Sector by sector, private equity is making deep inroads into UK public services. More than a decade ago, the collapse of Southern Cross, the private-equity-owned care home operator, revealed the havoc that can be wreaked when essential public services are run by heavily indebted businesses with complex financial structures. Typically, such owners maximise profits by using low-tax jurisdictions, loans, and sale-and-leaseback arrangements that split holding companies from property assets.
Present trends show that this cautionary tale is being ignored. A forthcoming report from the Common Wealth thinktank uses the example of the companies that lease trains to railway operators, to demonstrate that private equity companies are pressing their advantage from financial engineering. Britain’s transport network has joined health and social care, children’s homes and some areas of education in offering rich pickings to private-equity investors.
The advantages to businesses are obvious. Because these are essential services, whose continued operation is guaranteed in law and by the public’s need for them, the risks are low. On the railways, contracts guaranteeing revenue have turned rolling stock companies into hugely profitable entities at a time when the rest of the industry was forced to make cuts.
In health, social care and special needs education, a long-term lack of public investment has limited the options available to commissioners, including NHS bodies and councils. Privately owned businesses are filling the gaps. In 2021, a review by the Competition and Markets Authority noted the high profit margins of children’s home operators and judged the market they are part of to be “dysfunctional”. Yet Tory ministers rejected most of the recommendations of the independent reviewer they had appointed to look at the children’s social care system.
Anne Longfield, the former children’s commissioner, is among critics of how businesses based in low-tax jurisdictions are enabled to take money out of statutory services “at an alarming rate”. Yet far from cracking down on opaque accounting, capping profits or making efforts to re-shore taxes, Conservative governments have let a similar pattern emerge in early-years education and childcare. A Guardian investigation last year found investment funds had doubled their stake in childcare in four years, and further expansion is all but guaranteed given the government’s pledge to fund more places, without enabling the public sector to provide them.
Awareness of the harm caused by tax havens is wider than it used to be, but international efforts to tackle it have stalled, and UK overseas and crown dependencies have rejected transparency. Meanwhile, the mobile, intangible nature of digital businesses has made it far easier for multinational corporations to avoid taxation. This is a global problem as well as a national one. But the siphoning of profits from heavily subsidised public services – the subsidy is worth around £28bn a year in the case of rolling stock – must be curbed. As the Common Wealth authors point out, austerity and tax havens are a destructive combination. Offshore boots should never be filled at taxpayers’ expense.
