Search in Features

John Tizard: Public services and hedge funds do not equate

Monday May 20th, 2019

At the end of last month Britain’s second-biggest care home operator, Four Seasons, appointed administrators to push through a sale in a last-ditch attempt to save the business that houses 17,000 residents. The administration of two holding companies — which were set up by the care home chain’s former private equity owner, Terra Firma — will enable the US hedge fund that seized control to sell the business without any ongoing obligations. Four Seasons, which employs 20,000 staff, will continue to operate as usual and is hoping to be sold by the end of the year.

www.govopps.com

John Tizard

This is not the first time that a hedge fund owned social care operator has gone into administration, yet history is allowed to repeat itself.

Although in the case of Four Seasons we are repeatedly told that care will continue to be offered to its clients, there will be uncertainty and anxiety for many vulnerable people and their families, and for dedicated yet often low paid staff.  People are being used as pawns in some global business game designed to maximise profits whatever the cost to people.

There have been many reports of business sector care providers not paying corporation tax and failing to pay decent – and sometimes even legal minimum – wages to their staff whilst paying high salaries to senior executives and dividends to investors.

There have other examples of private equity and hedge funds, and other profit-maximising companies delivering services under contract to the public sector which have met neither their tax obligations nor their responsibilities to their staff.

The FT reported on 10 May 2019 that “HC-One will add to concerns over the role of private equity in delivering care for the elderly.

“Although care home owners complain that the industry has been hit by the rise in the minimum wage, higher costs for nurses and real-term cuts in residents’ fees by local authorities, the dividends show this is far from the full picture. This shows that the issue is not just how much public and private funding goes into adult care, but where the money ends up.

“Like some other major care home operators, this company is ramping up its debt and paying high-interest rates and huge management charges to facilitate financial gains for its owners, while leaving the risk with residents, employees and the state.

“HC-One appears to have declared a loss every year except one since its creation in 2011. It has paid no UK corporation tax in that time, and instead received net tax credits of £6.5m since a reorganisation in 2014. The highest paid senior director of HC-One received £2.5m since 2011.”

HC-One has a complex corporate structure, with 50 companies, six of which are registered offshore either in the Cayman Islands or Jersey and a further five in the UK as foreign entities. So, who knows what tax is actually paid, what profits made and where they end up?

In addition to concerns about service quality, sustainability and public accountability, there are some serious questions to be asked about both public sector procurement and outsourcing, and the regulations which are meant to protect vulnerable people, employees and the wider public interest. The efficacy of public service contracting and outsourcing must be examined as must the nature of companies allowed to provide public services.

There should be an immediate review of company business, financial and ownership models and their compatibility with delivering public services, especially services for vulnerable people.

For example, is the maximisation of short-term profit, wealth extraction from the business and exploitation of land and other assets to maximise profit consistent with a public service ethos and sustainable quality services?  Or what are the implications to service quality when staff are employed on precarious contracts and on low wages, sometimes even below the national living wage rate?

The limited evidence that is available would suggest that both these approaches of short-term profit maximisation and poor employment conditions are inconsistent with reliable quality services. Let’s get some hard evidence based on analysis and facts.

Such an evidence base would strengthen the argument that has been made by many that if public services are outsourced to the business sector:

  • strong effective regulations are needed to protect the public interest and the interests of service users and employees
  • external inspectorates and auditors should have a duty to examine the impact of operational business practices on service quality and value for money for the taxpayer
  • the public sector should consider the ownership and business and financing models of companies when evaluating tenders for public service contracts (of course such an approach would need to be consistent with EU procurement and competition regulations)
  • there should be break clauses in contracts so that when ownership or the business and/or financial model changes significantly the contract can be reviewed and, if necessary, terminated at no additional cost to the public sector
  • within the constraints of the law, consideration should be given to being able to take into account factors such as company senior executive remuneration and tax policies

and

  • contracts should require decent terms and conditions including the real living wages, pensions and trade union rights for staff

Such a set of regulations is urgently needed.

However, the government and wider public sector could give greater reassurance to service users, staff and the public by speedily moving towards the default for public services – particularly those which impact directly on individuals and their welfare such as social care, education and clinical health services – being that they are publicly owned and publicly managed. Such publicly operated services could be supported and complemented by services delivered by the voluntary and community sector (VCS), social enterprises and user and/or staff led co-operatives.

In the case of social care, a recent report from the Voluntary Organisations Disability Group (VODG) – www.vodg.org.uk/wp-content/uploads/2019-Above-and-Beyond-web.pdf – has demonstrated the added social and community impact when VCS organisations provide services for people with disabilities. Their track record, practices and ethos are poles apart from those of profit-maximising hedge fund-owned service providers.

Public service ethos matters. Quality matters. Security and respect matter for service users. Society, and government on behalf of society should ensure that across our public services these are paramount. Sadly, this is not the case today. This has to change, and it can change.

Leave a Reply

debug