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The I word

When you hear a politician or a company boasting about "investment", always ask what the investors are getting in return.

Flickr/ Luke H

Earlier this year, Corporate Watch published an investigation into the finances of commercial radio giant This is Global. It revealed that the owner of Classic FM, Heart and Capital had not paid any corporation tax in the last five years, after sending millions through tax havens.

A defensive Global responded that this was not tax avoidance but “significant and legitimate investment,” saying the company had “invested over £500 million in commercial radio in the UK over the past six years and played a major part in promoting and rejuvenating the sector.” £500 million is roughly the same amount as high interest loans that Global has taken from its owners through the Channel Islands.

In 2012, interest payments of £60 million on these loans helped turn a £33 million profit from the UK radio stations and other businesses into a £29 million loss, leaving Global with a UK tax credit of £257,000 for the year. Previous years’ accounts also show either no corporation tax paid or credits received. In total, more than £200 million has left the UK as interest payments to the owners since Global was founded in 2007.

“Channelled £500 million through tax havens” doesn’t quite have the same ring as “invested over £500 million” and Global’s statement is a familiar PR strategy. ‘Investment’ is the safe word for companies feeling a little too exposed.

Google boss Eric Schmidt said his company was “investing heavily in Britain” after the internet giant’s financial contortions were revealed last year. More recently, Npower’s Paul Massara dropped the ‘I’ word to justify his company’s non-existent tax bills. George Osborne likes to describe his government’s decision to slash corporation tax as “an advertisement for investment in Britain”.  

It’s a common refrain as governments across the world compete to lure the money of companies, banks, pension funds and other governments with ever more ‘pro-business’ policies. The investors themselves are often explicit about what they want. In Greece earlier this year, eleven aggrieved companies, including Nestle, Philip Morris and Unilever said that they would be happy to spend more in the country if only it was “more friendly to investment”. Their definition of friendship turned out to involve lowering minimum wage, especially to young or currently unemployed people.

In February this year, we asked water companies in England and Wales to respond to an investigation that questioned the financial efficiency of privatisation.* Their responses all boasted of their huge spending to improve the supply. Southern Water was a typical example, saying it was “investing £1.8 billion in a major capital improvement programme from 2010 to 2015 – equivalent to spending nearly £1,000 for every property in the Southern Water region over the five-year period.”

You can’t argue with those numbers, can you? Everyone knows leaky pipes need to be fixed, so why complain when such spectacular-sounding amounts are being pumped into the system?

But it’s not just about the amount the companies are spending. We also need to ask what they and their investors are getting back.

The 19 water companies’ accounts show that, between them, they are borrowing a massive £49 billion from banks, pension and investment funds. The principal motivation of these lenders is not to improve the quality of people’s drinking water but to make a decent return on what they hope will be a safe and stable investment. To satisfy their demands, the water companies paid more than £3 billion in interest payments on their borrowings in 2012.

Their owners and shareholders – also banks, private equity, pension and investment funds – want their cut too and the companies paid out a total of £884 million in dividends in the same year. The water industry’s total revenue in 2012 was £10 billion, meaning almost one third of the money spent by people on water bills in England and Wales left the system as interest or as dividends.

So the only people putting money into the system and not getting any back are the ‘customers’. And they’re not only paying for water and infrastructure, but for the owners and lenders’ returns.

All the water companies say borrowing is the cheapest way to finance investment and that it means people don’t see their bills rise massively each time new infrastructure is needed. In the current economic context that may be true but, just like the companies that won contracts under the Private Finance Initiative, the water companies are paying far more to borrow this money than the government would if the supply were public. The UK government can borrow much more cheaply than companies because it is regarded as a more secure investment.

If the water and sewerage system was in public ownership, borrowing and financing costs would be much lower. Corporate Watch found that, given the government does not have to pay dividends to shareholders and is currently paying around 3.5% a year on the 30-year bonds it is issuing (compared to the 6% overall rate the companies are paying) almost £2 billion a year could be saved. This could either be reinvested in the system to address problems like leakage or help reduce bills. If the amount was all taken off bills, the average saving per household would be around £80 a year.

This still might not be ideal - the supply would remain dependent on banks, bondholders and a big state - but it could at least bring the same big investment, only cheaper.

What’s the lesson? If you hear a company boasting about how much it is investing, always ask what it, and its investors, are getting in return.

 

This is an extract from 'Meet the Investors', the new issue of the Corporate Watch Magazine. Click here to buy a copy.

* Although some of the water companies are also avoiding tax in a similar way to Global!

About the author

Richard Whittell works for Corporate Watch. He is the co-author of Resisting Reform: Water Profits and Democracy (Sage, 2010) and Dodgy Development: Films and Interviews Challenging British Aid in India (Corporate Watch, 2011)


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