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Tuesday, 9 December 2014

Business giants walk off with our billions. No more something for nothing

The state has the powers to make business serve us better. A north London borough is leading the way


Walking skyscraper illustration by Matt Kenyon
Illustration by Matt Kenyon
A few weeks ago, I had the disconcerting experience of sitting in a smart room full of clever people who sincerely held a silly idea. We had been gathered together by a big charity to discuss its research on inequality, and talk naturally turned to Britain’s free-market economy. Some praised the free market, others longed to reform it: all agreed it was central to the UK being one of the most unequal economies in the rich world.
The famous political philosopher worried whether the free market was eroding our ethics; the gentle wonk from a rightwing thinktank thought that tempering it would turn a dynamic economy into an arthritic one. The British people now saw themselves as free-marketeers, argued the strategist from a giant consultancy; try telling that to the Occupy protesters in Parliament Square, retorted the environmentalist at his elbow.
Economists, politicians, academics: all well read and well meaning. But what was this free market they each took for granted? It had nothing to do with the tap water in our glasses – that came from the local monopoly, Thames Water. Nor did it apply to the trains that delivered some of my fellow diners – many rail services face no direct competition.
And what about the lights and heating? Nearly three decades on from the start of liberalisation, 90% of the gas and electricity piped into our homes is still controlled by an oligopoly of six huge suppliers who contend for our custom by trying to bamboozle us with their tariffs.
Few conceits are more cherished by our political classes than the notion that this is a free-market economy. To the right it is what makes Britain great. For the left it is what they are up against. And for the rich it is what justifies their huge pay packets: after all, they have earned it.
When asked for his view of western civilisation, Gandhi said he thought it would be a very good idea. I feel much the same way about the free market: I’m genuinely curious to see what such a mythical beast looks like. But that term, however widely accepted and advertised, has little to do with today’s Britain. The economy most of us experience – everything from who collects our bins, to how we commute to work, to that new school attended by the kids – is often not a free market at all. Instead, it’s a bog of privately run monopolies; of public projects and services outsourced to businesses for years, even decades, at a time; and massive taxpayer subsidies handed to the corporate sector with fewer questions asked than of disabled people wondering where their living allowance has gone.
Grasp that, and the question of how to tame corporate power becomes easier to answer. If corporations rely on the public for a sizeable chunk of their revenues and power, then we should start asking what they are doing for us in return. Do businesses deserve the privileges given them by society?
You almost never hear this question from any politician. What you get instead is the kind of cant served up by David Cameron at last year’s Conservative conference: “It’s not the government that creates jobs. It’s businesses that get wages in people’s pockets, food on their tables, hope for their families and success for our country.”
Really? Cameron can’t be looking at the same economy as the rest of us. In Britain businesses take £85bn a year from the public in grants, subsidies, insurance schemes, preferential credit and government services. That’s the corporate welfare bill as totted up by Kevin Farnsworth, senior lecturer in social policy at the University of York, and he admits it’s on the conservative side. Add on the various subsidies for too-big-to-fail banks and you’re well in excess of a hundred billion. Nor does he include the most fundamental privilege society affords the investors in a business such as Tesco: that of limited liability, which means they only stand to lose the value of their shares, and no more. We could argue for limited liability, but let’s not pretend it’s anything less than a substantial underwriting of shareholder enterprises.
If it is business that gives, and government that takes, then how does Cameron account for privatisation and outsourcing? Take the farce that is the rail industry, where taxpayers stump up billions for the infrastructure and the upgrades, while tycoons such as Richard Branson and Brian Souter put in hardly any investment, and always have the option in hard times of walking away. That is what GNER did with the East coast mainline that the public had to step in and save – and which the government has justawarded to Branson and Souter.
The same wacky logic of low risk, low investment applies in outsourcing. G4S can’t provide the security for the OlympicsSerco can’t lay on the staff for an out-of-hours GP service in Cornwall – but never mind, both still get to bid and win more public sector work. Under this coalition the money spent on outsourcing has doubled to £88bn,creating a whole string of what Margaret Hodge at the public accounts committee calls “quasi-monopolies”.
The fashionable thing to say is that in a globalised economy states can’t keep up with businesses. That is to get the relationship the wrong way round. The reality is that states often give businesses their revenues and so their power. More than that: markets are created by states, who provide the infrastructure, the transports and the rule of law.
So let’s start asking businesses what they’ve done for us recently. If the state is going to subsidise the rail industry (and we will, until it’s eventually renationalised), ministers should insist not just on an intermittently punctual train service and a token contribution to the Treasury, but also better pay and conditions for staff, decent training, and a commitment to sourcing equipment in Britain.
This is what the Centre for Research in Socio-Cultural Change terms “social licensing” in its latest book, The End of the Experiment. The academics’ suggestions have been followed by one council in north London, Enfield. Officers and researchers sat down and worked out how much money its 300,000 residents sent the way of big businesses: 11 Tesco stores, for instance, provided the PLC with around £8m of its annual profit. And what did the area get back? Not very much, but the highlight included a community toilet scheme and some charitable giving from the supermarket’s corporate social responsibility department.
And so the council has started asking big businesses, such as utility firms, what they had done for Enfield recently. They’ve begun hassling banks to lend more to local businesses, the likes of British Gas to give more of their local work to local contractors with local staff – or run the risk of being named and shamed in the local press. It may sound small, but imagine if the same approach were taken by Holyrood or Cardiff – or by Westminster.

Anni Dewani has been failed by South Africa


She died alone and terrified in one of the bleakest parts of the country, and after the collapse of Shrien Dewani’s trial her family still has no answers

Anni Dewani, a young woman shot dead in Cape Town, has haunted South Africa for four years. After the collapse of the trial of her husband, Shrien Dewani, accused of masterminding her murder, she will continue to do so. Not only because she was young, beautiful and just married; not only because her heartbroken, desperate parents have been taken into so many South African hearts; but also because the country, its police force and its justice system failed her so completely.
Anni and Shrien honeymooned in South Africa after an extravagant wedding in India in 2010. After going on safari they came to Cape Town and, on Saturday 13 November, went out for dinner. On their return their taxi was hijacked. The taxi driver, Zolo Tongo, and Shrien claimed they were forced out of the car and that the hijackers drove off with Anni. Her body was found in the abandoned vehicle at dawn the next day. She had been shot at close range in the neck.
Shrien was apparently a victim of the criminal violence that plagues South Africa. The police, goaded as they were by the press frenzy, were under huge pressure to find the killers because hijacking and murder are so commonplace, but there were anomalies from the start. Gugulethu, where the hijacking occurred, is notorious for its murder rate. Why would Tongo take them there at night? Shrien, allegedly forced through a window, did not have a scratch on him, and neither did Tongo.
Whispers of disbelief quickly began to swirl. Shrien looked less and less innocent as detectives and journalists picked apart the sequence of events described, and the statements he had made. The police, however, allowed him to return to England before the inconsistent aspects of the case – and his possible involvement in his wife’s murder – were properly investigated.
Tongo was soon arrested. He pleaded guilty to being party to the murder but, in return for a reduction of sentence, said he would tell the truth and claimed that Shrien had asked him to organise the killing. The hitmen, Mziwamadoda Qwabe and Xolile Mngeni, were subsequently arrested, tried and jailed. Monde Mbolombo, the receptionist at the luxury Cape Grace hotel where the Dewanis were staying, said that he had put Tongo in contact with the hitmen. In exchange for immunity from prosecution – now under review due to the case collapsing – he agreed to testify against Shrien.
The idea of hiring people to commit murder is not that shocking in South Africa. Firearms are cheap and easy to find, as are hitmen. In 2006 a young woman, Dina Rodrigues, went to a taxi rank in Cape Town and hired four strangers to murder the baby daughter of her boyfriend’s ex-girlfriend. She paid a similar amount to that which Tongo claimed Shrien paid.
It is notable that Anni’s murder took place just four months after South Africa had successfully hosted the football World Cup, when the country was under intense scrutiny because of its record of violent crime. This coloured the investigation from the start.
The then-commissioner of police, Bheki Cele, is reported to have said: “A monkey came all the way from London to have his wife murdered here. Shrien thought we South Africans were stupid.” There seemed to be a great sense of relief that responsibility for this awful murder, a public relations disaster for South Africa, lay elsewhere.
Shrien was charged and four years later returned to stand trial. Everyone seemed to have a view on his innocence or guilt. It was revealed early on that perfect wedding photographs masked Anni’s doubts about marrying Shrien. There were sensational revelations about Shrien’s bisexuality and his involvement, both online and offline, in sadomasochistic sex with male prostitutes. “At last,” people thought, “a clear motive!”
Shrien’s sexual orientation and sexual practices clearly indicated a double life. But when put forward by the lacklustre prosecution as the reason for the murder, the judge, Janet Traverso, ruled this testimony irrelevant and the state’s case unravelled rapidly. This may not have been a popular move, but prejudice about a gay lifestyle should not subvert the need for hard evidence.
During the trial it became apparent that the investigation had been botched, and that much of the police work had been shockingly incompetent: lost paperwork, incomplete statements and unreliable ballistics reports.
Traverso chastised the National Prosecuting Authority. “You have had four years to prepare,” she told them when she dismissed the case. The evidence of the main witnesses was “riddled with contradictions” and fell “far below the threshold” of what a reasonable court could convict on.
Anni’s family, the Hindochas, have said that they – and by implication Anni – have been failed by South Africa’s justice system. They are right. Their daughter came here on her honeymoon and died alone and terrified in one of the bleakest parts of the country. Her grieving relatives have sought answers, as have South Africans.
In a country with such high levels of violence, there are so many who have failed to receive a robust investigation followed by the satisfaction of justice. As the Hindochas stood tearfully outside the courtroom after the verdict, there would have been so many South Africans sharing the family’s anguish at not knowing how or why a loved one died.

OECD report rejects trickle-down economics

Revealed: how the wealth gap holds back economic growth

OECD report rejects trickle-down economics, noting ‘sizeable and statistically negative impact’ of income inequality
Organisation for Economic Co-operation a
OECD secretary-general Angel Gurría said that 'addressing high and growing inequality is critical to promote strong and sustained growth'. Photograph: Eric Piermont/AFP/Getty Images
The west’s leading economic thinktank on Tuesday dismissed the concept of trickle-down economics as it found that the UK economy would have been more than 20% bigger had the gap between rich and poor not widened since the 1980s.
Publishing its first clear evidence of the strong link between inequality and growth, the Paris-based Organisation for Economic Cooperation and Development proposed higher taxes on the rich and policies aimed at improving the lot of the bottom 40% of the population, identified by Ed Miliband as the “squeezed middle”.
Trickle-down economics was a central policy for Margaret Thatcher and Ronald Reagan in the 1980s, with the Conservatives in the UK and the Republicans in the US confident that all groups would benefit from policies designed to weaken trade unions and encourage wealth creation.
The OECD said that the richest 10% of the population now earned 9.5 times the income of the poorest 10%, up from seven times in the 1980s. However, the result had been slower, not faster, growth.
It concluded that “income inequality has a sizeable and statistically negative impact on growth, and that redistributive policies achieving greater equality in disposable income has no adverse growth consequences.
“Moreover, it [the data collected from the thinktank’s 34 rich country members] suggests it is inequality at the bottom of the distribution that hampers growth.”
According to the OECD, rising inequality in the two decades after 1985 shaved nine percentage points off UK growth between 1990 and 2000. The economy expanded by 40% during the 1990s and 2000s but would have grown by almost 50% had inequality not risen. Reducing income inequality in Britain to the level of France would increase growth by nearly 0.3 percentage points over a 25-year period, with a cumulated gain in GDP at the end of the period in excess of 7%.
“These findings have relevant implications for policymakers concerned about slow growth and rising inequality,” the paper said.
“On the one hand it points to the importance of carefully assessing the potential consequences of pro-growth policies on inequality: focusing exclusively on growth and assuming that its benefits will automatically trickle down to the different segments of the population may undermine growth in the long run, in as much as inequality actually increases.
“On the other hand, it indicates that policies that help limiting or – ideally – reversing the long-run rise in inequality would not only make societies less unfair, but also richer.”
Rising inequality is estimated to have knocked more than 10 percentage points off growth in Mexico and New Zealand, nearly nine points in the UK, Finland and Norway, and between six and seven points in the United States, Italy and Sweden.
The thinktank said governments should consider rejigging tax systems to make sure wealthier individuals pay their fair share. It suggested higher top rates of income tax, scrapping tax breaks that tend to benefit higher earners and reassessing the role of all forms of taxes on property and wealth.
However, the OECD said, its research showed “it is even more important to focus on inequality at the bottom of the income distribution. Government transfers have an important role to play in guaranteeing that low-income households do not fall further back in the income distribution”.
The authors said: “It is not just poverty (ie the incomes of the lowest 10% of the population) that inhibits growth … policymakers need to be concerned about the bottom 40% more generally – including the vulnerable lower-middle classes at risk of failing to benefit from the recovery and future growth. Anti-poverty programmes will not be enough.”
Angel Gurría, the OECD’s secretary general, said: “This compelling evidence proves that addressing high and growing inequality is critical to promote strong and sustained growth and needs to be at the centre of the policy debate. Countries that promote equal opportunity for all from an early age are those that will grow and prosper.”

PriceWaterhouseCoopers chief Kevin Nicholson denies lying over tax deals


Nicholson stands by previous testimony to MPs, as accountants are accused of mass-marketing tax avoidance schemes
Fifty Pound notes
Nicholson again denied that the tax services sold by PwC were mass-marketed schemes. Photograph: Chris Robbins / Alamy/Alamy
The head of tax at one of the UK’s top accounting groups was accused of lying to parliament about his firm’s role in devising controversial tax deals for clients in Luxembourg.
Kevin Nicholson, PwC UK’s head of tax, who worked as an HM Revenue and Customs tax inspector in the early 1990s, was in front of the Commons public accounts committee for the second time in two years, following last month’s revelations of aggressive tax avoidance by PwC clients published by the Guardian and more than 20 other international news outlets.
In a series of fractious exchanges on Monday, the committee’s chair, the Labour MP Margaret Hodge, said: “We’ve asked you to come back to see us because we’ve reflected on the evidence that you gave us on 31 January 2013, and tried to relate that to the revelations around the Luxembourg leaks that have been in the press. I think I have a very simple question for you: did you lie when you gave evidence to us?”
Nicholson responded: “I didn’t lie and stand by what I said.”
Hodge’s anger stemmed from Nicholson’s previous evidence that PwC did not “mass market” tax products or sell tax avoidance “schemes” to clients, when set against the new evidence of 548 letters – relating to 343 companies – showing how PwC wrote to Luxembourg tax authorities to agree on how their clients structured their businesses for tax purposes.
“It’s very hard for me to understand that this is anything other than a mass-marketed tax avoidance scheme,” Hodge said. “I think there are three ways in which you lied and I think what you are doing is selling tax avoidance on an industrial scale.”
Nicholson again denied that the tax services sold by PwC were mass-marketed schemes and said that around 80 of the Luxembourg rulings related to UK companies, which were all distinct and had been disclosed to HMRC.
He said: “At the heart of the Luxembourg economy now is an economy that is based around businesses going there to finance [and] to hold investments. The tax structure, the system that they have created, facilitates that happening, along with all the other infrastructure. I’m not here to change the Lux tax regime. If you want to change the Lux tax regime, the politicians could change the Lux tax regime.”
Last month’s analyses of the way multinational companies establish businesses in Luxembourg were based on a leaked cache of hundreds of tax rulings secured by PwC Luxembourg that showed major companies – including drugs group Shire Pharmaceuticals and vacuum cleaner firm Dyson – using complex webs of internal loans and interest payments, which have greatly reduced tax bills.
The exposure of these arrangements – signed off by the grand duchy and all perfectly legal – have triggered an emergency debate in the European parliament focusing on the track record of the new European commission president, Jean-Claude Juncker, who had dominated Luxembourg politics as prime minister between 1995 and 2013. Juncker has sought to brush aside criticisms, insisting: “I am not the architect of the Luxembourg model because this model doesn’t exist.” However, Hodge added: “Since I have uncovered all this, I have questions about if Mr Juncker is fit to be the president of the European commission. I think if this had been around during the period of his appointment, it might well be a different decision.”
Appearing alongside Nicholson was Shire’s head of tax, Fearghus Carruthers, who explained how the group had two full-time employees in Luxembourg, who earn a total of €135,000 (£106,200) a year and handle intra-company loans of around $10bn (£6.4bn).
Hodge said: “It is stretching our credulity in suggesting to us that these two employees, who are also directors of umpteen other companies, are seriously the guys taking the decisions on loans totalling $10bn. Let me put this to you, Mr Carruthers, because it is a very serious matter, because if the decisions in substance aren’t taken in Luxembourg, this isn’t just avoidance; for me, it’s fraud.”
Carruthers responded: “Madam chair, I can assure you that the decision-making in respect of that Luxembourg company is made in Luxembourg.”
The executive was also repeatedly asked to explain the commercial rationale behind Shire establishing companies in Luxembourg and his answers included: “The commercial purpose is to allow us to have a treasury operation in Luxembourg which finances our activities”; and “the commercial purpose is for us to reinvest our cash appropriately and efficiently.”
When asked what Shire could do more efficiently in Luxembourg, Carruthers said: “It is not necessarily a question of comparative efficiency, we could have this lending in and lending out in all sorts of other jurisdictions. It’s just a good location.”
Well-known buyout firms such as Blackstone and Carlyle also appeared in the leaked documents, and Luxembourg investment vehicles are commonplace in such investment firms. A 2008 joint venture between private equity group Apax Partners and Guardian Media Group, which owns the Guardian, used a Luxembourg structure after it invested in the magazine and events group Emap, now called Top Right.
When the leaked documents were published, a GMG spokesman said: “We partnered with a private equity company which regularly used such structures. A Luxembourg entity was used because Apax already had that structure in place. The fact that the parent company is a Luxembourg company does not give rise to any UK corporation tax savings for GMG.”
Last year, PwC made revenues of £2.81bn, of which £714m came from its tax advisory practice. PwC Luxembourg had turnover of €276m for the year to June 2013, up more than 12% on the previous 12 months. Tax advice accounted for 29% of revenues, up from 24% two years ago. The Luxembourg partnership employs about 2,300 staff – equivalent to one in every 240 people resident in the small country. New offices for the fast-growing practice were officially opened last week at a ceremony attended by the duchy’s prime minister, Xavier Bettel.