The Government has just fallen victim to a campaign of misinformation – this is not a good sign about how we are going to be governed. I have, myself, played in those dark arts of political number making and this is a classic example to my mind. A classic example of someone starting out – in my opinion – with something deliberately misleading and ending with us all being told an outright lie.
So much for the grown-ups being back in charge of the UK. Here is the specifics, from the Government itself:
According to analysis by the Local Government Association, there are now over 1,500 children in placements each costing the equivalent of over £0.5 million every year, while the largest 15 private providers make an average of 23 per cent profit.
As we’ll see, that 23% is wholly, outrageously wrong. But it’s one of the planks in the wall of evidence leading to – or providing an excuse for – a shakeup of how children’s homes are created and supplied.
Now it’s possible, even righteous, to take a step back and insist that the profit margin on a government supplier should be an irrelevance. Even, that it’s no damn business of anyone other than the capitalists making it.
Still, let’s accept, for the sake of argument, that these profits on children’s services deserve further scrutiny. Our first question should be: compared to what? We have two obvious possibilities. One is that children’s care is supplied directly by local authorities (LA), the other is that some outsider – a would-be profitmaking company, say – does so, and the LA pays for that. We might all have varied prejudices about which is preferable. For some, the presence of a profit margin means that the private provider will inevitably be more expensive. The Competition and Markets Authority (CMA) looked at this:
Turning to price, our evidence suggests that the cost to local authorities of providing their own children’s home placements is no lower than the cost of procuring placements from private providers, despite their profit levels.
Note how bureaucratese works. ‘No lower’ means ‘actually, it’s higher’. Which means that what we’ve really uncovered here is the gross inefficiency of local authorities. Even without that ‘23% profit’, they’re still more expensive.
So private providers, profits included, are cheaper than LAs. Which means we should use the private providers. As to what profit the private providers make, that’s nobody’s damn business. If they’re doing it better and cheaper, then we want them to be doing it. Their profit is their business.
No, really, there is no moral, just or ethical profit level. There are moral, just and ethical actions, methods of caring for troubled children, sure there are. But profit levels? Nope, if you’re achieving the task more efficiently then you get to keep that cash. Well, until everyone else works out what you’re doing and also does it. The CMA again:
If this market were functioning well, we would expect to see existing profitable providers investing and expanding in the market and new providers entering. This would drive down prices as local authorities would have more choice of placements, meaning that less efficient providers would have to become more efficient or exit the market, and the profits of the largest providers would be reduced. Eventually, profits and prices should remain at a lower level as providers would know that if they raised their prices they would be unable to attract placements in the face of competition. The high profits of the largest providers therefore shows that competition is not working as well as it should be.
The CMA is actually complaining that there is not enough – not enough effective – competition in this field. Okay, so let’s have more, and make childcare cheaper to the benefit of us all – not least that we can then offer childcare to more who need it. Driving out private firms by complaining they are too successful isn’t going to help.
There is, obviously, that little whisper at the back of the mind, that perhaps price is achieved by cutting corners, by degrading the service that is on offer. The CMA:
Nonetheless we are well placed to consider the outcomes that private providers produce, as compared to local authority provision. While there are instances of high and low quality provision from all types of providers, the evidence from regulatory inspections gives us no reason to believe that private provision is of lower quality, on average, than local authority provision.
Ah. So, we’ve actually got one of these big report things to the Government that says that private provision is as good as (or as bad as, to taste) anything the local authority lays on. It’s also cheaper. So, we’re good to go then, right?
Except that’s not how politics works. Enter those dark arts of number and perception management. There’s still that 23% profit to be dealt with. There are those who have the vapours over the capitalists being allowed to get away with that much. Indeed, that’s part of the Government’s complaint:
There will also be a ‘backstop’ law to put a limit on the profit providers can make, that the government will introduce if providers do not voluntarily put an end to profiteering.
‘An end to profiteering.’ That’s price controls that is. And don’t price controls have just the most wondrous historical record of actually working as intended? In fact, it’s 100% – they never do work.
So, where did this idea of, erm, ‘excessive’ profit come from? As I say I’ve played these games myself before now. And this all started in a report funded by the Local Government Association (LGA), as the Government itself says. The report has been repeated over the years, four times by my count. And it’s a really, really bad piece of number fudging.
Here, from 2023, is the fourth update. Yes, this has been going on for some years – as have my complaints about it.
The first report in this series was published in January 2020 and covered the largest 16 providers.
So, what is it that they look at?
The average EBITDA margin
And that’s where the misinformation is. Or, if you have an opinion like mine, the deliberate lie. There are three little bits of clarification we need. Ebitda is earnings before interest, tax, depreciation and amortisation. Gross margin – in this field – is after all the operating costs but before the capital costs. Net profit is after Ebitda, or, gross profit after all the capital costs.
These estimates of high profits are of 19+% (in this report) for Ebitda. Another estimation provides the 23% the government is talking about – but that’s of gross profit. That is, it’s the profit before all of the costs of having a home to put children in.
No, really. You might borrow to pay a mortgage on a home – don’t forget these children’s homes might have only three or four children in them. Some only have one. They’ll need space for overnight staff too. We’re not talking about some skanky flat in a tower block: these are substantial actual houses that have to be bought. Which, you know, cost real money. So, there’s the interest on that mortgage. Amortisation is paying off the capital of the mortgage. Depreciation is, as anyone who’s ever owned a house knows, a constant problem. New windows every 20 years maybe, new boiler – if they’re still legal – and a new roof every forty. That 19% is before all those costs. Or the 23% gross profit, again before all those costs.
It’s only my humble opinion, but they’re lying to us here. They know – or they certainly should – that Ebitda margin, gross profit, that’s all too complex for the political mind to keep, well, in mind. It’s very rapidly going to get collapsed down to ‘profit’. Which of course it does. Here, again, from the Government announcement: ‘largest 15 private providers make an average of 23 per cent profit’. This is a number that is now generally believed: see the BBC, Robert Peston, George Monbiot:
Large commercial providers of children’s residential care make average profits of 19%, according to a report commissioned by the Local Government Association – an astonishing rate of return. Ordinary businesses do well to make 5%.
But 5% would refer to net profits, the 19% is to Ebitda. They’re not the same thing, not at all. But the campaign has been successful – after all, politics is not about the truth, it’s about what people believe. Bien pensant non-thinking is now insistent that profits at private childrens’ homes are of the order of 20%.
Okay, okay, you can suggest that this is a little less than lying if you like. But it’s had the effect of misleading everyone, hasn’t it? Which, I reckon, was the intention from the beginning.
It should actually be obvious that something very dodgy has been going on here. For throughout the series of reports, the reporting on them, the CMA’s report, the following point has also been made:
Finally, as noted above, we have seen that some private providers, particularly those owned by private equity investors, are carrying very high levels of debt. As local authorities need the capacity from private providers, but these providers can exit the market at any time, these debt levels raise concerns about the resilience of the market.
Now, if you’re making 19 to 23% net profit, your debt level simply isn’t an issue. But they claim to be simultaneously concerned about those debt levels. Showing that they’re being significantly two-faced. Worrying about profits before debt and capital costs, then about solvency after debt and capital costs. Or as I’d put it, lyin’ bast….well, no, okay, canny political operators.
For that’s what this is. The LGA is run by the people who would be able to spend this river of cash internally in their own organisations if there was no contracting out to private providers. As C Northcote Parkinson pointed out near 70 years ago, the only motivating aim of a bureaucracy is to increase the budget and headcount of that bureaucracy. Which is what the LGA is doing here. Killing, through politics and numerical mutilation, their only competition so as to increase the budget they get to deploy.
Recall the finding of that CMA study. The private providers are, on average, as good as and no worse than the local council ones. Council provision is ‘no lower in cost’ – for which, read ‘usually higher’. So, all that’s left is to deliberately, with malice aforethought, manipulate the numbers so as to mislead bien pensant thinking. Which isn’t, let’s be honest about this, all that difficult – they all did words at uni, not numbers.
But that is, in the end, how we’re governed. For reasons of bureaucratic empire building, and no more, we all get told about this excessive profitmaking, something proven by gross manipulation of numbers and definitions. The original and base calculation is that our rulers are too dim to see through it all.
And, Dear Reader, they are too dim. Aren’t we the lucky ones?
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