Well, they’ve fooled George Monbiot so job done, eh?
George Monbiot gives us an example of that neoliberalism that so disfigures our society. The massive profits being made by private companies in the children’s homes business. The problem here is as we’ve been saying for some years now. The numbers used are entirely deliberate distortions meant to lead people to this conclusion.
We should point out that this is not - not, repeat - about whether children’s homes should be supplied by profit-seeking corporations or not. Not from our point of view at least. On this, as so many other subjects, we’re wholly pragmatic. Whatever system works best is the one that should be used. If that’s capitalism, profits and shareholders then let’s use that. If it’s direct government supply then let’s use that.
So this is what I have learned. That nothing is now sacred. Nothing is too valued, too important, too vulnerable to not be hacked and stacked and used as fuel on capitalism’s bonfire. Inured as we are to the scorching of all we hold dear, turning children into commodities from which commercial ventures can extract profit stretches the boundaries of belief. Can it be true? Is this really how the system operates? Yes and yes.
Children in residential care, on average, generate £910 each of profit a week for the corporations that control them. 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%.
Who are these lucky companies? An Observer investigation found many of them are private equity, venture capital and sovereign wealth funds. Among the owners are the state of Qatar and the emirate of Abu Dhabi, whose care company in the UK, mostly investing in special schools, made 26.5% profits in 2022.
Running back through those three examples used, The Observer report we discussed here. They measure Ebitda, not profit. The average profits of 19% - that’s Ebitda, not profit. The £910 per week profit, that’s operating profit (closely akin to Ebitda) not profit.
To explain this as clearly as we can for those who might be a little baffled by accounting. Imagine that there’s an activity which requires both spending today and this week and also spending covering some years. We might call these current costs and capital costs. Or operating costs for the first set. Or even “now costs” and “then costs”. Say, given that our example here is children’s homes, we’ve the costs of the staff, the electricity, the food, these sorts of things. The bills come in every week - maybe every month - and have to be paid on that basis. We could call these current costs, or operating costs. We also have those longer term costs. Say, the cost of having a building in which a home can be. This could be interest on the mortgage taken out to buy it. There would be amortisation (ie, the capital of the mortgage being paid off). Depreciation - buildings do need maintenance, new roof every 25 years, repoint the brickwork every 50 and so on.
It’s a useful accounting technique to differentiate between these two sets of costs. So, we take those current, operating, costs off revenue and we’ve got something called “operating profits”. Closely aligned with this although not exactly the same we’ve Ebitda. Earnings before interest, taxation, depreciation and amortisation.
With our example of children’s homes we’ve therefore those two sets of costs - running the home and having the home. We’ve also those two possible measures of what’s left over after the costs of running the home but before the costs of having the home - either operating profits or Ebitda.
Those costs of having the home are substantial. As the CMA report George refers to points out, the average new children’s home has three kids in it. Given that at least some of the staff will sleep in even if not live in this means a substantial suburban house - possibly what might be termed a villa. A couple of million £ in London at least and certainly not entry-level first time buyer sort of place anywhere in the country.
The actual profit made by the capitalist b’stards is, obviously enough, the one after all those capital costs are also paid. Which is nothing at all like that £910 a week, that 19% nor the 26.5%. This is how all these reports manage to marvel at the profit margins and also worry that everyone’s about to go bust - the margins are measured before the cost of the homes, the worries about finances after them.
But we’ve had that series of reports over the years claiming these vast profit margins. As we’ve said before we think this is purely performative. A deliberate attempt to mislead and thereby influence the public debate. That several years’ worth of such reports have been funded by the Local Government Association leads us to believe that it’s a bureaucracy annoyed at someone else gaining their rightful budget.
But here we go, George Monbiot is now thundering on about it in a Guardian column so job done, right? The public is mislead, mal-informed, by that deliberate elision between operating profit and net profit, not including the costs of a home to have children in when estimating the profits of children’s homes.
Of course, it’s entirely possible for anyone who wants to to say that these details of accountancy are too complex to be bothered about. Phwoar, look at those margins! and decry events on that basis. Sure, it’s possible - but anyone who does that really has no place at all in critiquing costs and margins now, do they? Or even in commenting upon matters economic.
And now an actual and proper economic point from the Competition and Markets Authority report, the first of the three George mentions:
Comparing types of provision, we found that for children’s homes, local authorities’ operating costs were in aggregate approximately the same per child as the fees paid to large providers. However, the fees local authorities pay are higher than the operating costs from the private children’s homes providers in our dataset, as they also cover capital costs and profit. Based on our sample of 29 local authorities from across England, Scotland and Wales, we found local authority operating costs have been approximately 30% higher, on average between 2016 and 2020, than the equivalent for the 15 large private providers whose accounts we have examined. It therefore appears that the amount paid for a place in the private sector, even allowing for profits, is not higher than that paid by a local authority to provide an in-house place. Our analysis of our dataset indicated that the primary driver of these cost differentials was in higher staffing ratios and costs in local authority provision.
It is not entirely obvious that the capitalists are in fact making out like bandits now, is it?
We’ll let you know if George responds to this. Might not as he’s a book about the evils of neoliberalism to sell currently and it wouldn't surprise us if this is one of his examples. Could be a tad embarrassing as the book’s not just gone to press it’s on release.