable example was reported in Private Eye's latest issue. Nottingham has given its share of the inadequate money to Northgate Information Solutions. Nor are they alone: apparently Wales intends to sub contract to the same company.

Northgate started life in 1969, distributing and, later, manufacturing computer systems. It used to be a part of the real economy of making stuff, in short. But it has not been that for a very long time. It could not hack it in the real world of competition to make and sell things so it stopped. Now what it does is provide IT for public and private enterprises: so that if you are getting wage in the UK it is very likely that you are paid by Northgate; and if you attract a fixed penalty for a driving offence it is Northgate which processes the payments.

This has proved quite profitable: so much so that Northgate was sold to Kohlburg Kravis Roberts in 2007 for £593 million. It was then delisted from the stock exchange, not suprisingly: for KKR is a private equity company which specialises in "leveraged buyouts" and is based in New York

KKR was founded in 1976 by three people who had previously worked together at Bear Stearns, so that is comforting. The Wiki article on KKR shows that it is predatory and not even very good at what it does: but the sums are enormous

http://en.wikipedia.org/wiki/Kohlberg_Kravis_Roberts

Northgate has precisely no experience in dealing with individual in difficult circumstances and no experience of social security at all. But their parent company is American and although they have no experience either it may be that this is seen as a sensible move because it appears that many of the local authorities (and the Welsh assembly) do not intend to give claimants cash any more. They are going to give vouchers instead: a very American approach, commonly called food stamps: and nothing more nor less than an insult to the people who are at the mercy of such a system. There are headlines all over the shop here extolling the merits of stopping folk "misusing" the help they get.

Northgate emphasise that they will be working with the Family Fund, which is a truly respectable charity which gives grants to families caring for disabled children. Unfortunately it is a little misleading to say they will be working with Family Fund: because that charity has subsidiary called Family Fund Trading. That subsidiary offers administration services to other charities, public bodies and commercial enterprises and it is not really a charity in the usual sense: it states that all its profits are gifted to the Family Fund: which is nice but not really what one thinks of when one thinks of a charity

So the funds which have moved (and shrunk) from central to local government will now have to provide profit for two separate organisations as well as supporting poor people in crisis. I imagine that it will be the usual story of the client group getting much more money because of the efficiency of all this: except it can't work like that, at all. Nope. There will just be less money for them and more money for loan sharks, so far as I can see

Unlike Wales and Nottingham it seems that Birmingham has rejected the ovetures of Northgate: instead they have decided to team up with Asda (a supermarket which is Walmart's face in the UK) and will issue prepaid cards valid in that supermarket only.

ww.guardian.co.uk/society/2013/mar/29/asda-welfare-scheme-birmingham

The cards will have restrictions on what you can buy
Why is it assumed that an "element of control" is legitimate in any way: I don't think it is, and I cannot see why this is taken for granted, without the need to justify it.

We already have compulsory contribution to bank profits: and now we have compulsory contribution to one supermarket's profits as well. What happens to those who can't get to an Asda? I don't have one near me and neither do many people.

Asda is one of the cheaper supermarkets (though not so cheap as Aldi and Lidl) but I note in passing that MP's do not confine their expenses payments to the cheapest source: they use the "John Lewis test" in determining whether an expense is reasonable: John Lewis is one of the most expensive shops within the mainstream. But hey, MP's are not feckless scroungers who demand expenses payments for basic groceries, like those poor people: oh, wait, they are.....

In 1996 our railways were privatised. This was done in the stupidest way imaginable, but let that slide. A number of benefits were supposed to flow from the privatisation and those were the usual fantasies we have become so familiar with. It is curious how seldom those claims are tested against the outcomes, however, and how often the benefits are just assumed to have materialised. Today I read a report commissioned by the Trades Union Council and based on research by the University of Manchester. The report looks at those expected benefits and compares them to what has actually happened. It is long and I have not read it all, but there is a summary which is interesting

First they outline the justifications for the decision to privatise: these were

1. Better cost effectiveness
2. Extra investment
3. Improved passenger comfort
4. Technological innovation
5. Added value
6. Lower fares
7. More passengers

All of these good things were dependent on transferring ownership to private companies for reasons which are, as ever, not explained. They are articles of faith. So what happened?

First you have to grasp that the operating companies are based on a franchise model: so there is no integration of the rail network. You might think that integration was a good idea for a railway, and that makes it a natural monopoly. But competition is king and so it has to be artificially created even when it makes no sense at all. In addition the track is completely separate from the trains, and the operators pay for use of it. It was originally also a private company but it went bust in 2002, and the track is now owned and run by a "not for dividend" organisation. The status of that organisation is disputed: the government calls it a private sector entity but many believe it should properly be described as a nationalised body. There are arcane reasons for this, but the bottom line is that the government underwrites all of its liabilities. Which is important for reasons which the report makes plain

The privatised railways make profit, or so they claim. As the report makes clear all of that profit is dependent on government subsidy, which now stands at £4 billion a year. This is higher than the subsidy before privatisation. Indeed state spending on railways is 6 times higher in real terms than it was when it was in the days when it was nationalised. It is difficult to see how that is a more "cost effective". In fact what happens is that they get a huge direct subsidy and they make "profit" which varies as a percentage of that subsidy. From 2007 to 2011 the total direct subsidy to the top 5 operating companies was about £5 billion: and the total profit was around £500 million. Almost all of that "profit" went to shareholders (total dividends paid were £466 million). It is easily seen there is no profit at all, as that term is normally understood, when it is understood that the fees paid to network rail have reduced, though use of the track has increased. Passenger numbers have increased by about 50% and so has revenue from fares. Fees for use of the track have decreased in real terms in the same period from £1.7 to £1.6 billion. And the debt owed by network rail has increased. It now stands at about £30 billion and all of that is underwritten by the government. This is effectively a transfer of costs from the operating companies to the semi-public network rail and it disguises the fact that the operating companies are no in any real sense "profitable". But the dividends are paid. And so is the interest, which also goes to the private sector

It was claimed that there would be extra investment: that has not materialised and it is hard to see how it could. Railtrack went bust and investment is now achieved (where it happens at all) through large government grants and through borrowing which is guaranteed by government. Network rail pays more in interest payments than it does on infrastructure maintenance and investment. Operating companies have time limited franchises and there is no incentive for investment in those circumstances: in fact they do not build trains, they lease them. The average age of a train has risen from 16 years, in the year before privatisation, to 18 years now. The leasing companies were meant to be entirely private, and the magic market would ensure that trains improved and were offered for lease at the best possible price.Curiously there was no prospect of loss from lessors who went bust, as in other leasing schemes, however: for the government guaranteed against that outcome on the basis that it had to keep the trains running. If a franchise holder walked away from the contract (which they can do for very little cost) the government would take up the contract paying 80% of the value, until the franchise was re-allocated. The trains came from the sell-off of existing rolling stock owned by the nationalised railway and, as ever, they were sold far too cheaply. This is shown by the fact that the three companies which bought them were themselves sold again by 1997 making profit for the owners of £750 million: another big loss for the public. They made big profits because they could hardly fail to, given the model adopted: but they did not reinvest in the industry, because they were not required to do that, being private. A side effect was the damage done to those companies which build trains, for now there was no market. There is effectively no competition, though the whole optimistic story is largely based on the benefits of competition

Passenger numbers have risen a lot: about 50% since privatisation. Train companies take credit for that but it is unlikely they are responsible. There are a lot of things which have changed outside the rail industry which might account for that. But leaving that aside does the passenger have a better experience in terms of comfort? Over the period when this vast increase in passenger numbers has applied there has been a 3% increase in the number of carriages. It is perfectly possible that this is due to underuse in the past and that comfort is not adversely affected where that is true. It is difficult to believe that all of the difference is made up that way, however: because people still want to travel at peak periods and there is great overcrowding on many commuter routes at least. A game of "sardines" on the way to work is a great start to the day, I suppose.

There has been some technical innovation: Virgin's tilting trains are an example widely cited and approved. But as the report notes, they were dependent on upgrading the line and that was not paid for by Virgin: it was paid for by network rail, at a cost of £9 billion, all in the form of grants from government or loans underwritten by government.

I don't really think "added value" is separate from what has already been discussed. Investment is absent and the rolling stock is older than it was before privatisation, on average. There is very little new track; and things like electrification have not been completed in most places. I see no evidence for this element on the basis of this report

Fares have gone up since privatisation: they have increased at a rate which is 3 times the increase in average wages since 2008 and they are about twice the cost for comparable journeys in Germany, France, Italy and Spain.

As already noted, passenger numbers have gone up, and the private sector take the credit for that. However the upward trend started a decade before privatisation, so it is not very likely that was the cause. Looking more closely at the context tends to confirm that view: for example from 2002 65% of the increase in passenger numbers came from London and the South East, just at a time when rising house prices were driving people further from the work and onto the railways for their travel to work in that area. At the same time the cost of motoring, for example, rose faster than the cost of rail travel

It is time the jury came back in and acknowledged that the privatisation of the railways is a failure which only serves to give public money to the private sector. That renationalisation is a good option is reinforced by the fact that the east coast line is currently run by the public sector because the franchisee walked away in 2009. It does better than the private franchise operators on many measures: so of course the government intends to pass it back. We cannot have a point of comparison which shows public is better or people might get the wrong idea.

http://www.tuc.org.uk/tucfiles/603/The_Gre...y_7June2013.pdf

And back to water. The corruption of the privatised water industry is well-known (see upthread) but today Nick Cohen, writing in The Guardian, seems to have just noticed this. This is because there is a paper on the issue which has been published by one of the "think tanks" (which are, themselves, a part of our problem, IMO).

http://centreforum.org/assets/pubs/money-down-the-drain.pdf

It is easy to read and much of what it has to say has already been covered in the Corporate Watch paper linked upthread. The author has a touching faith in "competition" and all the rest of the unexamined assumptions which underpin the neoclassical approach to economics: so he is not particularly impressive. But he does acknowledge that no matter what the merits of that case, it is not applicable to water as currently structured. So we need not go into that now.

One of the things which this paper addresses is something I have noticed a lot lately. Many companies which were previously plc's have been taken into private ownership and are owned and run by private equity firms. Water companies are in this group and so, as it happens, is the company which is the source of our esteemed chancellor's wealth, Osborne and Little. It has taken me a little time to grasp why they do this: I was seduced by narrratives such as that relating to Richard Branson's Virgin: which was floated on the stock exchange then brought back into private ownership. Reasons were not very clearly laid out: something to do with buccaneering entrepreneurs hampered by shareholder concerns and so unable to do their entrepreneurial thing. It is simpler than that.

If a company raises its finance on the stock market its profit is taxed before dividend payments are deducted. If it is financed by loans the interest is deducted and only the remainder is subject to tax. It is well to remember that when thinking about corporate profit and tax. Particularly since many of the loans are made by related companies based offshore in tax havens. I wonder if these facts could be related? I think we should be told.

Even this author, who believes in fairies, it seems, does not think this is good for "consumers" (consumers being people who use water; that is all of us no matter what hat we wear, though this author likes us in the "consumer" hat: so do they all). He says


Well it a point of view I suppose. Personally I do not think the equity market imposes any discipline of that sort and I think the fact that some shareholders in some companies voted down CEO bonuses last year and it made headline news is ample evidence for that position. That was not "dog bites man", after all.

We are not to worry, though. This author thinks that "transparency" will solve this. Another neoliberal idiocy we are all supposed to be impressed by. Though no mechanism which would translate knowledge into change is actually proposed. Like "competition", "transparency" is some kind of magic. It has wonderful effects with no visible means of transmission. Though to be fair he does acknowledge it will not be easy: and he encourages price capping as a means of altering the toxic situation we now find ourselves in


To me that says all we need to know. Let us skip the "technically difficult" and nationalise the lot without compensation. Or, if that is too draconian, let us buy it back at the price originally paid (which you will remember was far too low, as it always is) adjusted for inflation and reduced by a conservative estimate of the excess profit made through the price being too high (there are such estimates so that is not "technically difficult".

While we are on that subject, it seems that Thames Water is not in a position to build a necessary sewer in London: so it wants the government to pay for that: as a grant; from which they will derive the benefit. I have said before, one way of nationalising is to let them go bankrupt first: so the idea of bailing them out through a grant for predictable capital expenditure (remember it was the fact that the private companies would do this and thus relieve the public purse which was a main plank of the case for privatisation in the first place) is laughable. Except that we need the sewer. Nonetheless, since that was part of the case we can lay an obligation on them to build it: they will go bankrupt and we can nationalise without compensation. I really do not see that is "technically difficult" All of the difficulties arise from the commitment to private ownership and the complications that produces.

This author does not even consider the option of nationalisation. Instead he makes a series of recommendations which are pretty much absurd on their face: for example


HAHAHAHA

Or this wee gem:


So they go into special administration because they are broke: and we don't nationalise them we merely consider turning them into non profits? Note the american terminology which tells you all you need to know about this man's ideological stance.

What is true, though is that this report is the clearest explanation of how private equity companies make their dosh and why it is done that way. It is worth reading for that explanation if you happen to be a bit hazy about it

Edited by FionaK - 4/8/2013, 14:24