Lying to Ourselves over PFI – Private Finance Initiative

Ashmole-Academy-817x389

PFI was Government outsourcing at its worst as the Independent has uncovered. There is a saying “There are no free lunches” but politicians like to pretend that there are.

PFI was a scheme to bring forward capital spending for hospitals, schools, care homes and others areas of under-funded public utilities without showing it in spending profiles – without being honest and transparent with the public about what it was doing.

Ally this to the cozy relationship between certain politicians and those in the building and construction industry and the inability of civil servants to really understand enough about the risks to dissuade politicians and the recipe was in place.

What we have is a burden on our public sector that will not impact the politicians that made the decisions but will have grave (in some cases literally) consequences for those who will be unable to be provided with the care they need as costs in our public sector rise over the next few decades as the bills are paid.

Back in 1998, when I was a Trustee / Governor at a local school in North London, I identified that the school needed to be rebuilt. It was crumbling, had asbestos, its electrical wiring was unsafe, roofs were collapsing and let in vast amounts of rain water and the school had to make use of temporary facilities that were installed 30 years before. There was a real danger that the school would be closed at some time in the future unless radical steps were taken and the only answer was to rebuild.

I made a presentation to the Board of Governors in 1998 where I proposed that, while PFI was an option being actively touted by Government as a panacea, we should not touch it. In Powerpoint slides, printed and shown on an overhead projector (we could not afford the computer equipment) I tried to persuade reluctant but well-meaning local people to reject the obvious answer because of “long-term high charge over 30 years” and loss of control over our own assets. The slide shown 17 years ago is below:

1998

The school, now Ashmole Academy in Barnet was built without PFI – although it took until 2004 to see it through. Eleven years’ later, the school (where I was Chair for 12 years from 2002 until 2014) remains in excellent condition and is an excellent school – one of the best in England.

When this Government began its enquiry into school buildings a few years’ ago, it commissioned Sebastian James and his team that produced the James Report.

This report, to which a few of us from the board at Ashmole made representations and met with members of the Report team prior to publication, did not condemn PFI but simply said:

Private Finance Initiative

A procurement route established in 1995, and more widely adopted since 1997. It is an important route for much Government spending on assets as it transfers significant risks to the private sector. PFI requires private sector consortia to raise private finance to fund a project, which must involve investment in assets, and the long-term delivery of services to the public sector.

As a result, PFI was allowed to continue on the basis that it meant to provide a “transfer of risks to the private sector”. For this transfer (which is really nonsense as the transfer was merely to get public sector spending off the books and into the books of the companies), the construction and service companies were handsomely compensated.

Not only that, but local and national public sectors were completely overwhelmed by the prospect of architectural excellence rather than practical building and this resulted in grandiose schemes that impress architects and win awards but ended up being hard to maintain, costly to build and a long-term drain on finances.

The lessor, now the School or the local authority is then stuck with a long-term agreement which it has to pay – at costs which are far greater than those which a Government could have loaned the money at – just to get costs off the books so no-one would notice that the financial burden was excessive while the new facilities were being built.

As to the risk being transferred, at Ashmole, we decided to take on such risk and then make sure that we had good contractors, good architects, good project management overseen by knowledgeable Board directors / trustees and good contracts in place. The risk was normal – it was on the suppliers not the school as we were the customers. The risk issue is nonsense.

The James Report is now forgotten but should have been a reminder that PFI was a major accident waiting to happen.

The Independent’s Report highlights not just the crippling costs of PFI but also the problems that are met when government (local and national) become swept away by those in the private sector who promise a free lunch and by their own lack of transparency and inability to understand business.

We entrust Government with much of our future but, while we condemn those that allowed PFI to take place in such a shambolic way, we should bear in mind that we may be expecting far too much in an area of greatest risk – the place where public and private sector meet. Knowledge and capability on either side are varied but neither really “gets” the other. This is why banking crises will always appear from time to time and why outsourcing of public sector often delivers much less than “expected”.

The place where public and private sector meet is a dangerous one and is less well understood than the specific sectors themselves. However, one way that such disasters as PFI could be reduced is through transparency – it was the desire to keep costs “off the books” that took us into PFI when extra expenditure on the public sector financed by low-costs Treasuries would have been a far better investment.

However, the pressure to falsely account was made by the pressure put on politicians by keeping government spending down even in the face of greatest need. It is why, even today, the NHS funding row is all about showing how the £8bn will be afforded in years to come when we all really know that we have very little idea what the UK’s finances will look like in three to five years. Good management of finances does not mean we can possibly be that accurate (no company really believes it knows how it will be doing beyond twelve months and beyond that, forecasts are but guides based on spreadsheets – the same is true of economies but with thousands more indeterminate variables).

So, PFI and similar comes from our desire to lie to ourselves and for politicians to lie to a public that is implicit in the lie.

We need to educate ourselves to reality by being more transparent.

The Business of Sport

                                                                       

The Question: as the gap between elite sport and its fans grows ever-wider, should those who pay for the sport (its fans) expect to have a say, should the communities on which the clubs and associations depend be better treated by those at the top and, if so, how?

Many of us have a love affair with sport – many play it directly and millions watch sport and maybe actively or passively support a team. Sport underpins many of our lives – it makes us fit and provides excitement, motivations, inspiration, team-building and social cohesion.

As the 20th Century went on, professional sport was progressively distanced from the amateur and the fan by its takeover by business interests – initially, the local businessman but later, by international business.

This provides a distancing of ownership from the mass of people that generate the income in an industry that is unlike so many others: where the customers are so involved, often so passionate, often players.

This means that sports authorities (and especially businesses that own the major teams) have a responsibility that is different to other businesses or business organisations. They have a duty of care to their customers around the “game” and how it is played. This opens up the issue of how individuals (or groups of individuals) who are customers can be “played” because of their commitment and what can be done to protect them. There may be lessons for all industries from the examples available.

Business Governance and Sport

Governance in sport impacts many beyond the teams themselves. That is why Deloittes show their involvement in all the following areas :

  • licensing systems for sporting competitions;
  • cost control mechanisms;
  • transparency measures and anti-money laundering;
  • events and/or membership application and selection processes;
  • sporting calendar matters (national and international);
  • regulations in respect of players’ agents;
  • measures to protect the integrity of the competition;
  • independence of clubs – ownership rules and other means of influence;
  • player transfer rules; and
  • ‘football creditors’ rules.

Governance is much wider than this in regard to sport and its impact in  and on society can be shown by three articles in The Independent (Saturday, 18th May) that highlight the difficult interconnections between business and sport (here, England football teams) and the intertwining connection between sport and the community.

·      The first by Chris McGrath attempts to show the worst side (Manchester City’s owners sacking of Roberto Mancini) and the best side (the Portland Timbers superb response to a charity – Make a Wish – for help for an eight-year-old cancer victim).

·      The second (in the business section – Jim Armitage) reflects on the Arsenal blog that shows the support of Doan Nguyen Duc (a wealthy timber merchant from Viet Nam) for Arsenal and questions whether they should take the support (financial and otherwise) from someone that Global Witness (an anti-corruption NGO) says was responsible for much of Viet Nam’s destruction of its forests and the displacement of many people that lived there. He is said to have made the comment: “I think natural resources are limited, and I need to take them before they’re gone”.

·      The third (also in the business section by Simon Read) reports on how Sheffield Wednesday turned down a deal with a “payday lender” which it refuses to name but was said to have offered 25% more than anyone else.

The three articles (I assume “coincidentally” in the same newspaper on the same day) highlight the mistrust of journalists for the businesses behind the clubs but also for the type of ethical questions that the clubs have to consider at this time.  “This time” means at a time when business and the community is undergoing strains and, in football, when the position of a team as part of the community it serves is strained to the full. In the USA, big teams moves State; in the UK, only smaller teams like Wimbledon (now Milton Keynes based) have tried it as fan bases are crucial to the business (even if more revenue than ever is via TV and international support).

Whose business is sport?

It is a long time since amateur sport ruled anywhere (the top tennis players rarely joined the professional circuit until well into the 1960’s; athletics was similar and rugby became professional in the UK in the late 1990’s). In the UK, football was severely structured with maximum wages well into the 1960’s as well and even if clubs were limited liability companies, they were owned by local families who kept them private.

In those days of amateurism, sport was for the community. Players were not paid much (outside the USA) and players were close to those they played in front of, living in the same streets and drinking in the same pubs and clubs.

In the USA, football, basketball and baseball (and ice hockey and the rest) became business pursuits earlier. Europe and the rest of the world (and most sports) have followed. It is now the normal way of life that business had taken over professional sport to the financial benefit of players and (mainly through TV) the income for sport worldwide is now massive.

Whether the Olympics, football (through FIFA and its major tournaments such as the Champions League and World Cup), the Superbowl, 20:20 cricket in India and so many more, sport now generates massive income through its massive fan base and the ability of TV to generate that income. So, there has been a rapid shift by large businesses and entrepreneurs to own sports team and have influence over the organisations that manage sports – such as Formula 1 or baseball or football (of all types).

This income has been generated through the opportunity that sports presents over almost anything else – to transmit excitement visually and aurally through radio, TV and the internet to a mass audience that is entranced by the game played – with an excitement and passion rarely found elsewhere. This mass appeal is now available and reach-able worldwide and with that appeal comes massive advertising revenue (and, with the internet) growth is coming faster.

So, sport (something we all get involved in to some extent) has both appeal as participants and observers (although to a greater extent than anything else, the two are mixed with sport). This appeal is then converted into income for companies that are able to transmit sport into the home – via pay per view, rents and advertising.

Sky in the UK has become a dominant operator (although BT are now incurring on their territory).

Owners of sports teams (especially in football in Europe and all the major sports in the USA) benefit wherever they operate.

The Duty of Sport

Because sport is not just another product and because the “customer” is so involved, there is a chance that sport offers something different. The players are celebrities and, in modern culture, people that youngsters look up to (rightly or wrongly). More people know David Beckham than any politician or scientist – it is a (maybe unfortunate) fact.

This means that businesses involved in sport (and that means the sports clubs and managing organisations themselves) have opportunities to involve themselves with society that is not there for other businesses. Not only that, but they have a duty because of the nature of their business and for their own protection.

This duty can be said to be to serve the community that provides them with the income they derive. This is not about BSkyB or BT doing some CSR. They are the middlemen in all this – the means of transmission. No, this means the sports entities themselves working out how much their “community” means to them and how much they should give back to that community. It can be done.

A good example is Arsenal Football Club that has set up the Arsenal Foundation and, in turn, developed real partnerships with Save the Children (its international charity) and Willow Foundation (a national charity). I have an interest here in that I am Chief Executive of Willow Foundation – which provides special days for seriously ill young adults.

Arsenal is an international business these days but has worked out that it also has local roots and its Foundation works in the local community and with Willow on a national scale. With Save the Children, it operates internationally. At its recent Annual Ball, Arsenal Foundation raised over £300,000. That maybe small compared to the Football Club’s annual revenue of £226 million in 2011, but it is a start. Moreover, the time and effort of the club and those within it (like Arsene Wenger – an Ambassador of the Foundation) are worth a lot.

However, the balance sheet is patchy on sport’s involvement with their support base and through them with the community. There is no real driving force that connects through the massive distance that exists between them. While the same distance exists between many businesses and their customers (banking is a very real example, but the same can be said of energy companies and so many others), there is a very real difference in sport that is both for bad and for good.

The Sporting Difference  – and Opportunity

The business sector has been buffeted by recession and, in such a recession, business leaders and their companies are vulnerable to attack from other sections of society. So, the tax avoiders like Apple, Google, Starbucks and others (all under attack by newly-zealous politicians in the UK and the USA along with the tax havens that they employ) are not just seeing their potential tax bills increase. Their relationship with customers is also under attack that can lead to reduced sales. This may not be the case for Google (now so big and dominant that it may no longer care) but others may well feel the pain.

In the sporting arena, it is easy to see a large array of problems: FIFA and football corruption, allegations on racism across the world, NFL alleged behind-the-scenes collusion on player wages (the NFL is a not-for-profit – which may surprise) and the general disbelief that ordinary fans have with the salaries that players “earn”.

Football in the UK is an example of the changes that have taken place in the last forty years where salaries of £100,000 per week are not unusual (Gareth Bale is negotiating £200,000 a week at Tottenham) and the difference between that and the average wage in the UK of around £25,000 per year is stark.

Taking all this together, sport (as epitomized by the 2012 Olympic Games in London) can be magnificent but clubs and sports organisations have to take notice of the communities upon which they rely. The piecemeal CSR and charitable work should be as competitive as their sport rather than resisted or an afterthought – or done just for publicity.

Sport is a collective experience – whether in teams or the association between individual sports stars and their fans. This provides an opportunity to seal the gap between the stars and the fans that small groups of supporters on their own can never fill.

The link between the stars / clubs / associations (the elite) and the fans / amateur groups has always been a struggle. It is for each club to decide how it deals with the community upon which it depends. Some ensure the players get into the community – at Tottenham Hotspur in London, Ledley King and Jermaine Defoe are well-known for the time they spend with young, inner-City kids and clubs. Other set up Foundations and / or develop relationships with charities (usually connected in some way to the work they are doing or the area they are in).

Heading for Rollerball?

Deloittes produce an annual report on the top football teams – with the last issued in January of 2013.

No one (that I can see) assesses annually the contribution that sport and teams make in society or the potential for that contribution – let alone any analysis on the work individual clubs perform.

Business seems now to be the only driver – which is a Rollerball outlook on sport – a dystopian future that may well be here already. Made in 1975, the film showed the world in 2018 as corporate-controlled where sport was the controller – like 1984 with sport instead of three political blocs fighting each other.

So the Question: as the gap between elite sport and its fans grows ever-wider, should those who pay for the sport (its fans) expect to have a say, should the communities on which the clubs and associations depend be better treated by those at the top and, if so, how?

Bodies such as Sport England, the Department for Culture, Media and Sport and the major associations of all the sports and clubs discuss the wide range of benefits and opportunities that exist. Because it is hard to measure the impact of sport and the part played by big corporations in sport (it is not something easy to measure like GDP), the real impact of large corporations on communities and people in the UK is not assessed.

Like the problems of measuring the benefit of a woodland or a river, our focus on numbers (and scores) misses the potential for large sports organisations to do good – and the result is that newspapers see the Rollerball potential.

The Government has set up a Natural Capital Committee to measure the value of natural capital in the UK. It  just published its first Annual Report

Because of its enormous impact on society and people, one response may be to set up an equivalent in the area of Sport – to assess the benefits and problems associated with the business of sport and the benefits to society, people and communities in ensuring that Sport is well managed for the benefit of as many as possible and that Businesses in Sport gives back to society sufficient of the benefits it derives from those communities and show how they take those communities into account. We would then get to see an Annual Report on the state of sport in the UK.

Easter and Eostre, Germanic goddess

This post was written in 2013 – pre-Brexit and Trump, before we realised how plastic was killing our oceans, when the northern white rhino was not extinct. It’s about value over volume, about the quality of life over the quantity of life – the sort of thing we should consider at the start of Spring or even at Easter-time.

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In the Christian tradition, it is Easter – named after Eostre, the Germanic Goddess of Fertility and Spring. It is that time of year, when we look for growth all around us. Yet, more prosaically, mention growth to most and we talk about recession and how ironically the current German goddess (Chancellor Merkel) is not so keen on helping those in need around the periphery of Europe.  She wants them to help themselves.

Growing Pains

Michael Heseltine, Cabinet Minister under Margaret Thatcher, who recently provided a report to the UK Government on the regeneration of English cities that David Cameron and George Osborne have welcomed , told The Independent newspaper on Saturday, March 30, 2013 that: “the richer you get the less imperative there is” for people “to drive themselves”.”

BBC Radio 4 followed this up with a debate on Saturday’s Today programme between Mariana Mazzucato (an economist) and Terry Greenham (from New Economics Forum – NEF). Terry ended by calling for more quality rather than quantity in how we measure “growth” – that GDP as a measure was flawed.

Our Affluent Society

Back in May, 2012, I posted “The Affluent Society and Social Balance” which looked back at the writings of John Kenneth Galbraith (author of The Affluent Society) and wrote about how mindsets had not changed since he wrote the first edition in 1958. Quantity was still valued over quality – economics was still all about more things, not more quality of life despite our (developed world) ability to acquire so much stuff.

I spelt out four areas for concern as developed nations seek to address further “growth” requirements. They were characterized as follows:

Forty years ago, five, major elements were missing from or only sidelines in Galbraith’s analysis – issues which have become more central over time and which complicate the prescription that Galbraith proposed: They are repeated below:

1. Globalisation

2. The errors in GDP accounting – quantity vs quality

3. The Environment – valuing quality

4. Civil Society – ending the private vs public sector spat

5. Social Balance

1. Global Trading

The world is a different one from 1958 or even 1973. We trade globally and the developed nations increasingly use labour from the undeveloped nations to do low-cost, manual work (often in conditions we would not tolerate in our own countries). It is a 19th Century state of work but internationalised– where now, international companies tend to operate as the mill owners of old.

From a micro-economic sense that is understandable – each company is different and many act responsibly. However, from a macro-economic viewpoint and from an international political viewpoint, there are limited mechanics for equalizing health and safety laws let alone education and pay scales.

Galbraith’s concern was that we produced too much and that we should be able to make less in a country like the USA. When the work goes international, the responses to the problem have to as well.

2. Production by numbers: quantity versus quality

In an affluent society, production is made the cornerstone of all we do (the economy is central to all our decisions) because work is needed to secure income. Even in an affluent society, income at a certain level is deemed to be critical. Products of progressively less use (or utility) are sold (often solely on the back of advertising) and we buy them and this is meant to keep us in work and more buying goes on.

Of course, in an international labour market, that won’t always work (as Gandhi found out in the early 20th Century when England produced most of the cotton garments sold in India) and it has become harder to focus just on one country.

However, the global economy does not mean that products become more useful – much of what we make is simply wasting energy and resources. However, it is keeping people in work in many developing nations.

But, growth is measured by GDP and GDP is a poor measure of quality of life or even production. Quality of education, for example, is measured in GDP by its cost (an input) not an output. A £500 handbag is deemed worth the same as £500 worth of essential foods – no difference in utility is assessed.

The felling of a rare tree is “valued” at the cost of felling or its price in the market as a table. The value of a river is missed completely – unless over-polluted when its clear-up costs may enter as a cost in a nation’s GDP.

It is production by numbers, quantity versus quality.

3. Environmental Balance

While mentioning the issue of environment, the main topic of “The Affluent Society” is the social balance between public goods and market production. All these are made by people – so, the environment in which we live is ignored. The trade-off is not, of course, that simple (even though the Galbraith trade-off has never been seen to function). The environmental trade-off (our need to maintain our natural capital) is now being understood but remains relatively hidden in economic debates. Natural capital needs to be brought into any debate on affluence in society – our quality of life as opposed to the quantity of life.

4. Civil Society

To Galbraith, the game is between the market and the public sector and to most, this battle still exists as the only one. There was not much mention of civil society – where most of us spend most of our time – except through discussion of leisure time. Here, the trade-off was between productive working and spare time. I expect that this assumes that all non-productive time is spent on hobbies or watching TV.

The creativity and value of civil society – a huge array of organisations from sports to international development, from charities to women’s institutes – is normally missed completely by economists and thinkers on society. The problem is that it does not fit easily into econometricians’ computer simulations: more of the “if you can’t count it, it doesn’t exist” syndrome.

Of course, for centuries, people have been undertaking “good deeds” – the history of the 19th Century is full of examples of charitable activities. However, society is changing fast and as politics loses its appeal for so many (with parties genuinely fearing for their future), the role of civil society is growing and, in affluent societies, taking back more from the state that it lost to the state in the 20th Century.

This escape from the centre is to be applauded, but needs to be better understood.

5. Social Balance

Complete reliance on the market or on the centre (libertarianism or communism) may still appeal to some. The reality is that complexity is the norm. Society is a mixture of competing ideas and competing structures – out of which we muddle through and where individuals take centre stage and form organisations to make their voice louder.

Nevertheless, we should learn from history and our mistakes. Centrism is a doctrine of the defeated; totalitarianism a doctrine of the damned. There is no one answer but a constant mix of opportunities that society provides and where changes are constant in the way we answer our problems.

The mix of competing answers does no longer rest between public and private sector in an affluent society – that is a 20th Century doctrine or response. The response now has to take into account the social balance we want from our lives between products, social value, natural capital and civil society relationships in a global context not a rigidly national one.

This means being adult about the causes of change and grown-up about the challenges – it means being international in approach and understanding the complexity of the problem – not something that can be understood wholly by quantities or computer simulations.

As we grow materially (i.e. through the quantity of products we are able to manufacture) and bump up against the troubles of environmental degradation and massive disparities of wealth and conditions (on a global scale), the question to be addressed is how does a complex society best form itself to take the decisions it needs to maximize the value we all give and receive from this “affluent society”.

So, should we Give up on Growth?

Terry Greenham of NEF would propose (as does NEF) that this is what we have to do. As the developing world strives towards economic well-being as described by growth of GDP (gross domestic product), the developed world should (in NEF terms) re-balance the lives of their people so that quality is maximized and quantity is stabilized.

Of course, all our measures and motivation focus on quantity. Homo sapiens have developed over 100,000 years to seek food and shelter and the more the better. However, following Maslow (Hierarchy of Need), humans aspire to more than just “stuff” and as we gain wealth, the majority want more that is not measured.

A salutary valediction from The Independent’s Michael McCarthy (Environment Editor) today after 15 years with the newspaper, showed a pessimism that the human race could wake up to the qualitative disaster that it was causing in its rush to quantitative growth. Governments have responded with nothing in this debate – transfixed as they are by the glamour of GDP statistics. Heseltine is the first senior Conservative in the UK to state the obvious – that being the fastest growing economy is not necessarily what we all want. GDP is, in reality, meaningless as it fails to measure value as outlined above. A tree is not worth the amount it costs to fell and transport; a river is not worth just the cost of keeping clean – they have value beyond this that is not within the bounds of GDP.

Businesses, operating in the micro-economy cannot be expected to make the change – they are set up to benefit their shareholders and adjust to cultural and legal pressures (usually with some degree of resistance).

It ends up with Government having to lead. In very few nations is there an understanding of the problems that faces us – the race to grow GDP. Most completely misunderstand what GDP measures (and that includes most economists – centred as they are on econometrics the simulation of economies that reflect the 19th Century reality not the 21st Century’s).

We need to establish measurement (if that is how we work best) of the Gross Domestic Value  –  GDV  –  where Value takes over from product (things).

In this way, CO2 in the atmosphere can be valued; that tree being felled can be valued; humans can better value their time given back to society.

We should not give up on growth, but growth of value not product or income (based on the wrongful simulation of salaries, costs and sale prices).

National Value or Gross Domestic Value should become the target – not how many products we have. The question is whether there is a drive and energy to establish an understanding of what really is important or whether (as economist Georgescu-Roegen said in the 1970’s)

“Perhaps the destiny of man is to have a short but fiery, exciting, and extravagant life rather than a long, uneventful, and vegetative existence. Let other species — the amoebas, for example — which have no spiritual ambitions inherit an earth still bathed in plenty of sunshine.”

Michael Heseltine is only partially right. There is a limit to the drive and push people have to continuously get more stuff – but, there is probably no limit to our drive for more value. Michael McCarthy is, maybe, too pessimistic – we can drive human growth through value not products – GDV not GDP.

 

Do Companies Exist???

David Cameron is an astute politician and he understands that, at last, there is a popular movement for equity in taxation. This equity includes companies paying a reasonable share of profits. Ian Birrell in The Independent sees this as the start of a movement but this is a campaign that people like Richard Murphy have waged for many years.

True, much of the publicity around his work and that of organisations like the Tax Justice Network and Action Aid have revolved around tax and the developing world. This is where multinationals – especially in the energy and mining sectors – have often connived with governments with a corrupt result that siphoned off hundreds of billions of dollars from the state into the pockets of individuals, elite groups and corporates.

The Dodd-Frank Act – and its focus on country-by-country reporting of tax in such areas – was aimed at opening up governments and companies payments.

However, the taxation effects of tax havens, low tax jurisdictions and multinationals with expertise in moving their tax affairs wherever they want has also created the opportunity for such multinationals to pay if they want, where they want. Organisations like the Institute of Directors, whose members are mainly smaller companies with less multinational options, have recently come out in favour of zero corporate tax rates – on the basis that it is people that should pay tax, not companies.

What’s a Company for?

There are many who believe that a company should not pay taxes – that the market economy needs to ensure that companies are free (within the law) to grow and prosper and that their assumption of human qualities (they are seen as entities under the law) is a fiction. It is people that need to be taxed – not companies and the IoD, for example, in its paper “How to get rid of Corporation Tax” (written following a similar paper from the 2020 Tax Commission) strongly advocates the elimination of all corporation tax as the company is a mere conduit for shareholders, staff etc who should pay all the tax on disbursements from the company.

This begs the question about the essential qualities of a company in a market economy – what is it that makes a company different from an individual – why shouldn’t it pay tax?

Limited liability provides individuals with the scope to take risks. It is a formula from which individuals seeking to build a business can bring in investment knowing that the only requirement to repay (if managing a legally proper business) is limited to the value of the shares as well as any loans taken out. It is limited liability that was fully developed in the Netherlands in1602 when stock was tradable on the Amsterdam Stock Exchange that gave the push to enterprise in Europe. Taken up by the British, it heralded the industrial revolution.

Joint stock companies (having limited liability) were the original, defining force that differentiated companies from individuals pursuing business opportunities. Now, most business is done with limited liability.  Governments have lost track of the ability of such joint stock companies to register in whatever jurisdiction they want and to appoint Directors that have nothing to do with the business – often purely there to hide ownership.

Clearly, companies have a huge presence. Their marketing ability is as the company – not the individuals that are behind it. Advertising and brand management is aimed at providing the public with an identifiable face. A company relies on its customers seeing it as a tangible and identifiable organization with which customers can do business. It has a legal basis (and can take action as such and be actioned against as a result) as well as a moral requirement – the advent of CSR is merely a tangible outcome of the way that companies are seen to be real and impact the environment and society in many ways.

If it quacks…..

We all know that companies are the centre of entrepreneurship and product and service creativity. In a market economy, the rise of joint stock corporations have worked to de-risk investments so that competition has been developed and economic growth maintained since the early 1800’s. This growth has developed some enormous corporations in businesses as wide as energy, food, utilities, construction, defence and aerospace, pharmaceuticals and beyond. Every area of opportunity is mined by the evolution of companies across the globe. Governments have progressively sought to assist business but, under pressure from society (people) laws have been passed which inhibit them to what society believes are proper norms.

These laws include health and safety and employment laws but also include tax laws. As a result, companies make decisions on where to locate – although this often includes where it needs to sell as much as where it can find skilled staff or suppliers.

Apart from rogue traders, set up with the need to hide its affairs within foreign jurisdictions and behind false Directors, many MNC’s (multinational corporations) are able to move their profits around by manipulation of licensing and other features. Rather than pay tax on profits in the areas in which they make the money, accountants can provide companies with boltholes in which the rates of tax are very low.

The IoD and others believe that companies are not real – that Governments should give up on them and rely on the payments they make to people on which tax should be paid.

The question arises: if a company is a distinct entity in law; if it can be held responsible for its impact on the environment, its impact on people, its duty of care to customers – why, oh why, should it not pay taxes? Why should society not look to some repayment from the company itself – which benefits hugely from joint stock activities as well and huge benefits that are introduced for companies such in terms of infrastructure, government regulations, and a myriad of other incentives – rather than (in this instance only) having to seek tax purely from receivers of income from companies. Taxing companies is, in principle, correct as it is the company that derives the income from a location.

If tax is to be separated, then the long-term outcome for companies would be potentially the loss of other benefits (such as joint-stock arrangements) as the legal distinction becomes blurred. Not just the thin end of the wedge – but a potentially disastrous change.

Companies have to play their part

If companies exist in law as distinct entities, which they do worldwide, then it is reasonable that they face up to the reasonable demands of the society in which they operate. Company law, however, may set up companies as distinct but the reality is that the company has no moral code except that which society imposes. People have moral codes, companies (which are organisations of people) do not. CSR is reactive to society, not pro-active and while companies have a need to become sustainable (in terms not just of resources but sustainable in terms of the relationship with its customers and the societies in which they operate) it is extremely rare for them to lead – to take such societal risks.

This is true in most areas. Health and safety leaders in companies were years ahead of the legal changes in places such as California but were reacting, quite properly, to likely long-term changes. Those that did so were ahead of the game when laws changed in areas such as environmental restrictions.

This reactive ability (changing as the environment changes in an evolutionary way) makes the best companies resilient – sustainable. It shows they are real entities as much of society as any other organizational form or the individuals that self-organise around them and within them. Companies are a part of society and should contribute to society as a key part of it. This means that opting out of a crucial element of the system – taxation – is ludicrous on grounds of the companies’ relationship with society – whether that opting out is legal or not.

The dangers are obvious. The crack in society would be potentially dramatic – companies would be seen to have no fiscal contract with society. This may well be the case for MNC’s now but the public backlash is starting to inhibit their ability to prosper in this environment. Companies that properly pay their tax are now selling this proposition to their customers – companies such as J Sainsbury whose pride in paying proper company tax in the UK is seen in distinct contrast to those MNC’s like Amazon, Starbucks and similar. The latter is threatening to disentangle itself from future investment in the UK if David Cameron (and his “time to smell the coffee remarks”) persists in trying to get them to pay tax where they trade rather than using licensing and royalties to hid their true profits.

Companies are a key part of society. They have to act as such and not just contribute to society solely through CSR documents. They have to be seen to contribute and tax is one of the most obvious manifestations of that contribution.

Let tax be paid where the trade is made

Let’s end the notion that companies should not pay corporation tax and let’s get on to the next step of the ladder – working out how to ensure that royalties, tax havens, tax schemes, fake Directors and the like are no longer tolerated and that tax is paid where the trade is made.

 

See: Do Companies Exist – Part II