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Spectator
a day ago
- Business
- Spectator
How private equity ruined Britain
What has happened to Britain's rivers isn't a mistake. The fact that serious pollution is up 60 per cent on the year, or that only one in seven rivers can be called ecologically healthy, is the result of corporate tactics. It is effluent from the murky world of private equity. Some 2.5 million people in the UK now work for a business that is ultimately owned by private equity. Since the 2008 financial crisis, Britain has become a prime target for takeovers, driven by low company valuations, favourable exchange rates and a pliable regulatory environment. Everything from Bella Italia to the Blackpool Tower, Travelodge to Legoland, the AA to Zizzi, has been owned by private equity. Today, it claims to make around £7 in every £100 generated for the British economy. In the first half of last year, 60 per cent of the total invested in UK firms via private equity was from abroad. Many will see this as a success story: British ingenuity attracting international money. Those who worry about foreign investment are seen as misguided and a little jingoistic. The emphasis should be on the investment, rather than worrying that our high streets and infrastructure have been sold off to foreign buyers looking for a good deal. The reply to these free marketeers can be seen floating down our rivers and in the balance sheets of our creaking water companies. Back in 1991, water firms had a debt-to-equity ratio of 4 per cent. Today it's around 70 per cent, with some firms having neared 95 per cent. Where did that money go? Clearly not enough of it has been funnelled into infrastructure. Take Thames Water, which serves a quarter of all British households. In 2006, the utility was bought by a consortium led by the Australian private equity firm the Mac-quarie Group. Over the next 11 years, Thames Water's debts grew from £3.2 billion to £10 billion, while £2.8 billion was paid out in dividends. Macquarie borrowed against the value of the business – reservoirs, treatments works, even future cash flow – to pay out even more to shareholders. Thames Water's parent company became enmeshed in a complex web of intercompany loans and shell structures in places like the Cayman Islands. During the period of Macquarie's ownership, the company paid just £100,000 in corporation tax. Thames Water is now so heavily indebted, its infrastructure so degraded, that there are serious discussions about renationalisation. Macquarie defends its behaviour, arguing that they did invest in infrastructure and that Thames Water was never publicly criticised by Ofwat during its tenure. To which one might reply, so much the worse for the regulator. Perhaps that's why Labour announced this week that they will scrap Ofwat. As it happens, Macquarie also owned the Hampshire ferry company Wightlink, which under its control saw borrowing increase to pay shareholders, with corresponding timetable reductions, the near doubling of ticket prices and a lack of investment in ferry upgrades. It's almost as if Macquarie has a strategy. Of course, not all private equity works in this way. Some companies really do improve the target firms. Pret A Manger is an obvious example, where Bridgepoint helped Pret expand to hundreds of locations before selling it for five times the purchase price, giving every employee £1,000 in the process. But plenty of people within the world of high finance have expressed concern about some of the practices of private equity. Luke Johnson, the former chairman of Gail's and former owner of the Ivy, said that in private equity, 'attention is not directed towards the common wealth, but enriching the management, buyout partners and their institutional backers. That is the nature of the game. To argue otherwise is bogus'. The former CEO of one of the largest institutional investors in the US, Theresa Whitmarsh, says she was told by one private equity founder that the industry is 'a zero-sum game, a blood sport'. This is because growing a business is much harder than squeezing one. If you don't plan on holding on to a company for the long term, making money can be devilishly simple. First, identify an undervalued business, one that may have struggled but has hard assets that could be flogged on. Then take out loans of up to 80 or 90 per cent of the value of the target company's assets. Crucially, load the target company with that debt and make them pay the cost of their own acquisition. Next, send in your partners, who will either try to juice the company's income or slash spending, all while charging fees for these services. Within the first two years of a public-to-private equity takeover, around 13 per cent of the workforce tends to be laid off. Expert negotiators are brought in to bid down suppliers and assets are sold. There is a laser-like focus on shifting the balance sheet: spend less, earn more, cash in what you can. Never mind the fact that a lack of investment will create problems down the line, that staff turnover rises as wages are squeezed and suppliers abandon the company. Such problems are for the next owner to discover. Private equity is reaching ever deeper into British life. Take the village of Little-bredy in Dorset. It was recently acquired wholesale by a firm called Belport, which bought all 32 properties in the village from Sir Philip Williams, whose family had owned it for seven generations. One resident who had lived in Littlebredy for 21 years was evicted to make way for an office, while part of the village has been closed to public access. Belport insists that rumours of a mass eviction in January are incorrect. But no one is quite sure what they plan on doing with the estate. Perhaps the village will be turned into a private members' club like Soho Farmhouse, or maybe it'll become a high-end holiday park or wedding venue. When private equity comes to town, every asset is sweated for all its worth. It's strange to see an English village bought up in the name of shareholder value. But things get much stranger when we look at unloved parts of the British state. The number of children's care homes that are operated by private equity has more than doubled over the past five years. Many of the larger operators have profits in the tens of millions of pounds and margins sit at more than 20 per cent. According to the Local Government Association, children's care homes are charging the taxpayer as much as an annual £3.2 million per child – and fees are growing well above inflation. Meanwhile, many local authorities are themselves close to bankruptcy as they scrabble to pay for these services. An independent review into the sector recently found that 'there are few indicators to suggest that high prices are leading to better quality homes for children'. Local councils are legally bound to ensure that children with serious disabilities and those without parents are looked after. Most of the time, councils meet these obligations by outsourcing. That means costs can be locked in for the length of the contracts, which makes cash flow easier for local authorities to manage. But it also gives civil servants plausible deniability. When something goes wrong, they can point to the private company and shift the blame. And the likelihood of something going wrong is much higher with private equity, because the portfolio companies are highly leveraged. For every £1 in debt these children's homes are, there's just 5p of cash flow for debt servicing. For non-private-equity homes, that figure is around 40p. This is exactly how private equity is supposed to work – spare cash is a form of inefficiency. So instead that money is redeployed or used to pay shareholders. The problems come with economic uncertainty, when rates spike or credit availability shrinks. It's a pattern we see repeated again and again. Southern Cross, a care group for the elderly, collapsed in 2011. Its previous owners, Blackstone, the largest private equity firm in the world, had performed a classic industry trick: sell off the properties, then lease them back and pocket the difference. (Morrisons' new owners are currently using this sale and leaseback strategy having said during the buyout that they wouldn't.) Meanwhile, Blackstone expanded the group through debt finance. When the 2008 crash came, social care budgets were squeezed and Southern Cross was unable to repay its debts. Blackstone had already cashed out, making £500 million in the process, while 31,000 residents were thrown into limbo. The group was broken up and sold off, with councils footing the bill for higher operating fees and transition costs. In many private-equity-run care homes, everything is cut to within an inch of what regulations allow. Workers are kept on minimum wage or brought in from agencies, and the staff-to-residents ratio is kept as low as is permitted. Food is purchased in bulk and for the lowest possible price while maintenance on buildings is deferred. A study in the United States found that care homes owned by private equity have a mortality rate 10 per cent higher than those managed by medical professionals. Private equity firms tend to have large and diverse portfolios, meaning that expertise doesn't necessarily translate across the different companies they own. Knowing how to run an efficient biscuit factory doesn't mean you know how to run an efficient chain of veterinary clinics. The one thing that all businesses have to worry about is tax, meaning this tends to be what private equity firms actually focus on. One study found that up to 40 per cent of the savings brought by private equity come from tweaking tax arrangements. The large amounts of debt often helps. Target companies offset the cost of servicing debts against their tax bill. Gatwick Airport didn't pay a penny in corporation tax for the six years it was owned by private equity, because its buyout loans were tax deductible. Selling a company isn't always even necessary to make a profit. When Toys 'R' Us filed for bankruptcy, it emerged that the private equity firms which bought it still ended up in the black. They'd charged Toys 'R' Us fees that more than recouped the relatively small amount of capital they'd put up for the acquisition. The staff, meanwhile, saw their pension contributions disappear. Most of the money for acquisitions is paid by institutional investors like pension funds. Repayments to these limited partners are fixed, but the upsides for private equity can be huge. The irony, of course, is that pensions are supposed to create stability for workers. Yet these savings are being used to acquire companies and often cut costs, sometimes even dismantling pension pots. Take the Yorkshire mattress manufacturer Silentnight. In the late 2000s, the family-run firm was facing cash-flow problems. It found salvation in HIG Europe, an affiliate of the Miami-based private equity firm HIG Capital. This gave Silentnight a line of credit, allowing the company to weather the effects of the 2008 recession. That was, until HIG suddenly removed it, demanding the debt be repaid. Within days, Silentnight went into administration and was snapped up by HIG. It's a classic example of what's known as loan-to-own. In the process, the private equity firm jettisoned the company's hefty pensions obligations. Instead, the state-run emergency Pension Protection Fund had to pick up the tab, suddenly making Silentnight an attractive, solvent company once again. The regulator twice accused HIG of engineering an unnecessary insolvency in order to shift pensions on to the public purse. Eventually, after more than a decade, HIG settled for £25 million but did not accept any liability. Staff pensions had been cut by a third, the equivalent of £50 million. HIG was still quids in. Perversely, the state-run Pension Protection Fund is a major investor in private equity firms, some of whom have been accused of offshoring profits to avoid tax. No one could object to genuine investment, but this type of business practice gives capitalism a bad name. In Britain's desperation for foreign money, we've invited in a whole class of savvy corporate raiders who know how to loot UK Plc – and get away with it. The result is that we've been left, quite literally, in the shit.
The National
a day ago
- Politics
- The National
Steve Reed's water claims that of an incompetent charlatan
IN an article for The National, the Scottish Cabinet Secretary for Climate Change and Energy angrily responded to false statements made earlier this week by UK Environment minister Steve Reed. He attempted to defend his own Labour party's betrayal of its pre-election promise to nationalise England's failing, privately-owned water companies by claiming that nationalisation was not the solution to England's dirty and expensive water, stating that Scottish Water is publicly owned, yet "[water] pollution levels in Scotland are worse than they are in England". This is categorically untrue. Either Reed knew it was untrue and said it anyway, knowing he'd be unlikely to be challenged – in which case he's a charlatan and a liar –, or he didn't know it was untrue – in which case he's an incompetent charlatan, who uncritically leaps on false statements to get himself out of politically tricky situations. Reed also warned that nationalisation would cost £100bn and would slow down efforts to cut pollution. This claim has also been disputed. READ MORE: Anas Sarwar urged to break silence on Labour's 'nuclear tax' for Scots Estimates of the cost of renationalising the water industry in England range from £14.7bn, a figure estimated by the public services international research unit (PSIRU) at the University of Greenwich, to £99bn if company debts are included, a figure estimated by a thinktank commissioned by the water companies themselves. By citing the figure of £100 billion, it's clear that Reed and the Labour Government are siding with the profiteers of the English private water companies. This figure is based on a calculation of the maximum dividends, which starts from the purchase cost of the companies in 1990 when they were privatised, adding capital investment per year and inflation, but it takes no account of the actual market value of the companies. Crucially, these figures are predicated on the assumption that directors and shareholders who have extracted vast profits from the water companies over the years while piling debts on the companies should be financially compensated for nationalisation and not be left liable for the debt. Some claim that the cost of nationalisation could be close to zero. Thames Water is currently in debt to the tune of some £20 billion – even though its directors and shareholders have continued to profit, so it could be argued that the true value of the company is next to nothing. Thames Water is not alone. England's water companies are bust. They would not be financially viable if they had to meet the required standards without taking on huge amounts of debt. According to the latest independent water commission report, Scotland has a far higher percentage of its waterways in 'good' ecological condition than England and Wales. The Independent Water Commission found that 66% of Scotland's water bodies were of good ecological status, compared with 16.1% in England and 29.9% in Wales. READ MORE: Labour panned for foreign aid cuts as women and children to be hit hardest It is also worth noting that Scotland has some 32% of the UK land mass, is the part of the UK with the highest annual rainfall and has many more water bodies than England and Wales. Loch Ness alone is popularly claimed to contain more fresh water than the combined total of the rivers and lakes of England and Wales, holding 7.4 cubic km of clean Scottish water. Yet Loch Ness is neither Scotland's largest loch by surface area (that's Loch Lomond), nor is it the deepest – that's Loch Morar, whose maximum depth is 310m (1017 ft). Scotland contains truly vast amounts of water, most of which is in good condition. 87% of Scotland's entire water environment is assessed by SEPA as having a high or good classification for water quality, up from 82% in 2014. The claim about Loch Ness (below) containing more fresh water than all of England's lakes and rivers may just be a popular myth. It's not easy to find reliable statistics on the amount of water in all of England's rivers and lakes, but since the English water companies abstract 4.6 cubic km of water annually and don't extract every last drop of water – otherwise there would be no lakes or rivers left in England – the popular boast about Loch Ness seems unlikely to be true. However, what is unquestionably true, is that Scottish Water must manage much more water than all the water companies of England combined. It does so successfully, without siphoning off large amounts of cash for directors and shareholders and invests back into Scotland's water infrastructure. Steve Reed and this Labour government are terrified of nationalisation, so Reed would rather lie about Scottish Water. For him, that serves two purposes: allowing him to stick the boot into the Scottish Government, while defending the interests of the profiteers of England's private water companies. He does know knowing that he's not going to be challenged by a London centric media, which is all too happy to propagate the Anglo-British nationalist myth that 'parochial' wee Scotland could not possibly make a better fist of things than the all-mighty Westminster. Westminster goes into summer recess this week, and just prior to MPs going off for the summer, Energy Secretary Ed Miliband sneaked in an announcement that the energy bills of everyone in the UK, Scotland included, will increase by around £1 per month in order to cover the estimated £38 billion cost of the new Sizewell C nuclear power plant in Suffolk. The SNP's Westminster energy spokesman, Graham Leadbitter, said nuclear power was 'extortionate, takes decades to build and the toxic waste is a risk to local communities'. He added: "To make matters worse, Scots will be left to foot the bill with a levy on energy bills – you simply couldn't make it up, yet Anas Sarwar and Scottish Labour back this extortionate and wasteful plan that energy-rich Scotland will pay for through the nose. 'Meanwhile, Grangemouth has been shut down and Westminster's fiscal regime has ruined Scottish energy jobs – Scotland isn't just an afterthought, it's barely a thought at all.'
BBC News
a day ago
- Business
- BBC News
Residents 'rightly frustrated' over Thames Water hosepipe ban
The leader of a council affected by a hosepipe ban has said "people are tired of the same old excuses" from the water company. Thames Water introduced the hosepipe ban for customers in north Wiltshire, east Gloucestershire, Oxfordshire and Berkshire on Tuesday. Jim Robbins, who leads Swindon Borough Council, said he was "really disappointed" by the ban, adding that the company had prioritised pay-outs to shareholders over "making sure the water supply for customers is there where it needs to be".Thames Water said the restriction was due to a lack of rain and increasing demand and added leakage in the network was at its "lowest ever level". While the company did not respond directly to Mr Robbins' comments, it added that it was using "innovative technology" to fix leaks faster, with 650 leaks fixed each however now face a fine of up to £1,000 if they are found to use of a hosepipe for activities such as watering the garden, washing the car or filling a paddling pool. Thames Water has been fined millions of pounds and heavily criticised for a series of leaks and Robbins, who has been highly critical of the company in the past, said: "I think residents are rightly frustrated that this is an organisation that hasn't made the investment that it needs to over the past 20 years or so since it's been privatised. "People are tired of the same old excuses... after years of failure and them not doing the hard work to make sure they maintain people's supply and keep our rivers clean."It's consistently prioritised taking money out of the business... but there is no evidence they have done the work of making sure that the water supply for customers is there where it needs to be." 'Doing everything we can' The hosepipe ban was announced last week and came into force at midnight on Tuesday - covering some 1.1 million people. The temporary restrictions cover areas with postcodes beginning with OX, GL, SN, RG4, RG8 and RG9.A number of other water companies around the country have announced similar hosepipe bans, though none of those are in the West or South West. Announcing the restrictions, Nevil Muncaster, Thames Water's strategic water resources director said: "I'd like to reassure all our customers that we are doing everything we can to look after our water resources and to protect the environment through this continued warm, dry weather."Our engineers are working 24/7 to maintain supply to all our customers and we have more teams out in the field fixing leaks, which often increase during long dry spells because of shifts in the ground that move our pipes. "We all have a role to play in reducing our water use and customers can help us by saving water around the home and in the garden."
Daily Mail
2 days ago
- Climate
- Daily Mail
Met Office issues thunderstorm warning as stormy conditions to batter south coast and trains suspended amid flooding fears
Parts of South East England were battered by torrential downpours today with more than an inch of rain falling in just an hour as trains were suspended due to flooding. The Met Office imposed a yellow thunderstorm warning for parts of East Sussex and Kent until 5pm, covering Brighton, Eastbourne, Hastings, Folkestone and Dover. Some areas were told to expect 20mm (0.8in) to 25mm (1in) of rain in less than an hour, with 30mm (1.2in) to 40mm (1.6in) in one to two hours in a few locations. The alert, which was activated as soon as it was announced at 12.52pm, comes amid concerns driving conditions will be affected by spray and standing water. Forecasters also warned of power cuts; damage to buildings and structures from lightning strikes; flooding of homes and businesses; and delays to public transport. Train operator Southern said its services between Hastings and Ashford International were cancelled this afternoon after the railway flooded and blocked all lines. It comes a day after England's fourth major hosepipe ban of summer came into force as Thames Water activated restrictions for more than one million customers. Homes served by the firm in parts of Oxfordshire, Gloucestershire, Wiltshire and Berkshire were hit by the ban following one of the driest springs on record. Despite four days of downpours since Saturday, company bosses said they could not confirm when restrictions will end because it is "generally waiting for rain". Some 1.1million customers with postcodes OX, GL, SN, RG4, RG8 and RG9 now have the ban - but it was avoided by London, which is also served by Thames Water. The ban follows Southern Water activating restrictions for Hampshire and the Isle of Wight on Monday. That followed other bans implemented by South East Water for parts of Kent and Sussex last Friday, and in the Yorkshire Water region since July 11.
Telegraph
2 days ago
- Business
- Telegraph
The great British public keeps being forced to bail out our incompetent political class
To the surprise of nobody, our water industry has been found wanting. An ineffective regulator allowed self-serving companies to enrich shareholders and directors at the expense of the public interest for decades. Instead of investing in our creaking Victorian infrastructure, water companies were saddled with debt by their private owners to pay out dividends. Billions of pounds were funnelled from Thames Water alone, funded largely through then-owner, Macquarie, which more than tripled the utility provider's debt burden to £10.8bn in just 11 years. Most recently, the firm paid 21 senior staff £2.5m in bonuses in April as a reward for taking on an eye-watering loan, partly to plug the gaps of said wealth extraction. Thames Water is not alone in this. Over the past decade, more than £112m has been paid in bonuses to senior staff at water utility firms, despite their consistent failures as either public good or private enterprise. These businesses dumped raw sewage into the nation's waterways for 3.6 million hours in 2024 because their ancient systems, left unimproved for decades, are overwhelmed by modern requirements. But of course it is we, the British public, who are being charged for cleaning up someone else's mess yet again. The eternal mugs, and doormats for the incompetent, we will be saddled with a hefty increase in our water bills to fund the ever-worsening services we enjoy. Don't forget, this comes on the back of a roughly 30-50pc rise three months ago, depending on your provider. But we can't be surprised they've taken us for fools again. This is just the latest kick in the teeth in a dense history of tooth-kicking. If there's one thing the British public can rely upon, it's paying for the privilege of decline. Draw an infrastructure project out of the hat, and you'll find a spiralling bill and a bumbling bunch of executives soon to be called in front of a committee hearing explaining why there's no sign of what was promised – and why they couldn't possibly return their fee. Promised to open in 2026 for a cost of £31bn, HS2 was set to connect London to Birmingham, Manchester and Leeds on high speed rail. Now, it will open no earlier than 2036 for a cost of more than £100bn, and will only run from London to Birmingham. If we're lucky. For more than triple the cost, we're set for a third of the railway to be delivered in double the time. And who'll be footing the bill? You guessed it. Even on our current tracks, we're being taken for a ride. Rail fares rose yet again this year, but only 68pc of services depart on time. We're finally set for a new nuclear power plant a decade from now in the form of Sizewell C at a bargain cost of just £38bn. Excellent news, but nobody mention the fact it was supposed to be operational by now for a total cost of £20bn. Don't forget our crumbling services. Councils continue to raise taxes while they shift our bin collections to once every three weeks. Yes, the burden of funding care costs leaves a large dent in local authority finances, but pouring £665m into an (alleged) sham can't help. It's not just the failed investments and obscene borrowing that our local councillors are learning from the water sector. They also enjoy golden parachutes for bankrupting their organisations, and saddling us with the bill. Not to mention how difficult it is to get a GP appointment (no wonder record numbers now use private healthcare) or an NHS dentist, find a local school or have the police investigate a burglary. At some point, the gravy train of incompetence will come to a juddering halt. Whether that's because we start to hold those responsible to account or simply run out of money to burn in its engines is anybody's guess.
