A Level Economics 67: Causes of Government Intervention Failure

Government interventions to correct market failures can sometimes lead to government failure, where the intended policy objectives are not achieved or result in unintended negative consequences. Here are some common causes of government failure when intervening in markets:

1. Information Asymmetry: Government policymakers may lack complete information about the complexities of the market or fail to accurately predict the future consequences of their interventions. This information asymmetry can lead to poorly designed policies that do not effectively address the market failure.

Example: If the government implements a subsidy program to encourage the adoption of a new renewable energy technology without fully understanding the long-term costs and benefits, it could result in inefficient allocation of resources and unintended financial burdens.

2. Regulatory Capture: Sometimes, the regulatory agencies responsible for overseeing market interventions may become subject to regulatory capture, where they develop a close relationship with the industries they are supposed to regulate. This can lead to policies that favor the interests of powerful industry players rather than promoting the public good.

Example: In the financial sector, regulatory capture may occur if regulators develop cozy relationships with banks and financial institutions, leading to weak oversight and inadequate regulation of risky financial practices.

3. Political Interests and Lobbying: Government interventions can be influenced by political interests and lobbying efforts from various stakeholders. This can result in policies that cater to the interests of specific groups rather than addressing the market failure in a fair and equitable manner.

Example: If a powerful agricultural lobby influences the government's agricultural subsidy policies, the subsidies may disproportionately benefit large agribusinesses rather than smaller family farms.

4. Unintended Consequences: Government interventions can have unintended consequences that undermine the original objectives. Policies that may appear beneficial in theory can lead to negative outcomes in practice.

Example: Rent control laws intended to make housing more affordable may reduce the incentive for landlords to maintain their properties, leading to a decline in the quality and availability of rental housing.

5. Administrative Inefficiencies: Government programs can suffer from administrative inefficiencies, including bureaucratic red tape and delays in implementation. This can hinder the effectiveness of the intervention and result in resource misallocation.

Example: If a government program aimed at providing financial assistance to small businesses involves complex application procedures and lengthy approval processes, it may fail to reach those in need of assistance promptly.

6. Budget Constraints: Government interventions often require substantial funding. If resources are limited or misallocated, the effectiveness of the intervention may be compromised.

Example: A government-sponsored job training program may have limited success if the budget is insufficient to cover the costs of adequate training and support services for participants.

Conclusion:

Government interventions to correct market failures are essential, but they can lead to government failure if not carefully designed and implemented. Policymakers need to consider the potential causes of government failure, assess the risks, and continually evaluate the effectiveness of their interventions. Transparency, accountability, and evidence-based decision-making are critical to minimizing the risks of government failure and ensuring that interventions achieve their intended objectives without creating unintended negative consequences.

Regulatory Capture? Insurance Regulator rules in Favour of Insurance Industry

City regulator will not intervene over businesses ineligible for payouts writes Kalyeena Makortoff in The Guardian 

 

Small and medium-sized businesses fear they will not be able to survive the economic impact of the coronavirus lockdown. Photograph: James Veysey/Rex/Shutterstock


Most UK businesses will not be eligible for insurance payouts over the Covid-19 lockdown, the City watchdog has warned, adding that it was not prepared to intervene on their behalf.

In an open letter to insurance chief executives on Wednesday, the Financial Conduct Authority said it found that most claimants on business interruption policies did not have the right coverage to warrant a payout during a pandemic.

“Based on our conversations with the industry to date, our estimate is that most policies have basic cover, do not cover pandemics and therefore would have no obligation to pay out in relation to the Covid-19 pandemic,” the FCA’s interim chief executive, Christopher Woolard, said.

“While this may be disappointing for the policyholder we see no reasonable grounds to intervene in such circumstances.”

The move is likely to anger small and medium-sized business owners who fear they will not be able to survive the economic impact of the coronavirus outbreak.

Typical business interruption policies pay up to £100,000 to cover the cost of keeping a company running if it is forced to shut for reasons beyond its control, such as flooding or fires.

However, while large insurers such as Hiscox sold policies before the lockdown that promised to pay out if businesses were forced to shut because of a notifiable disease, business owners say their claims have been denied because the policies do not specifically cover pandemics. A group of brokers and loss adjusters are planning legal action against some of Britain’s largest insurance companies.

The FCA said some small businesses – that earn less than £6.5m in revenues and employ fewer than 50 employees – can still take claims worth up to £355,000 to the Financial Ombudsman Service, which could result in faster decisions than if they were taken through the courts.

However, in a warning shot at the wider financial sector, the watchdog announced that it was also launching a new small business unit that would keep an eye on how smaller firms are treated by financial services during the outbreak.

The FCA also said insurers should be acting quickly to get money to businesses who have legitimate and undisputed claims, and should give partial payments where only part of the claim is under review.

Pioneering Britain has a rethink on privatisation

 Jonathan Ford and Gill Plimmer in The Financial Times

It was one of the most influential reports ever written by a modern British economist — and perhaps the most rushed. 

Stephen Littlechild, then a little-known academic, was commissioned by Margaret Thatcher’s government in October 1982 to design a regulatory mechanism that would prevent Britain’s soon-to-be privatised telecoms monopoly, BT, from exploiting its position and gouging the public. 

The work was urgent. The prime minister wished to push through legislation that would enable the company to be sold as soon as possible, making it a pioneer for the privatisation of public utilities that she hoped would create a new shareholding democracy in Britain. She needed the report by January 14 1983, which Prof Littlechild said gave him just “10 working weeks (allowing for Christmas!)”. 

 His formula “was invented between 5 and 7 January 1983” allowing just a single week “to write it up in a plausible way, test it against the specified criteria, [and] conclude that it was the best available option”, Prof Littlechild recalled. 

Fortunately, “RPI minus x” passed muster not only with Mrs Thatcher, but also with BT’s investment bankers, SG Warburg, which thought it vastly preferable to the profit ceiling used by US utilities. “It was politically defensible and even attractive,” recalled Prof Littlechild. It won the day. 

The Littlechild formula has gone on to serve as the template for all UK regulation of privatised utilities. In modified form, it sits at the heart of the mechanisms that still regulate prices set by electricity and water companies. 

That means it is also at the centre of the divide in British politics, which in the past two years has fractured about the merits of allowing private companies to run essential utilities that are natural monopolies. 

After a series of scandals and controversies over poor service, high prices and generous payouts to shareholders, the country that was the global frontrunner in privatisation is rethinking how to run its essential utilities. Almost three decades after they were sold off, critics — and many voters — believe that investors have run rings around the watchdogs set up by the government to regulate the industries. 

Under Jeremy Corbyn, the opposition Labour party has come out firmly for the renationalisation of rail, water, energy and the postal service. 

At the Labour party’s annual conference in September, the shadow chancellor, John McDonnell, promised to bring “ownership and control of the utilities and key services into the hands of people who use and work in them”. 

Labour’s attack has exposed the fragility of public consent for private utilities. An October poll conducted by the UK’s far-from-socialist Legatum Institute showed 83 per cent of respondents favoured the nationalisation of water. For energy, the figure was only slightly lower, at 77 per cent. 

“If you look at this list, you see the public most objects to private ownership of natural monopolies — ones where there is little real possibility of injecting meaningful competition,” says Martin Blaiklock, an infrastructure expert and former head of the European Bank for Reconstruction and Development’s power and energy division. 

 Prof Littlechild’s regulatory system was supposed to substitute for competition, giving consumers a fair price while also offering private owners incentives to innovate and find efficiencies. Charges were set to give operators a reasonable return on their capital assets, indexed for inflation (the retail price index) less a certain amount each year (x) to spur them to drive productivity. 

 What makes Britain’s regime different from the one for private US utilities, for instance, is that these returns are not capped. “We didn’t like the idea of an effective 100 per cent tax on efficiencies over a fixed rate of return,” recalls Prof Littlechild. “Margaret Thatcher’s economics adviser, Alan Walters, was particularly offended by the cap. He said: ‘We can’t do this. It’s socialism!’” 

Instead, every few years the watchdog estimates the costs the company is likely to face in the next regulatory period. If the company can achieve greater savings, it is permitted to keep 100 per cent of the extra it makes. 

 This sounds logical enough. It has helped to usher dozens of utilities into the private sector and support huge investment. But critics allege the system has delivered neither the discipline nor the innovation that was promised. They think regulators have been too lenient in setting the efficiency targets that are used to justify extra returns for private capital. 

Take, for instance, the water industry, which was sold off in 1989. Cathryn Ross, until recently the chief executive of Ofwat, boasted that her organisation’s efficiency demands had saved consumers £120 off bills (which currently average about £400) since privatisation. That may sound a large number, but it equates to an annual productivity improvement of just 1 per cent. It is well below even the anaemic 1.5 per cent average rate for the UK economy over the same period. 

“By giving the companies an easy ride, the regulator has ensured that customers’ bills have risen more than they should have,” says David Hall, director of the Public Services International Research Unit at Greenwich university. In the case of water, they have gone up by about 40 per cent above the rate of inflation since 1989, although the steepest increases took place in the first decade after privatisation. 

Second, regulators have paid too little attention to the way companies structure their finances. Finance costs are a key factor watchdogs weigh when setting prices. Yet they have consistently overestimated these expenses during a long period of falling interest rates. 

That, combined with a reluctance to regulate companies’ balance sheets, has resulted in an orgy of borrowing, as this allows owners to achieve “savings” that have more to do with financial engineering than effort and enterprise. Stratospheric debts — including high yielding shareholder loans — have also suppressed tax revenues. Thames Water, for instance, has paid almost no corporation tax for the past decade. 

In 1989, the water industry in England and Wales was privatised with no net debt. Yet almost three decades on, it has built up borrowings of £42bn. 

All but three of the 10 English water companies have been taken off the stock market by private equity investors — many backed by foreign sovereign wealth funds and pension schemes. In the meantime, all the industry’s post-tax profits have been carried off in the form of dividends. Shareholders’ funds have barely budged since 1989. 

A comparison with Scottish Water is instructive. The Scottish utility was not privatised in 1989, but remained in the public sector. Like its southern cousins, it has been forced into a heavy programme of investment, much of it at the behest of the EU.  

Yet unlike the English utilities, it remains relatively unleveraged. Its borrowings of £3.8bn represent just 48 per cent of the value of its regulated assets, as against the 65-80 per cent that is prevalent in England. Meanwhile, the average bill from Scottish Water was £357 last year — 10 per cent lower than the English average of £395. 

Some believe that tweaks to the regulatory regime could make the system function better. Prof Littlechild argues, for instance, that instead of keeping 100 per cent of any extra efficiency gains, these could be split with the customer. “That way there would be some community of interest,” he suggests. 

Mr Blaiklock, a longstanding critic of excessive leverage in utilities, believes the watchdog should intervene much more in companies’ financial affairs, which he thinks are unsustainable in the long term, especially if interest rates rise. “The regulator should be given stronger executive powers to intervene in extreme financial engineering initiatives and aggressive tax tactics.” 

Faced with mounting criticism, watchdogs are making changes. Ofwat is proposing to alter the payment terms for water companies so that more of their money comes from hitting performance targets. 

Critics warn that this will make an already complex system even more baroque. “You have to question whether any system this involved can be transparent, when even people with an interest in getting to the bottom find it very hard,” says Mr Hall. The intricacy of the regulatory process also troubles Prof Littlechild, who notes that it takes about three years to decide the next regulatory settlement. “When we created it, I fondly imagined the regulator sitting down with the companies shortly before the expiry of each period and just setting a price,” he says. 

 Not everyone is convinced that tweaks are sufficient. Mr Hall argues that the regulatory system is inherently dysfunctional. “There is a fundamental contradiction between the regulator’s duty to protect consumers and its overarching duty to ensure that the companies have enough money to deliver investment,” he says. 

Prof Littlechild’s original idea with BT was that the watchdog would simply hold the fort for the consumer until competition arrived like the US cavalry. Permanent regulation is vulnerable to industry capture. “The problem is that the regulator spends all its time talking to the company and its investors,” says Mr Hall. 

Ofwat, for instance, has been criticised for its focus on investors rather than customers. While the watchdog sets aside two days a year to give presentations to the City of London, there is no forum for it to meet customers. 

While regulators do have the power to strip companies of their licences, this has been invoked only once in the water sector — when the collapse of Enron in 2001 forced Ofwat temporarily to take control of its Wessex Water. 

According to Mr Blaiklock, this lack of grip explains why privatisation has failed to achieve its primary purpose — of passing the operational and financial risks for the delivery of a public service to the private sector. London’s £4.2bn “super sewer”, for instance, is financed directly from customer bills, with households rather than the company bearing the risk of a complex project. 

Few developed countries have copied the British model in selling off whole utility networks to private entities. In Europe, the model has generally been to separate asset ownership from service provision and to grant private companies the right to operate concessions. 

In recent years, doubts about the governance and customer benefits have encouraged other countries to reverse this process — especially in water — and take these concessions back into municipal ownership. A study of French water services in 2004 found that the price of privately-delivered water was 16.6 per cent higher than in places where municipalities delivered the service. 

Similar arguments buttress the Labour party’s plans to bring utilities back into public ownership. 

Its proponents stress not efficiency, which they claim is much the same in either public or private sectors, but cost and accountability. A publicly-owned utility would not have to deliver the returns demanded by the private sector. 

A study by Greenwich university claims that refinancing utility debt and equity with government bonds and scrapping dividends could save £2.3bn a year. That is equivalent to a saving of almost £100 off the average £400 water bill. Public ownership would also remove all the incentives that, Mr Hall claims, encourage bosses to favour financial management over customers. 

 “These are local amenities supplying a basic service that ought to be properly accountable to local people,” he says. 

Other structural options involve introducing more competition by separating network ownership from the services, and auctioning limited concessions. The snag is that this would be extraordinarily expensive, requiring the state both to buy out the existing owners and then retender the operations. Taxpayers could end up paying twice — first to compensate existing investors and then potentially to reward the new operators. 

Lastly, there is the possibility of placing utilities in not-for-dividend entities, akin to Welsh Water, which was restructured in 2000. Although they would remain regulated entities, companies could use retained earnings only to invest in their assets or to cut customer bills. Shareholders and executives would no longer be able to skim off all the cream. 

There may be no cheap and easy answers to the problems facing Britain’s utilities, but the status quo is unlikely to hold. “What we can now see is that the regulatory regime is not robust enough,” says Mr Blaiklock. “We need to change that.”

Don't blame addicts for America's opioid crisis. Here are the real culprits

America’s opioid crisis was caused by rapacious pharma companies, politicians who colluded with them and regulators who approved one opioid pill after another

Chris McGreal in The Guardian



‘Opioids killed more than 33,000 Americans in 2015 and the toll was almost certainly higher last year.’

Of all the people Donald Trump could blame for the opioid epidemic, he chose the victims. After his own commission on the opioid crisis issued an interim report this week, Trump said young people should be told drugs are “No good, really bad for you in every way.”

The president’s exhortation to follow Nancy Reagan’s miserably inadequate advice and Just Say No to drugs is far from useful. The then first lady made not a jot of difference to the crack epidemic in the 1980s. But Trump’s characterisation of the source of the opioid crisis was more disturbing. “The best way to prevent drug addiction and overdose is to prevent people from abusing drugs in the first place,” he said.

That is straight out of the opioid manufacturers’ playbook. Facing a raft of lawsuits and a threat to their profits, pharmaceutical companies are pushing the line that the epidemic stems not from the wholesale prescribing of powerful painkillers - essentially heroin in pill form - but their misuse by some of those who then become addicted.


The amount of opioids prescribed in the US was enough for every American to be medicated 24/7 for three weeks”

In court filings, drug companies are smearing the estimated two million people hooked on their products as criminals to blame for their own addiction. Some of those in its grip break the law by buying drugs on the black market or switch to heroin. But too often that addiction began by following the advice of a doctor who, in turn, was following the drug manufacturers instructions.

Trump made no mention of this or reining in the mass prescribing underpinning the epidemic. Instead he played to the abuse narrative when he painted the crisis as a law and order issue, and criticised Barack Obama for scaling back drug prosecutions and lowering sentences.

But as the president’s own commission noted, this is not an epidemic caused by those caught in its grasp. “We have an enormous problem that is often not beginning on street corners; it is starting in doctor’s offices and hospitals in every state in our nation,” it said.

 ‘This is an almost uniquely American crisis.’

Opioids killed more than 33,000 Americans in 2015 and the toll was almost certainly higher last year. About half of deaths involved prescription painkillers. Most of those who overdose on heroin or a synthetic opiate, such as fentanyl, first become hooked on legal pills. 

This is an almost uniquely American crisis driven in good part by particular American issues from the influence of drug companies over medical policy to a “pill for every ill” culture. Trump’s commission, which called the opioid epidemic “unparalleled”, said the grim reality is that “the amount of opioids prescribed in the US was enough for every American to be medicated around the clock for three weeks”.

The US consumes more than 80% of the global opioid pill production even though it has less than 5% of the world’s population. Over the past 20 years, one federal institution after another lined up behind the drug manufacturers’ false claims of an epidemic of untreated pain in the US. They seem not to have asked why no other country was apparently suffering from such an epidemic or plying opioids to its patients at every opportunity.

With the pharmaceutical lobby’s money keeping Congress on its side, regulations were rewritten to permit physicians to prescribe as many pills as they wanted without censure. Indeed, doctors sometimes found themselves hauled before ethics boards for not supplying enough.


It’s an epidemic because we have a business model for it. Follow the money


Unlike most other countries, the US health system is run as an industry not a service. That gives considerable power to drug manufacturers, medical providers and health insurance companies to influence policy and practices.

Too often, their bottom line is profits not health. Opioid pills are far cheaper and easier than providing other forms of treatment for pain, like physical therapy or psychiatry. As Senator Joe Manchin of West Virginia told the Guardian last year: “It’s an epidemic because we have a business model for it. Follow the money. Look at the amount of pills they shipped in to certain parts of our state. It was a business model.”

But the system also gives a lot of power to patients. People coughing up large amounts of money in insurance premiums and co-pays expect results. They are, after all, more customer than patient. Doctors complain of patients who arrive expecting a pill to resolve medical conditions without taking responsibility for their own health by eating better or exercising more.

In particular, the idea has taken hold, pushed by the pharmaceutical industry, that there is a right to be pain free. Other countries pursue strategies to reduce and manage pain, not raise expectations that it can simply be made to disappear. In all of this, regulators became facilitators. The Food and Drug Administration approved one opioid pill after another.


The Food and Drug Administration approved one opioid pill after another.


As late as 2013, by which time the scale of the epidemic was clear, the FDA permitted a powerful opiate, Zohydro, onto the market over the near unanimous objection of its own review committee. It was clear from the hearing that doctors understood the dangers, but the agency appeared to have put commercial considerations first.

US states long ago woke up to the crisis as morgues filled, social services struggled to cope with children orphaned or taken into care, and the epidemic took an economic toll. Police chiefs and local politicians said it was a social crisis not a law and order problem.

Some state legislatures began to curb mass prescribing. All the while they looked to Washington for leadership. They did not get much from Obama or Congress, although legislation approving $1bn on addiction treatment did pass last year. Instead, it was up to pockets of sanity to push back.

Last year, the then director of the Centers for Disease Control, Tom Frieden, made his mark with guidelines urging doctors not to prescribe opioids as a first step for chronic or routine pain, although even that got political pushback in Congress where the power of the pharmaceutical lobby is not greatly diminished.

There are also signs of a shift in the FDA after it pressured a manufacturer into withdrawing an opioid drug, Opana, that should never have been on sale in the first place. It was initially withdrawn in the 1970s, but the FDA permitted it back on to the market in 2006 after the rules for testing drugs were changed. At the time, many accused the pharmaceutical companies of paying to have them rewritten.

Trump’s opioid commission offered hope that the epidemic would finally get the attention it needs. It made a series of sensible if limited recommendations: more mental health treatment people with a substance abuse disorder and more effective forms of rehab.

Trump finally got around to saying that the epidemic is a national emergency on Thursday after he was criticised for ignoring his own commission’s recommendation to do so. But he reinforced the idea that the victims are to blame with an offhand reference to LSD.

Real leadership is still absent – and that won’t displease the pharmaceutical companies at all.

Why on earth would HSBC leave a country that gives banks an easy ride?

Prem Sikka in The Guardian

Bankers in the UK have faced no prosecutions – despite their serial abuses, and the catastrophic consequences of their actions.

 

‘Perhaps someone would investigate the culture that enriches a few at the expense of many.’ Photograph: Reinhard Krause/Reuters


So, HSBC is retaining its headquarters in London. Was there ever any danger that it would quit a cosy jurisdiction with feather-duster regulation and prosecutions as rare as hen’s teeth?

Banks have little to fear here, as UK regulators and prosecutors rarely take action.

In 2012, HSBC paid a fine of $1.9bn to US authorities for its role in money laundering by drug traffickers and governments on sanctions lists. The US Department of Justice stated that the bank “accepted responsibility for its criminal conduct and that of its employees”. In 2015, the Swiss authorities fined HSBC 40m Swiss francs (£28m) for “organisational deficiencies” that allowed money laundering to take place in the bank’s Swiss subsidiary. UK regulators twiddled their thumbs.

Leaked documents showed that HSBC’s Swiss banking arm helped around 30,000 wealthy clients dodge taxes. As the primary regulator of HSBC, the Financial Conduct Authority (FCA) promised investigations. Just a few weeks later, Martin Wheatley, the FCA chief executive found that his contract was not being renewed, even though he had some “unfinished business”. In January, HMRC told the House of Commons public accounts committee that it had abandoned its criminal investigation into the role of HSBC in alleged illegal activities.

HSBC to keep its headquarters in London



Bankers face no retribution in the UK. Iceland has sent 29 bankers to prison for their role in the 2007-08 banking crash. The UK’s overcrowded prisons could have squeezed in some bankers, but there have been no prosecutions for bringing down the industry and ushering in austerity. The UK finance industry has been a serial offender, as evidenced by mis-selling of pensions, endowment mortgages, payment protection insurance and rigging of interest rates, but successive governments have failed to prosecute.

Abuses are deeply ingrained into the bank business models that pursue ever rising profits and mega performance-related remuneration for executives. Perhaps someone would investigate the culture that enriches a few at the expense of many. Despite the fanfare of an investigation, the FCA, possibly under pressure from the Treasury, dropped its investigation into banking culture.

Auditors are paid vast sums to evaluate internal controls operated by banks. Yet all ailing banks received a clean bill of health before the 2007-08 crash. This should have prompted the regulator, the Financial Reporting Council, to act, but it did not.

Irked by this inertia, Andrew Tyrie MP, chairman of the Commons treasury committee, pressed the FRC to investigate the audits of HBOS, a bank bailed out by taxpayers in 2008. In January 2016, some eight years after the events, the FRC said that it is considering making some “preliminary inquiries”.

It is not only regulators, prosecutors are missing too. In the US, Citicorp, JPMorgan, Barclays, the Royal Bank of Scotland and UBS have pleaded guilty to manipulating the foreign exchange rates, and traders have also been convicted of rigging a benchmark interest rate known as the London Interbank Offered Rate (Libor). In the UK, the Serious Fraud Office has recently lost six cases of alleged rigging of Libor. It previously botched investigation into the collapse of Icelandic banks.

Deep reforms of the finance industry are not on the government agenda. After the banking crash, the government sought to take the heat out of the public debate by appointing an Independent Commission on Banking, under the chairmanship of Sir John Vickers. Its 2011 report recommended ringfencing retail banking from speculative trading. In the interest of stability, the report recommended that banks have a broader capital base to enable them to absorb shocks. Both remain unimplemented. Last Sunday, Vickers complained that the Bank of England had watered down the proposals, and banks might not have enough financial buffers to survive the next crisis.

The above is just a small illustration of the shameless appeasement of the finance industry by the UK government. It is hardly surprising that HSBC and other financial behemoths find London attractive. The finance industry may welcome the government’s capitulation, but the rest us are repulsed by the stench of scandals and bailouts. The UK’s regulatory system has utterly failed and needs to be redesigned.

Now water companies are caught avoiding tax

James Moore in The Independent

British water companies are avoiding millions of pounds in tax by loading themselves up with debt listed on an offshore stock exchange, an investigation has revealed.

The disclosure is likely to reignite the public outcry about legal tax avoidance by big firms at a time when Britain is drowning in debt and suffering painful public spending cuts. It comes only a week after industry regulator Ofwat announced that water bills would rise by an average of 3.5 per cent to £388 a year. Corporate Watch found six UK water companies took high-interest loans from their owners through the Channel Islands stock exchange. Interest payments on the loans reduce taxable profits in the UK and, thanks to a regulatory loophole, go to the owners tax free.

According to the report, Northumbrian, Yorkshire, Anglian, Thames, South Staffs and Sutton and East Surrey water companies all borrowed from subsidiaries of their owners based overseas. Those owners can receive the interest payments tax free by issuing the loans through the Channel Islands stock exchange as "quoted Eurobonds".

When a UK company pays interest to a non-UK company, it usually has to withhold 20 per cent of the payments and give it to the UK tax authorities. But if the loans are issued as quoted Eurobonds on a "recognised" stock exchange – such as those on the Channel Islands or Cayman Islands –they benefit from an exemption, so no tax is taken off.

Corporate Watch found that some £3.4bn had been borrowed by the six companies using this method. It highlights Northumbrian Water as "the most brazen case", as it paid 11 per cent interest on just over £1bn of loans it has taken from its owner, the Cheung Kong group, a Hong Kong-based conglomerate run by Li Ka-shing, the world's ninth-richest person.

The Treasury considered closing the loophole last year, questioning the way companies were using it, but decided against it. The report also found that Britain's 19 water company bosses were paid almost £10m in combined salaries and other bonuses in 2012.

The huge levels of debt used by the industry overall to finance its operations are also costing UK consumers £2bn a year more than if it was publicly financed – equating to nearly £80 per household.

The figure comes from the difference the Government pays to borrow money and the rates that the water companies secure on the international money markets. In total, the report found, the companies have amassed debt of £49bn and paid more than £3bn in interest payments on it in 2012, as well as £884m in dividends. Total revenue in 2012 came in at £10bn.

This suggests that almost a third of the money spent by people on water bills in England and Wales went to paying either interest charges on water company debt or dividends to their owners, most of which are now based overseas. The water industry defended its financing and insisted consumers receive a "good deal".

Paul McMahon, director of economic regulation for trade body Water UK said: "The tax framework has been put in place by the Government and companies work within that regime. Clearly government debt is cheaper than private debt. But it's not free and the public sector is inheriting the risk that comes with that."

Anglian Water did not dispute the report's figures but said it contributed "£150m in other taxes" to the UK economy in the past year.

A Southern Water spokesman said it was "undertaking a major capital improvement programme from 2010 to 2015. A spokesman added: "At £1.8bn, it is the equivalent of spending nearly £1,000 for every property in the Southern Water region over the five-year period."

Northumbrian Water said it could not comment on the report until it had spoken to its shareholders. But it argued that the figure for its tax payment was "unrepresentative" and that Northumbrian Water Ltd, one of the group's operating subsidiaries, paid £30m in tax in the 12 months to 31 March 2012.

Thames Water accepted that interest rates had effectively wiped out operating profits, but said a tax credit received for 2012 came from "previous years" and that investment was at its "highest-ever" level.

Sutton and East Surrey Water told Corporate Watch it could not comment because it was "up for sale".

South Staffordshire Water confirmed it had Eurobonds in emails sent to Corporate Watch and also said it was investing heavily.

Ofwat did not respond to a request for comment.

The lowdown: Water suppliers

Northumbrian

Owner Cheung Kong Infrastructure Holdings (Hong Kong)

Operating Profit £154m

Tax Paid £0

Debt £4bn

Chief exec Heidi Mottram – salary, bonus and benefits: £595,000

Yorkshire

Owners Citi (US); GIC (Singapore) Infracapital Partners and HSBC (UK)

Operating Profit £335m

Tax Paid £0.1m

Debt £4.7bn

Chief exec Richard Flint – salary, bonus and benefits: £800,000

Anglian Water

Owners Canadian Pension Plan; Colonial First State Global Asset Management and Industry Funds Managment (Australia); 3i (UK)

Operating Profit £363m

Tax Paid £1m

Debt £6.9bn

Chief exec Peter Simpson – salary, bonus and benefits: £1,024,000

Thames

Owners Macquaire Group (Australia), China Investment Corporation, Abu Dhabi Investment Authority

Operating Profit £577m

Tax Paid -£70m (tax credit)

Debt £9bn

Chief exec Martin Baggs – salary, bonus and benefits: £845,000

South Staffs Water

Owners Alinda Capital Partners (US)

Operating Profit £16m

Tax Paid £0.2m

Debt £488m

Chief exec Elizabeth Swarbrick – salary, bonus and benefits: £202,000

Sutton and East Surrey Water

Owners Sumitomo Corporation (Japan)

Operating Profit £17m

Tax Paid £1m

Debt £219m

Chief exec Anthony Ferrar – salary, bonus and benefits: £290,000

'Buddy' scheme to give more multinationals access to ministers

Controversial scheme which gives corporations privileged government access to be extended to a total of up to 80 firms

• James Ball and Henry Taylor
• The Guardian, Friday 18 January 2013 16.55 GMT

Figures suggest Shell has had the greatest access to ministers under the 'buddy' scheme, with 56 face-to-face meetings since May 2010. Photograph: Robin Utrecht/EPA

 

The government is expanding a controversial scheme which pairs dozens of multinational companies with a ministerial "buddy", giving them privileged access to the heart of government, the Guardian has learned.

The minister for trade Lord Green launched the "strategic relations" initiative in July 2011, giving 38 companies, including oil, telecoms and pharmaceutical giants, a direct line to ministers and officials.
The Guardian has obtained a list of 12 further companies which have now been added to the programme, and understands that UK Trade and Investment is considering up to 30 more for addition over 2013.

Analysis of official registers reveals the 38 companies in the first wave of the initiative – more than two-thirds of which are based overseas – have collectively had 698 face-to-face meetings with ministers under the current government, prompting accusations of an over-cosy relationship between corporations and ministers.

The full degree of contact between the chosen companies and the government is not known as telephone calls, emails, and meetings with officials are not recorded on the registers.

Campaigning groups expressed alarm at the level of access that some of the businesses appeared to have to ministers. The Guardian figures, which looked at the meetings the companies held with No 10 and the three departments involved in the buddy scheme – Business, Culture, and Energy and Climate Change – suggested Shell had the greatest access to ministers. The oil giant has had 56 face-to-face meetings since May 2010.

Greenpeace said this consistent access was showing through in government policy.
"The concern about the government's buddy system was always that policy would end up skewed towards narrow corporate interests rather than the wider public good, and these revelations will do nothing to allay those fears," executive director, John Sauven, said.

Other signs of the scheme bearing fruit for business have arisen in public statements made by the universities minister David Willetts. Last week he urged officials to prescribe more of an Astrazeneca drug, and in November he met Novartis officials about streamlining and accelerating UK research and development and clinical trials – something advocated by many clinicians, as well as businesses.
Among the first wave of "buddied" firms were some which have been targeted by campaigners for paying little or no UK tax, or making "sweetheart" deals with tax authorities, including Google and Vodafone. A spokeswoman for UK Uncut, which campaigns against tax avoidance and spending cuts, said the regularity of government access for big business was drowning out other voices.

"There are hundreds of thousands, if not millions, of people who have marched, written to MPs, gone on strike, protested and occupied over the cuts and privatisation which are devastating our lives," she said.

"These demands by ordinary people have been ignored by a cabinet of millionaires which is choosing to only take the calls, the meetings and the dinners with big business and the banks to introduce policies which benefit them and the wealthy minority in this country."

The new companies to be given ministerial buddies – but not yet publicly disclosed – include the property firms Atkins and Balfour Beatty, which have been paired with climate change minister Greg Barker, who is overseeing work on the government's green deal and zero-carbon homes programmes.
David Heath of the Department of Agriculture is paired with food businesses Nestlé, Unilever, Mondeléz (formerly part of Kraft, and includes Cadbury) and Associated British Foods (owner of Primark and Kingsmill). Statoil is added to the oil companies already in touch with Vince Cable; foreign office minister Hugo Swire has been buddied with Procter and Gamble, and David Willetts with Cisco. The culture minister Ed Vaizey is paired with Telefonica (O2) and Everything Everywhere (Orange and T-Mobile), while Green adds engineering firm GKN to his list.

A spokesman for UK Trade and Investment confirmed the government was considering adding "around 30" more companies to the strategic relations programme over 2013.

"As previously, companies will be selected based on a range of criteria, including the complexity of their relationship with government (and hence the need for strong co-ordination) and their existing or potential contribution to the UK economy," he said.

"Understanding business concerns and being clear about government's own priorities can make a real difference to trade and investment."

A Department for Business, Innovation and Skills spokesperson said Willetts was responsible for the "strategic relationship management" for several pharmaceutical companies, including AstraZeneca. "He regularly meets with companies to discuss issues of importance to them, and has a strong interest in making sure that the environment for the life sciences industry is conducive to innovation and growth."

The Federation of Small Businesses defended the relationship with the government, saying members had good access to ministers through representation by the federation at regular meetings with ministers, but the government could do more.

A spokeswoman said: "We support schemes where multinationals support small businesses in the supply chain and give advice and support through mentoring, for example, such a scheme was announced between UKTI and Diageo in 2012. We would like the government to play an important role in encouraging, promoting such schemes, and engaging small businesses more in the process."
The FSB had 34 meetings with ministers in the four departments analysed by the Guardian between May 2010 and June 2012.

The UK Banking Fraud

Libor scandal: gunfight on Threadneedle Street

This is not just some common or garden mishap or even misbehaviour at a big business. This is 'fraud'

• Editorial
• guardian.co.uk, Tuesday 17 July 2012 20.50 BST

Only two weeks into the market-rigging scandal and already the economic-policy establishment resembles the final scene of Reservoir Dogs: a bunch of men in suits all blindly shooting at each other.

Former Barclays boss Bob Diamond has landed the Bank of England's Paul Tucker in deep trouble, with a note implying that he encouraged the misreporting of money-market rates. Barclays' ex-chief operating officer Jerry del Missier told MPs this week that Mr Diamond ordered him to fiddle Libor rates. And Barclays was accused by theFinancial Services Authority (FSA) on Monday of a "culture of gaming – and gaming us". The FSA has been dumped in it by Mervyn King, who argued on Tuesday that it was not the Bank's job to regulate Libor – the implication being that it was the FSA's fault. Both the FSA and the Bank agree that prime responsibility for monitoring Libor lay with the British Bankers' Association. And then there is George Osborne, whose main contribution to the chaos has been to suggest to a magazine interviewer that Gordon Brown and his lieutenants are somehow to blame.

This is the British economic-policy establishment under unprecedented pressure – and what an unseemly, blame-ducking, buck-passing panic it presents. Not just the humbling of some of our most senior and respected officials but also the erraticism with which they have been making policy. Take, for instance, the ousting of Bob Diamond. The FSA's Adair Turner told MPs this week that when he spoke to the Barclays chairman Marcus Agius after the Libor scandal, he had expected Mr Diamond to walk the plank. Something was obviously lost in translation, however, because Mr Agius stood down instead. It took the intercession of Mervyn King to force out the Barclays chief executive. And why exactly was Mr Diamond pushed out? Not for any direct involvement in the Libor scandal but, in the words of Mr King yesterday: "They [the bank] have been sailing too close to the wind across a wide number of areas." No actual infraction; just a general sense of having gone too far for too long. This raises the question of why no regulator seriously intervened in Barclays before the Libor scandal. Bob Diamond has been head of one of Britain's biggest banks since January 2011, yet no official has brought up a previous incident where they told the board to change their behaviour or their personnel. The impression left is of rather rough justice. As Andrew Tyrie, head of the Treasury select committee, drily observed in the same session, by that measure every chief executive in the land is "only a couple of bad dinners" away from being forced out of a post.

This is not just some common or garden mishap or even misbehaviour at a big business. As Mr King observed on Tuesday, this is "fraud". And it has not just been carried out by Barclays, but by a string of other financial institutions – who between them fiddled the benchmark interest rates that are used as reference for hundreds of billions of pounds' worth of transactions. Some of the commentary about this scandal has brought up the fact that this occurred during the credit crunch in 2008, when it would apparently have been in everyone's interests to pretend that all was normal in money markets. Maybe, except that this scamming took place over at least four years – and the kindest interpretation of the evidence to date is that officials asked barely any questions. In place of supervision there was what looks like worrying chumminess. "Well done, man. I am really, really proud of you," Mr Diamond emailed the number two at the Bank on his promotion in December 2008. Mr Tucker replied: "You've been an absolute brick."

This story has so far revolved around one bank rigging one set of interest rates, involving emails and letters and committee hearings. Imagine what a serious, wide-ranging inquiry could uncover. Britain certainly needs one, because this blossoming scandal threatens not just the reputation of an industry but the regulators and ministers who let it run riot.