A little over two years ago, I wrote a short piece on this blog about the dangerously precarious funding of residential care. At the time, I didn’t realise how pervasive the financial model had become. I’ve recently read an account from the USA by Brendan Ballou, called Plunder (PublicAffairs, New York, 2023), which discusses just these problems. (Full disclosure – I was given a signed copy of the book, by way of the author’s sister. ) Private equity firms have developed a business model which battens on to, and ultimately destroys, profitable businesses – and, when they get the opportunity, privatised public services. Examples in the UK include not just residential care, but the water companies, rail franchises, energy and health care.
The methods adopted by these companies include
- Leveraged purchases: firms and assets are acquired by borrowed money, and it becomes the responsibility of the firm that has been taken over to repay the debt.
- Further debt. Beyond the cost of purchase, firms are then put into further debt in order to increase the rate of return to the controlling financiers.
- Leaseback. The assets of firms are transferred to other companies and the firms are then required to pay rent in order to use the facilities they used to own.
- Fee structures. Firms are required to pay further liabilities for services provider by their purhaser, typically including fees for transactions, management, consultancy, ICT and payroll management
- Tax avoidance. The returns from this milking machine are diverted through tax havens. If they are submitted to taxation, it is done through the most advantageous tax regime, such as the limited taxes on capital gains rather than taxes on income.
- Pension funds. Some firms have raided their pension funds directly – it is a common element in bankruptcy proceedings – but it is also done by directing the investments made by pension funds towards support for the firm.
- Nested firms. It has become common for firms to be owned by other firms. These structures are opaque. The effect of separating out each function within a business is to make it possible to cook the books, so that profits disappear through cross-charging.
- Limited liability. Many firms which have been drained through these procedures go bankrupt. The construction of laws relating to bankruptcy and limited liability mean that those responsible can avoid all liability to meet their debts or obligations. make it legally possible for subordinate businesses to become bankrupt without leaving any liability to the parent firm.
- Aggressive – and effective – lobbying. Ballou makes the point that these firms have bought extensive influence without incurring the duties of transparency and reporting that public firms have to meet.
Most of the options that Ballou considers for reining this in are geared to the pecularities of the American legal system, such as anti-trust legislation; I think they have a very limited potential in the UK. It seems to me that we need to consider a number of changes in the law:
- preventing beneficial owners from claiming limited liability for default. If the subordinate firm goes bankrupt, the beneficial owner should either be fully liable or themselves go bankrupt.
- taxing firms on turnover rather than profit.
- equalising capital gains tax with the rates of income tax.
- treating pension funds not as a liability, but as something in the unqualified ownership of the beneficiaries. If you leave your shoes for repair and the repairer goes bankrupt, the repairer is a bailee, and you can get your shoes back. Beneficiaries have to be treated not as creditors but as owners, and the firm as a bailee of those beneficiaries.
I know this falls some way short of dealing with a major, endemic problem, one which has come to threaten not just the public services but, by Ballou’s account, the whole structure of the market economy. I’d be grateful for further suggestions – I’d be happy to revise this blog, or to return to the subject with better ideas.