Student Loans Swindle 2: Cash from chaos

A month ago I wrote about the weird world of Student Loans and how they are accounted for by the Government.

/https://jon-chadwick.com/2018/11/17/the-great-student-loans-swindle-its-a-swindle-a-swindle/

Today the Office of National Statistics published their review of Student Loans accounting, which makes some big changes to how the Government calculates the deficit (but not national debt)

https://blog.ons.gov.uk/2018/12/17/accounting-for-student-loans-how-we-are-improving-the-recording-of-student-loans-in-government-accounts/

In short an extra £12bn will be added to the deficit, increasing it from £40bn to £52bn.   After 8 years of austerity to discover that we have calculated the deficit wrong, and that a huge chunk of the deficit reduction was just accounting measures is a huge disappointment.  

Adding up all of the other wriggles and wheezes the Government has used to make the numbers look better my guess is that the actual deficit reduction was only about half the Governments claims.

Just think of all of the hardship caused for such a piss poor return.  

Took my apprenticeship levy, but the levy was dry

My last full length blog was a deep dive into the weird world of student loans financing, a mess so big that it will take years to unwind.

Two people separately approached me and raised the issue of the Apprenticeship levy.  You know who you are.

For those who don’t follow education policy the levy was introduced by George Osborne in his 2015 budget to raise funds for expansion of apprenticeships.   All businesses with a payroll over £3m pay at a rate of 0.5%.  In case you hadn’t spotted it’s another pay roll tax.   

The funds raised go into an account for the employer which they can access to pay for apprenticeship training. The money stays in the account for 2 years after which it goes back to the Treasury. 

The training which can be funded from the account is tightly controlled. This is a consequence of previous scandals where Government funds for training were alleged to have been spent fraudulently.    You may remember David Cameron appointing Emma Harrison from A4E as his Tsar for something that even I can’t remember.

https://www.telegraph.co.uk/news/politics/9101766/David-Camerons-back-to-work-tsar-Emma-Harrison-quits-amid-fraud-allegations.html

The massive problem is that the rules are so strict that it is almost impossible for businesses to access it.     A year in the Treasury has raised over £2.5bn, but had spent only £180m on training. The rest of it is still sat with the Government.   As a consequence the Government is getting a benefit when it does the public accounts of over £2.5bn a year, which makes the progress in reducing the deficit look better than it really is.

Eventually companies will get better at accessing the cash, but it looks as if the system is designed to make it impossible for all the money to be spent.  

This might sound like a scam, but the Tories aren’t the only ones doing odd things like this.   The Labour Party has a rather eye catching policy to force companies with more than 250 employees to create an employee share ownership scheme.  Employees would get up to £500 a year each as a dividend, with the rest going to the Treasury.   This sounds great but for lots of companies the majority of the dividend will go HMG not the workers.  It is essentially another pay roll tax.   Some of the modelling done by the FT shows 90% of the money going to the Government rather than the workers.

I don’t mind Governments raising more money to supplement the tax take.  We need to find ways of increasing the flow of money into the Treasury if we want to have things like the NHS.  But maybe there is a more honest way of doing it rather than schemes like this, which rig the rules in the Treasury’s favour.

We can’t condemn Companies for working the system on tax if HMG does the same thing.

Interserve Overdrive

A few months ago I wrote about the collapse of Carillion, and drew comparisons between their collapse and the Government outsourcing industry in general.

This week Interserve have announced they are negotiating a financial recovery package.  This news led their shares to slump to 24p each, down from 660p 3 years ago.  

Interserve turn over roughly £3.5bn a year, a bit smaller than Carillion, which had revenues of £5.5bn before it went under.  Like Carillion, they have a huge book of future contracts worth £7.5bn, and they operate in the same outsourcing/PFI space.  Interserve’s revenues come largely form Government contracts, including school meals, hospital cleaning contracts, school building programmes.  Most of this work is often called facilities management (FM).  Hard FM is stuff like buildings maintenance.  Soft FM is cleaning contracts.    

Its also a big part of the consortium building new Colleges for Durham University.  

Some of Interserve’s problems stem from the risk in their contracts.   Costs and revenues in areas like facilities management are stable and predictable, but as public bodies have squeezed contracts profit margins have fallen.   

Interserve’s response has been to move into other areas of Government business.   They are the UK’s largest provider of outsourced probation and criminal justice services, areas where costs are being squeezed and penalties for performance are starting to bite.   It is just tougher to make the kind of predictable profits that investors like from services like probation than from FM.  This is essentially the same problem that Circle Healthcare had with running an NHS Acute Hospital – the techniques that the private sector use to control cost, drive efficiency and build profit don’t really work with volatile public services. 

They also made a bold attempt to diversify their revenues borrowing heavily to invest in an energy from waste business.  This business area was a disaster for them, and it has taken them years to unwind these investments.  It was problems with these deals that prompted the most recent fall in their share price.  This is an area where the Government tried to encourage investment in EFW to reduce the amounts of landfill, but ended up with a lot more capacity than the UK needs. 

This is starting to look like an endemic problem with the outsourcing market.   There isn’t enough profit to be made from outsourced facilities management contracts to support all of the big players.   Once these companies expand outside of traditional FM work they take on risks that they don’t really understand, and debts they can’t service.  A lot of the contracts involve a large capital investment up front (funded through borrowing) so secure future revenues,

Call me a heretic but I don’t really have a problem with the public sector outsourcing FM services.   Interserve probably have a really good FM business somewhere under all of these other debts and contracts.  But there are too many companies trying to do outsourced FM and not enough profits to support them all.   

There will be a shake up, and companies who can divest of their too risky bits of business will survive, others won’t.

Underpinning all of this is the concept of what outsourcing of public services means.   It is often regarded as the epitome of free market neo-liberalism but in reality when the Government incentivises companies to invest in areas like EFW it is actively distorting markets in a which that is contrary to neo-liberalism.  It is more like old fashioned Keynesianism.  But you have to wonder when the state can borrow at tiny interest rates why it should pay a risk premium to a private company?  Particularly a private company than now finds itself sinking under that same debt?