“Yorkshire schools will not get back millions lost in trust’s collapse”

“Schools in Yorkshire that transferred millions of pounds to a multi-academy trust before it went bust will not get the money back, the area’s schools commissioner has confirmed.

Wakefield City Academies Trust (WCAT), which ran 21 schools, was accused of asset-stripping after it moved its schools’ reserves to centralised accounts before admitting new sponsors would need to be found for them days into the new term in September 2017.

The schools commissioner for Lancashire and West Yorkshire, Vicky Beer, has written to MPs confirming that the trust entered liquidation and was closed on 24 October this year.

“I advised previously that any remaining monies would be determined at the point of closure and that there were still costs to be met including pension liabilities and outstanding invoices,” she wrote.

“These costs have now been met and balances cleared. Unfortunately, this does not leave any remaining funds to distribute amongst the previous WCAT academies and their new trusts.” …”

https://www.theguardian.com/education/2019/nov/18/yorkshire-schools-will-not-get-back-millions-lost-in-trusts-collapse?CMP=Share_iOSApp_Other

Tory”attack lines” document leaked

“The 22-page briefing document is likely to embarrass Conservative HQ as it exposes the party’s strategy for the 12 December poll. …”

A few pages – note fake news like “we are not privatising the NHS … continuing to [de]fund publuc services … the prime Minister’s “Great New Deal” (shades of Trump there and really pretty much May’s old deal – but worse!).

https://news.sky.com/story/general-election-leaked-tory-dossier-details-attack-lines-for-candidates-11852076

How company debt (and greed and tax avoidance) will sink us all

“Corporate addition to high debt threatens to destabilise the world economy. Not my words – those of the International Monetary Fund.

A recent report by the IMF says that “in a material economic slowdown scenario, half as severe as the global financial crisis, corporate debt-at-risk could rise to $19 trillion —or nearly 40 percent of total corporate debt in major economies—above [2008] crisis levels.”

In other words, in an economic slowdown, many firms will be unable to cover even their interest expenses with their earnings. Countries most at risk are US, China, Japan, Germany, Britain, France, Italy and Spain.

One study estimated that in 2018 UK s FTSE 100 companies alone had debt of £406bn.

Sinking in debt

Low interest rates have persuaded companies to pile-up debt in the belief that they will be able to use it to maximise shareholder returns. The key to this is tax relief on interest payments.

Ordinary folk don’t get tax relief on interest payments for mortgages or anything else because successive governments argued that such reliefs distort markets and encourage irresponsible behaviour.

However, corporations get tax relief on all interest payments. Currently for every £100 of interest payment, companies get tax relief of 19%, the prevailing rate of corporation tax, which reduces the net cost to £81. The tax subsidy enables companies to report higher profits.

Companies do not necessarily use debt to finance investment in productive assets. The UK languishes near the bottom of the major advanced economies league table for investment in productive assets and also lags in research and development expenditure.

British companies appease stock markets by paying almost the highest proportion of their earnings as dividends. BHS famously borrowed £1 billion to pay a dividend of £1.3bn. Carillion used its debt to finance executive pay and dividends. Thomas Cook had at least £1.7bn of debt but that did not stop lavish executive pay and bonuses.

Fatal effects

Corporate debt facilitates profiteering and tax avoidance. Water companies have long used ‘intragroup debt‘ to dodge taxes. Typically, they borrow money from an affiliate in a low/no tax jurisdiction. The UK-based company pays interest which qualifies for tax relief and reduces the UK tax liability.

Many a tax haven either does not levy corporation tax or exempts foreign profits from its tax regime. As a result, the affiliate receives the interest payment tax free.

It is important to note that the company is effectively paying interest to another member of the group and no cash leaves the group. The inclusion of interest payments in the paying company’s cost base can also enable it to push up charges to customers, especially if has monopoly rights on supply of goods and services.

Thames Water is an interesting example here. From 2006 to 2017, it was owned by Macquarie Bank and operated through a labyrinth of companies, with some registered in Caymans.

During the period, Thames’ debt increased from £2.4bn to £10bn, mostly from tax haven affiliates, and interest payments swelled the charges for customers. Macquarie and its investors made returns of between 15.5% and 19% a year.

For the period 2007 to 2015, the company’s accounts show that it paid £3.186bn in interest to other entities in the group alone. Tax relief on interest payments reduced UK corporate tax liability. For the years 2007-2016, Thames Water paid about £100,000 in corporation tax.

Private equity entities use debt to secure control of companies and engage in asset-stripping. A good example is the demise of Bernard Mathews, a poultry company.

In 2013, Rutland Partners acquired the company and loaded it with debt, which carried an interest rate of 20%. This debt was secured which meant that in the event of bankruptcy Rutland and its backers would be paid before unsecured creditors.

In 2016, Bernard Matthews’ directors, appointed by Rutland, decided that the business was no longer viable and sought to sell it. However, they only sold the assets of the company which realised enough to pay secured creditors, Rutland and banks.

The big losers were unsecured creditors, which included employee pension scheme, HMRC and suppliers. The purchaser of the assets told the House of Commons Work and Pensions Committee that it offered to buy the whole company, including its liabilities, but the offer was declined by Rutland because by dumping liabilities it collected a higher amount.

What needs to change

There is some recognition that corporate addiction to debt poses a threat to the economy. Following recommendations by the Organisation for Economic Co-operation and Development, the UK has placed some restrictions on the tax relief for interest payments, but that is not enough.

An independent enforcer of company law is needed to ensure that companies maintain adequate capital. Companies need workers on boards to ensure that directors do not squander corporate resources on unwarranted dividends and executive pay.

The insolvency laws need to be reformed to ensure that secured creditors can’t walk away with almost all of the proceeds from the sale of assets and dump liabilities.

And finally, tax relief on debt needs to be abolished altogether.”

https://leftfootforward.org/2019/10/prem-sikka-how-companies-use-debt-to-line-their-pockets/

Water companies enraged that OFWAT is putting consumers before investors

“Top investors in the water industry have complained to the Treasury that the regulator Ofwat is being politicised and warned of a flood of appeals against its financial demands.

International investors that control suppliers including Anglian, Yorkshire, Affinity, South East and South Staffs led a delegation this month ahead of a crunch ruling on prices by Ofwat, due in December. They are reeling from the toughest draft settlement from the regulator in years and fearful of Labour’s pledge to renationalise the sector at a big discount to market value.

After years of taking huge dividends from water companies and piling debt onto them, while paying minimal corporation tax and overseeing scandals such as sewage spills and water leaks, utility investors have seen the industry and political environment turn toxic.

Ofwat, chaired by former Anglian Water boss Jonson Cox, stunned the sector in July when it rejected the spending plans of all but three companies and sent the other 14 back to the drawing board, demanding more efficiency, faster paydown of debt and better customer service. It will publish its final ruling on their 2020-25 spending plans in December.

The meeting on October 14 is believed to have included blue-chip investors such as German insurer Allianz, Singapore sovereign wealth fund GIC, Deutsche Bank’s wealth division and Australia’s IFM Investors. Among the issues raised was Ofwat’s independence and the dangers of it reacting to political pressure.

Cox has been on a crusade to clean up the sector. In an interview last year, Cox told The Sunday Times: “This industry still doesn’t accept that customers should be at the heart of this business. We are unwinding one of the last bits of the pre-crash bonanza: buying an asset and gearing it up.”

Investors also asked senior mandarins whether the Competition and Markets Authority had the resources to deal with simultaneous appeals against Ofwat’s financial stipulations. At least five suppliers are believed to considering appeals.

The funds called on the Treasury to assess the financial resilience of the sector, after companies including Thames and Northumbrian complained that Ofwat’s demands were “unfinanceable”.

Global investors have ploughed billions of pounds into former state-owned companies since the privatisation wave of the 1980s and 1990s, yet are increasingly reassessing whether the UK is still an attractive place to park their cash.

Ultra-low interest rates and the need for returns inflated asset values and led to a bidding war for infrastructure companies. However, the appetite for water companies has cooled over the past two years. The Sunday Times revealed in April that Labour planned to renationalise the industry at a big discount to market value, making deductions for “asset-stripping since privatisation”.

That and Ofwat’s clampdown have spooked local authority pension funds, which have belatedly begun pouring cash into infrastructure. GLIL, which invests the pensions of council staff, was among the attendees at the Treasury meeting.

Last month, Alain Carrier, European boss of the CAN$400bn (£239bn) Canada Pension Plan Investment Board, which owns a stake in Anglian, said: “It’s difficult for the regulator under the current political climate not to be seen to be very tough. The independence of the regulator is under some pressure.”

Ofwat said: “Our decision-making is independent from government and based on delivering the very best for customers. Investors have always made clear they value the independence of the regulatory regime.”

Source: Sunday Times (pay wall)

“£14 Billion ‘wasted’ by the government on ‘botched’ outsourcing”

“The government has wasted at least £14 billion between 2016 and 2019 on poorly managed outsourcing contracts finds a report from the Reform Think Tank.

The report is based on an analysis of investigations by the National Audit Office NAO), Parliamentary Select Committees and other statutory bodies. The total value of the contracts investigated was £71.1 billion.

The Ministry of Defence accounts for 27 per cent of this waste. This includes a 17 year delay in the full decommissioning of nuclear submarines and a poorly planned army recruitment programme. This saw soldiers forced into backoffice jobs to clear an IT backlog created by an untested IT system created in partnership between the army and Capita.

Other examples include the vastly expensive liquidation of Carrillion, which cost the government at least £148 million as well as involving the time and resources of 14 government departments and public bodies.

Also the Department for Education continued to give Learndirect £105 million after the programme was rated ‘inadequate’ by Ofsted. This should have led to the funding being withdrawn.

A third of the government’s annual budget is spent on outsourced services, at a total of ££292 Billion.

Reform is now calling for an independent regulator of the outsourcing sector which – unlike the NAO or Select Committees would have the power to enforce change and impose sanctions on failing providers.

Senior Researcher and Reform procurement lead, Dr Joshua Pritchard said “Our public services cannot function without outsourcing. But when it goes wrong, it’s taxpayers who end up footing the bill

“The £14.3 billion wasted as a result of poorly drawn up and managed government contracts is inexcusable.

“We need a new regulator with the power to prevent public money being squandered because of totally avoidable mistakes.”

£14 Billion ‘wasted’ by the government on ‘botched’ outsourcing

Government has to concede rail privatisation not working

“Northern rail could be renationalised, says transport secretary.

The Northern rail network could be renationalised after years of late and cancelled trains, according to the transport secretary, who said the current franchise cannot continue as it is.

Grant Shapps told the Commons transport select committee that first steps had been taken towards taking the Northern rail network back into public hands. He said he had asked the Northern franchisee, the German-owned Arriva, and the government’s operator of last resort to draw up proposals to improve the service.

Highlighting that barely one in two Northern trains ran on time, Shapps said: “I consider that it cannot continue delivering in the current delivery method.”

He added: “I entirely believe we cannot carry on thinking it is OK for trains not to arrive, or Sunday services not to be in place – that simply has to change.”

His remarks were welcomed by politicians who have criticised the service, whose vast network runs from Newcastle to Leeds, Liverpool, Hull, Manchester and Stoke. Greater Manchester’s mayor, Andy Burnham, said: “After months of misery it is a relief for us to hear government finally accept what we’ve been saying repeatedly, that things can’t carry on as they are.

“Northern passengers will agree with the transport secretary that the current situation of unreliable, overcrowded trains cannot continue. …

Labour said all rail franchises should come under the state’s wing, joining Network Rail. Andy McDonald, the shadow transport secretary, said: “Northern Rail’s incompetent operator should have been stripped of its contract years ago over its abysmal performance record. The government’s refusal to do so has meant massive inconvenience for rail passengers and damage to the region’s economy. …”

https://www.theguardian.com/business/2019/oct/16/northern-rail-should-be-renationalised-says-grant-shapps-transport-secretary?CMP=Share_iOSApp_Other

How fat cats get fatter

“The regulator has allowed energy network companies to make bigger than expected profits at the expense of household bills, according to its own state of the market report.

Ofgem admitted the companies that run Britain’s energy pipes and wires had earned double-digit returns in the last year despite its efforts to keep a lid on energy bills.

The regulator oversees the business plans of regional gas and electricity networks to keep a rein on how much each firms can spend on their infrastructure, and how much they can claim back through energy bills.

It said that with hindsight it had set the rate of return too high, and that some companies had managed to spend less than planned, to rake in higher profits.

The uncomfortable evaluation has emerged following Ofgem’s decision to appoint its head of networks as its new chief executive. Jonathan Brearley will replace Dermot Nolan when he steps down in February next year.

It said: “The overall costs to consumers of the transmission and distribution networks have turned out to be higher than they needed to be.”

The admission is likely to anger critics of the companies, including UK Power Networks and National Grid, who have warned that networks are hiking up household energy bills while paying bumper shareholder payouts to foreign investors. …”

https://www.theguardian.com/business/2019/oct/03/energy-network-firms-allowed-to-make-bigger-than-expected-profits-ofgem-admits?CMP=Share_iOSApp_Other