And You're Working for No-one but Us

 “And you’re working for no-one but me” is George Harrison’s sign off to the first song on one of the greatest British albums of all time, the Beatles’ Revolver. But compared to what follows it has always struck me as rather a damp squib – lyrically one extended whinge about how Surrey mansion dwellers pay too much in tax. I suppose to be fair to the author, Harrison was very anti-war and he objected to unwillingly paying millions in tax – at the time the top rate stood at 92.6% – so governments could bomb people.

Nonetheless it is quite sad that of all the sentiments the Beatles expressed, “in the end” it was those of Taxman that had the greatest longevity. You need a lot than love, and giving war a chance now seems to be the spirit of the age (alright that was Lennon). But thanks to Margaret Thatcher, Ronald Reagan, and the sprouting up of numerous tax havens around the world successful pop stars need no longer fret about governments getting their paws on their money.

But from the perspective of nearly sixty years, to sing “you’re working for no-one but me” with reference to His Majesty’s tax collectors seems faintly ridiculous. We’re definitely working for someone but there are people much further up the queue than HMRC. Perhaps their silhouettes need more light shone on them:

Landlords and Banks

The first thing we all need is somewhere to live. After rising above inflation for years, rents increased by 9% in 2024, the highest surge on record. The average rent now consumes over a third of renters’ income and more than half of it in London.

Though there are only 11 and half million renters in the UK, their numbers are inexorably rising. But they are still below the so-called “owner occupiers”. Except in many cases, while they occupy, they don’t own anything. The ‘owners’ are paying off a debt (which everyone calls a mortgage to avoid calling it a debt) to the actual owner of their property, usually a bank. And since interest rates have ballooned in the last few years – in the context of house prices inflating by 1,000% since the early 1980s – that debt has become much more expensive.

Banks, by the way, are sharing the pain by making record profits – HSBC amassed £24 billion in 2023, an 80% increase. This windfall results from the interest they receive on mortgage payments and loans being so much higher than the interest they pay on their savings accounts. Why this discrepancy should exist is a bit of a mystery. Theoretically, the two should cancel each other out and banks should not be laughing all the way to the bank because interest rates have been hiked. Maybe Sir Kier – who gave HSBC’s chief executive a knighthood in December – can enlighten us.

It’s good to know the people your monthly labours are paying off are having a hard time too.

Utility companies

Next on the identity parade are water and energy companies. In the past, these two public services were nationalized. But in our post-Thatcherite wasteland, sorry landscape, they are the play things of private equity firms who load the owners with debt and expect their captive customers – us in other words – to pay for the privilege of being compelled to use them. I just love the free market.

And when, as with Bulb Energy, these wealth destroyers experience liquidity problems, they can rely on the taxpayer, in the form of the government, to bail them out. Not that we have any say in the matter.

When the direct debits kick in every month, a lot of the damage to your balance is down to these two suspects. Energy bills are about 50% higher than they were pre-Covid. As with rent and mortgage payments, only in a semantic sense is this not taxation. Unless you want to live in a cave somewhere, or on the streets, you need a home and you need heating and water. Contrary to American monetarist proselytiser, Milton Friedman, we are not “free to choose”.

And it’s going to get worse. The average water bill will increase by 36% over the few years.

“If you get too cold, I’ll tax the heat,” Harrison sang in 1966. He meant, “I’ll raise the energy price cap”.

Corporations and things like eating

In common with all living beings, human beings need to consume if they want to continue living. But the cost of consumption keeps going up. If consumer inflation has fallen from its highs of a couple of years ago, that doesn’t mean prices will return to their former levels, just that they will continue to rise at a slower rate (although inflation seems going up again now anyway).

But the ever-increasing cost of essential goods is not solely due to ‘impersonal’ factors like the cost of raw materials. It is also down to the power of the huge corporations that dominate the market to increase costs above the ‘natural’ rate of inflation. For example, in the UK, “price mark ups” – price increases above the production costs to produce profit – rose from 58% in 2002 to 82% in 2020. The profits of the 350 largest companies on the London Stock Exchange have swollen by 73% since 2019.

This price gouging is symbolised by internet providers typically hiking raising annual broadband fees – now essential for doing most things in life, including work – by CPI (inflation) plus 3.9%. Why? Because they can.

What is now hitting home is that, contrary to the advertising, the Thatcherite revolution did not enthrone the consumer as king. Everyone knew that workers would have to suck it up, but the customer was felicitated. But that’s not how things have turned out. All regulators have a duty to protect the consumer but, as evidenced by the failure to compel banks to pay interest on savings in line with hikes in interest rates, this is just honoured in the breach. And with Reeves’s drive for deregulation, such a responsibility is going to become even more threadbare.

 You have to crane your neck to see the real beneficiaries.

Only in the perverse universe we now inhabit, could a privately educated ex-stockbroker who claims to be “keeping the flame of Thatcherism alive” and controls a company masquerading as a political party be the one to take advantage of this situation.

It’s enough to make you gently weep.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Manchester United and the malaise of our time?

 

What do Manchester United and English water companies have in common? Not a great deal you might say beyond being not very successful at what they do. Once a football titan, Man U is now a has-been. Twice a recent winner of the Champions League and regular semi-finalist, the club now struggles to get out of the competition’s group stage. The winner of 13 Premier League titles since 1992, it now cannot compete with its rivals across the city of Manchester, not to mention numerous other clubs.

English water companies, meanwhile, are notorious for not doing their basic job of ensuring clean water in rivers and seas. Despite it being a legal requirement, they have not invested in infrastructure, preferring to pay out enormous dividends to their investors. And the real level of the pollution may be much higher than the firms admit.

But delve a bit deeper and there is something else that unites these two apparently disparate ‘businesses’*. They are both creatures of private equity (PE). Private equity is where a firm is taken off the stock market by a takeover. The new owners borrow the money to acquire the target company in what is called a ‘leveraged buyout’, in the process loading it down with massive debt. Once acquired, along with interest payments on the debt, large dividends are prioritised, either solely for the owners or for their investors/clients.

A family club

Manchester United, for example, had been a public limited firm (i.e. anyone could buy shares in it) from 1991 until 2005 when it was taken private by the Glazer family in a £790m leveraged buyout. Virtually debt-free since 1931, the club’s net debt now stands at £500m and has been much higher. Man U pays over £18m in annual interest on that debt and, unusually for a football club, £32m in yearly dividend payments to the Glazers.

Private Equity ownership is now more common for football clubs (think of Chelsea) but Manchester United provides an opportunity to observe the effect of PE ownership over time – and the picture is not a good one. This is not a financial crisis, which football clubs are especially susceptible to, but the mature consequence of a particular type of financial regime. No wonder fans are desperate for the Glazers to sell up.

Now consider the ten English water companies, all but three of whom have been taken off the stock market by their private equity owners. The commonalities with Manchester United are striking. When Thatcher privatised the ‘industry’ in 1989, it had its existing £5bn debt written off. Since then the debt pile has mushroomed to £60bn. The debt of the largest water company, Thames Water, rose from £3.4bn to £10.8 billion after it was acquired by Australian investment bank, Macquarie, in 2007 and now the firm is in danger of bankruptcy. Since privatisation, over £70bn in dividends has been paid out while bills have increased by 40%, while increases of a similar scale are forecast to deal with the sewage spills that have been allowed to happen.

In either case, what you might think of as the primary function – winning trophies or ensuring clean water – has taken a back seat in favour of maximising returns to the owners.

‘Public’ versus Private capitalism

Maximising returns, you might say, is simply what capitalism does and you’re not wrong as Walter from The Big Lebowski would doubtless attest. However, as English academic Carolyn Sissoko argues, the ‘old fashioned’ way of maximising returns through ‘public’ corporations at least sometimes had a collateral benefit in the shape of capital investment leading to products that people wanted to buy. What happens under private equity capitalism is an entirely valueless process in which the only beneficiaries are extremely rich people becoming even richer. Actually it’s worse than that. Private Equity destroys value for everyone else – consumers, workers, supporters, target companies – apart from the owners who make out like bandits.  As Sissoko puts it:

Whereas the corporate form is a win-win for the economy when it is used to facilitate the raising of funds for large projects that could not otherwise by completed such as railroads or trans-oceanic cables, the corporate form is transformed into a win-lose for the economy when it is used to impose huge debt burdens on otherwise successful corporations.

And this particular form of capitalism is on the march. According to Sissoko, private equity now controls more than 10% of the US stock market, up from 0% 40 years ago. And she says it is “positioned to continue displacing the public corporate form at a rapid pace”.

Where America leads, Britain dutifully follows and PE on these shores is, in the description of advertising sultan Martin Sorrell, “rampant”. Supermarkets such as Morrisons and Asda are PE-owned as was Debenhams before its demise. And in addition to water companies, many care homes have been taken over by private equity firms.

It is important to stress here that the critics of PE are not merely saying the practice is perverting organisations that have – or should have – a social purpose at their heart. It is doing that obviously but by loading down for-profit companies with huge debt – procured in order to take them over – PE is, in a supreme effort of self-destruction, warping capitalism itself. The frighteningly large level of global corporate debt, which has increased by double the rate of personal and financial debt since 2007 (which have also risen exponentially) can be attributed, at least in part, to the modus operandi of private equity. And while this debt mountain may have been manageable in the context of rock-bottom interest rates, as rates have risen, the debt-ridden concoctions of PE are – as shown by the travails of Thames Water – becoming more and more exposed.

No paradox

This is not a new problem though one that hasn’t been around for a while. In the 19^th century, Karl Marx bemoaned the existence of ‘usury capital’ – money lent purely to maximise the interest paid to the lender. This was in contrast to ‘industrial capital’ which had a social purpose in that it purchased shares in – and thus financed – enterprises which made new products or changed the way they were produced. The former, he said, “does not alter the mode of production, but attaches itself as a parasite and makes it miserable. It sucks its blood, kills its nerve, and compels reproduction to proceed under even more disheartening conditions.”

For usury capital in the Victorian age, read Private Equity today.

Brett Christophers, the Sweden-based academic and author of the exposé of PE, Our Lives in their Portfolios, has previously noted the interesting fact that Adam Smith – the darling of the Right and father of market economics and Marx – the pre-eminent left-wing critic of capitalism – shared “the belief that it was entirely possible for an activity to be revenue- and profit-generative without actually contributing to the creation of value. There was no paradox.”

And we are now in an era where value, once again, is not being created. As contemporary economist Michael Hudson has documented, PE is just one of several ways that ‘activist shareholders’, hedge funds and banks have, since the 1980s, increased looked upon public listed companies as cash cows to be looted regardless of the long-term consequences. Illegal until the Thatcher and Reagan eras, share buy-backs are now commonplace for corporations. In the US, Apple, IBM, Exxon Mobil, and Proctor & Gamble are some of the most famous exponents. In the UK, recent practitioners include BP, Shell, Diageo (Guinness, Smirnoff etc.), HSBC, and Unilever.

Share buy-backs are often undertaken under pressure from large shareholders and the company will, not infrequently, swallow a “poison pill” (in Hudson’s words), placing itself in severe debt to purchase its own stock. The effect of a share buy-back is to reduce the overall number of a company’s shares, thereby increasing capital gains and dividend pay outs to its existing shareholders. But its side-effect is to shrink the amount of capital the company has to invest in research and development and growing its own business.

But some companies, says Hudson, have stubbornly resisted the trend and concentrated on building up their business. He cites the example of Google, which, at least in its early days, aimed to use “corporate profits to expand the business rather than giving quick hit-and-run returns to the wealthiest One Percent.”**

Capitalism will eat itself

But this highlights a fatal flaw in the arguments of those who criticise private equity – and kindred financial innovations – for subverting capitalism. Google may have defied the financial bloodsuckers and concentrated on R&D but the effect of this, although good for Google’s health as a business (it’s worth over $1 trillion now apparently), cannot be classed as beneficial for society as a whole. Its innovations have consisted in myriad ways to beguile the attention-spans of billions of people so that they can be exposed to more advertising. If this is a “win-win”, in Sissoko’s description, I think we need to re-define what we mean by winning.

Google is also an intimate part of the whole Big Tech social media revolution which, because it is founded on getting people to compare themselves to others, is having a corroding effect on mental health. From 2018 to 2023, Norway, for example, fell from 3^rd place in the world happiness league table to seventh because of a decline among its young people. And – an assiduously cultivated – addiction to social media also certainly lies behind that.

Likewise, if oil companies want to buy back their own shares rather than putting all available resources into drilling for oil and gas deposits, thereby intensifying global warming, why should we try to talk them out of it?

Why, this time around, should we be the ones – in erstwhile Keynesian fashion – to ‘save capitalism from itself’?

It is a good question.

To be continued

* H/T to a friend who pointed out the link

** Quote from Hudson’s Killing the Host which is well worth reading

Money, money everywhere and not a drop to drink

Water, wealth uncreation and turning the means of life into financial assets

The scandal of Thames Water – £14 billion in debt and seemingly incapable of fixing leaks or avoiding untreated sewage being pumped into rivers – says so much about our allegedly democratic political system.

The Conservatives, naturally, want renationalisation – should it become unavoidable – to be a strictly temporary stop-gap before, as with insolvent banks after the 2008 crisis, water is returned to the good hands of the private sector.

But the other team, Labour, are also against permanent nationalisation. In fact, together with the water industry, they are racking their brains to come up with plausible alternatives to it.

Such an absurd situation, at a time when large pluralities of voters, including Conservative ones, want the water ‘industry’ to be taken back into public hands, is perhaps more understandable in the light of the last New Labour government’s intimate ties to the water companies.

Ruth Kelly, for example, former cabinet minister under both Blair and Brown, is head of Water UK, the trade association for the water companies and naturally regards nationalisation as anathema. Angela Smith, former Labour MP and one of the founders of (Don’t) Change UK, vehemently opposed Labour’s previous policy, under Corbyn, of renationalising water. She was quietly readmitted to the Labour party last year. Ian Pearson, former New Labour environment minister is a non-exec director of Thames Water, the UK’s biggest water company, which also employed the ex-Labour cabinet minister and one time Trotskyist, Gus Macdonald, as its  European advisor between 2006 and 2016.

Such an elite consensus is symptomatic of the British oligarchy which masquerades, less and less convincingly with every month that goes by, as a model democracy. The Conservatives are obviously in favour of the continuation of privately-run water – it was Thatcher who privatised it in 1989. But the opposition Labour party is so well ensconced in the (fraying) order of things, that it is just as ideologically opposed to a change in the status quo. Notwithstanding obvious errors like the Brexit referendum, which released so many exorcised ghosts from the closet, British ‘democracy’ is about persuading the public to acquiesce in a state of affairs they dislike more and more as time passes.

But if the water ‘industry’ illustrates the hollowness of democratic decision-making, it also exposes something fundamentally rotten in the way we approach our economy as a whole. The water companies are, it has been reported, collectively in debt to the tune of £65 billion, up from nothing when they were privatised. “The staggering combined debt pile built up by the UK’s 12 water companies means that huge swathes of cash are being spent on interest payments,” fumed the Daily Mail a few weeks’ ago, “money that could be spent cleaning up polluted rivers or fixing leaky pipes.”

But no-one seems to ask why they are in debt. It can’t have been to fund infrastructure investment as the sewage-tainted rivers and seas and unplugged leaks wouldn’t exist if the infrastructure was properly maintained, let alone upgraded. The real reason is both more prosaic and depressing. Deliberately placing companies in debt, in order to extract money from them, is a core part of the strategy of their immensely wealthy owners.

The technical term for this is a ‘leveraged buyout’. The idea goes back to the 1960s but really only took off in the 1980s and ’90s. One American writer on “asset-manager capitalism” describes it thus:

[Traders realized] they could buy a company with borrowed money, using the company’s assets as collateral for the loan. They then transferred the debt to the company, which in effect had to pay for its own hijacking, and eventually sold it for a tidy profit.

The root of Thames Water’s debt affliction stems from the time it was bought by Australian asset manager Macquarie in exactly such a leveraged buyout in 2006. According to Money Week magazine, “by the time it was sold again in 2017 its debt had ballooned from £3.4bn to £10.8bn”.

Incidentally, Macquarie’s interest in the UK’s Water ‘industry’ has not abated. In 2021 it completed a “debt investment” in Anglian Water and acquired a majority stake in Southern Water.

According to American economist Michael Hudson, asset managers and ‘activist shareholders’ now look upon companies generally as “cash cows”. Rather than “plowing [sic] profits back into the corporation to expand the business by new long-term investment, research and development,” he argues, “the company is urged to pay out its earnings as dividends and buy back its stock to bid up its price.”

Share buybacks, illegal until the Thatcher and Reagan eras, have become routine for corporations. Among UK water companies, the owners of South West Water and Yorkshire Water have both initiated share buybacks. The effect of a firm buying back some of its own shares is to reduce their overall number, thus increasing the earnings per share that shareholders receive. However, there is a cost. The money used could have been deployed to invest in the business or, in the case of water companies, modernise infrastructure or reduce bills. According to one critique, “By systematically draining capital from America’s public companies, the habit … corrupts the underpinnings of corporate capitalism itself.”

Politicians aside, many British people are outraged that these predatory capitalist practices are being used to degrade a vital public service such as water provision, without which life would be unbearably hard. But the uncomfortable fact is that such predatory practices are degrading capitalism as well.

The peril of damaging the delicate flower of ‘wealth creation’ is invariably raised whenever the idea of public ownership or more regulation or taxation is mooted. Sir Keir of Starmer-land, leader of something called ‘the Labour party’, says that ‘wealth creation’ and economic growth must happen first if money is to become available for public services.  But today’s financial managers, in the water industry or elsewhere, aren’t doing anything to create wealth. Instead, by stopping infrastructure or capital investment from occurring, they’re destroying it – to no-one’s benefit but their own.

And this is before the fact that they invariably avoid paying any tax on their ‘wealth creating’ activities is brought into the equation. Because water firms – and many other companies – are drowning in debt, they pay very little tax on their “special dividend payments”. Thames Water, for example, admits it doesn’t currently pay any corporation tax “because of the Government’s Capital Allowances scheme and the impact of our interest costs”.

We have been lulled into accepting the fiction that wealth creation is synonymous with rich people doing whatever it takes to become even richer – that a high share price is a sign of economic vigour  – when, in reality, their labyrinthine money-making schemes can be its utter antithesis.

Arguments contesting the duplicitous concept of wealth creation have generally taken the form of arguing that other people – workers, entrepreneurs or consumers – are doing the real work of creating wealth. The owners, by contrast, do very little, apart from becoming legally entitled to receive it after it has been generated. This is what Marxists call (surplus) value. But even one takes the highly dubious wealth creation ruse at purely face value, it involves the creation of jobs and products or services by someone. How are we to react if, in fact, no value is being created, besides the ‘wealth effect’, the translation of capital gains made in the stock market into luxury consumption?

At this point someone will be sure to pipe up about pension funds. They loom large among the investors in water companies (and electricity firms), either as clients of the private equity investment firms that own them, or as partners in consortia that run water companies directly. For example, the Universities Superannuation Scheme (for academics in the UK) and the Ontario Municipal Employees Retirement System both own large stakes in Thames Water.

But pension funds are as desperate for ‘yield’ as anyone else, in order to pay for the pensions of current and future retirees. They illustrate the absurd quid pro quo we have got ourselves into – that we must accept sewage being pumped into rivers and seas, and bills that keep rising while tax is avoided, in order to ensure barely adequate occupational pensions for thousands of ordinary people.

This is not a choice we should be forced to make. As should be obvious since the financial crisis, the stock market is not, despite superficial appearances and the best efforts of governments through ‘quantitative easing’, an eternally bountiful cash cow – either for money managers or pension funds. The old pension system in the UK – a better basic pension and an occupational (SERPS) scheme – both based on the pay-as-you-go principle offered more stability than endlessly trying to squeeze as much as possible from unwilling companies or privatised utilities that neglect their primary functions in favour of making money.

Still there is something archetypal about water. Along with energy, health services, ports, nursing homes, waste management, car parks, telecommunications etc., it is a real asset with a guaranteed cash flow that makes it irresistibly attractive to asset managers. This is, according to one author, “a society in which the key physical systems supporting social life and its reproduction—so-called ‘real assets’—are increasingly owned by institutional investors [pension funds, insurance companies, university endowments] specifically through the mediation of dedicated asset managers [the plunderers] and their investment funds.”

However, it seems peculiarly odious that water, so basic to the preservation of life, is treated in this manner. One of the first things acts of a Corbyn-led Labour government would have been to renationalise water, while his successor is brainstorming ways to head off the threat of that common sense option being taken. Nothing else illustrates quite so starkly which side they are on.

 

Addendum: Last week ITV broadcast a programme called 'Dirty Water – what went wrong', an investigation into why there were more than 300,000 sewage spills in England & Wales last year. But the programme shied away from the real reason things have gone horribly wrong – privatisation. Specifically a system in which asset managers buy water companies by placing them in debt and then get them to pay for the privilege of being bought out – in the process sacrificing the basic function they are supposed to have, which is to ensure clean water. The programme suggested that bills would have to rise to pay for the investment in infrastructure that will have to take place to avoid the mass contamination of water in the future. But bills have already increased by 40% in real terms since privatisation, with the result of sewage being pumped into rivers & seas across the country. So where has all the money gone?  You don't need me to tell you.

The experience of England is not unique. In the book Our Lives in their Portfolios, author Brett Christophers relates how private equity companies have acquired water systems across cities in America with the result that bills have skyrocketed while the systems themselves have been left in a terrible state. In England & Wales all but three of the water companies in England & Wales have been removed from the stock market by private equity firms.

The incidents are not exceptions, says Christophers. "Rather, they are the more or less inevitable upshot of core features of the model by which asset-managers society operates. They are, in short, a feature not a bug".

I look forward to a TV programme about that.