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> "It's even simpler than that ... their goal is to extract profits" According to the article, profit has not been the primary goal for the utilities though, b
by m-i-l 3y ago
> "It's even simpler than that ... their goal is to extract profits"
According to the article, profit has not been the primary goal for the utilities though, because there is limited scope for extracting profits from uncompetitive essential utility services - the focus instead has been on maximising shareholder returns. So in the case of the water utilities, they "borrowed £53bn in debt while distributing £72bn to shareholders", which of course is what the issue is now interest rates have risen significantly. The article describes this as "the tension between generating strong returns for investors in uncompetitive monopoly conditions and providing high-quality, affordable infrastructure to the public". The end result is still the same though - transfer of wealth in a socially destructive direction.
- lotsofpulp 3y agoHow are shareholder returns and profit different?
- WithinReason 3y ago"borrowed £53bn in debt while distributing £72bn to shareholders" There is the difference
- lotsofpulp 3y agoNo lender is going to lend a business money just so it can pay the owners. They must have used the debt to finance operations, as opposed to cutting the dividend or even putting more money in. This allowed them to continue to have profits in the short term, at the expense of higher interest costs in the long term (which probably cause higher prices for customers in the long term).
- WithinReason 3y agoDidn't InstantPot just go bust for the same reason? Somebody decided to lend them too.
- lotsofpulp 3y agoI do not know what “same reason” means here. Instant Brands went bankrupt because it could not pay its debts in a timely manner, so lenders decided to take the collateral. It is possible lenders did not do sufficient due diligence, or maybe they got unlucky, but they did not lend Instant Brands money specifically so Instant Brands’ owners could pay themselves (maybe they did if there was corruption in this case, but it is not the norm otherwise why would anyone lend to anyone?). And of course, Instant Brands’ owners will lose equity and credibility in the bankruptcy, so it is not like any dividends made possible due to the financing were “free money”.
- specialist 3y agoLoading up orgs with unnecessary debt is what private equity (neé corporate raiders) does. The financiers who underwrite the raids certainly get paid. All the other stakeholders lose. It's just fancy accounting talk for theft. A shell game. Like u/Spooky23 states upthread. It's wrong. It doesn't make any sense. And yet here we are.
- youngtaff 3y agoIn the case of the UK water companies the parent fund was often involved in getting or making the loan e.g. Water company does a debt bond issue, parent owning fund takes a % of the issue (enough so that the bond issue is a success at a good price), parent fund extracts all the funds raised as a dividend, and sells the % of the issue it own too All while extracting management fees etc too
- lotsofpulp 3y agoRight, so the “parent” posts a profit, and it comes (either tomorrow or next year) from revenue earned by the “child” that borrowed, trading revenue tomorrow (going to lenders) in exchange for cash today (going to “parents’” owners). Without getting into the weeds, my point was that in order for owners to end up with cash in their pocket, the business has to earn a profit, at some point. And that profit must come from revenue (higher prices for customers) minus expenses (lower quantity/quality for customers). You can insert a lender in there to shift when those cash flow changes happen, but the money must come from customers, eventually. Barring any research and development that results in technology that will allow for lower expenses and/or increased production, but I do not think that is the case here.
- youngtaff 3y agoNo the business doesn’t have to make a profit it just needs enough revenue to service the debt Of course what happens is many business geared this was don’t make a profit, fail their banking covenants, interest on the bond rises and eventually they go bust leaving lenders out of pocket It’s happened to many PE owned businesses
- HWR_14 3y ago> No lender is going to lend a business money just so it can pay the owners. Of course they will! There's an entire industry (leveraged buy outs) built around it. And more generally, lenders will let you do dumb things with the money they lend you. As long as they expect to get paid back. So, could a small business borrow money to pay it's owners? Probably not, it's not likely to get paid back. Could a multinational corporation borrow money to pay dividends? Yes, it's happened.
- fmajid 3y agoMoney is fungible. Lending should only be used for capital investments, not operations or maintenance. The lender's money may have been used for what little capital investment is still happening, but the money they would have otherwise used was diverted to shareholders.
- bandrami 3y agoWow. Yes, they do. It happens most fiscal quarters.
- theonlybutlet 3y agoThis is how a lot of the private equity industry is funded. Shareholders are "de-risked" taking the proceeds of a refinance out of the business upfront. The financier offers the upfront loan in return for a consistent stream of their cash flow (the interest and capital on the loan, and sometimes not even the capital). These businesses tend to have very steady cash flow generation.
- jfengel 3y agoBorrowing is accounted differently from earnings. But yes, at the end of the day the people getting rich don't care which pile of money it comes from, and the people getting poor service are equally unhappy.
- HWR_14 3y agoProfit is extracting money from customers. Shareholder returns can come from profit, or selling off assets, or taking on loans, or underfunding pensions, or probably other ways financial experts can invent.
- lotsofpulp 3y agoThe financing agreements surely require business assets and equity as collateral. At the end of the day, any cash flow that goes to the owners has to come from long term profits from the business, which comes from extracting money from customers. Maybe not today or this year or next year, but everyone is always going to want a return on the money they put in, whether it be owner or lender.
- HWR_14 3y agoUnless I sell off assets. Or take loans now, give the proceeds to the shareholders and get a bonus for it, and leave before the company declares bankruptcy. Or leave a unfunded pension obligation. Or run a nationally important service into the ground and then need emergency government money to keep providing it.
- newsclues 3y agoDo we consider the government a customer?
- HWR_14 3y agoIf it's buying goods and services. I would not treat it as a customer, and instead one of the unenumerated other ways of generating shareholder dividends, if it paid money to keep a nationally vital industry from imploding under the weight of its bad choices.
- yread 3y agoYou can for example buy back shares
- lotsofpulp 3y agoThe money to buy back shares has to come from profits.
- yread 3y agoThat would be actually a nice policy: only allow buybacks using taxed profits. Unfortunately, it's not there yet
- robertlagrant 3y agoWhy would that be a good idea?
- yread 3y agoLots of corporate tax code is about taxing the money flows from the company to the physical persons. Somehow buybacks weren't taxed until recently.
- lotsofpulp 3y agoHow are buybacks not taxed? The entity selling the shares has always had to pay income tax on capital gains from selling shares.
- robertlagrant 3y agoI think this is wrong, twice: - buybacks are taxed when a person gets money for their shares, as capital gains tax - lots of corporate tax is about exactly the opposite of what you say; i.e. reaching inside a company's bank account and taxing its profits directly, rather than waiting for the money to flow out and taxing it as VAT/income tax/cap gains. A huge amount of money and effort is spent on balancing this correctly, with R&D credits, structuring profits to appear in the correct year, etc etc.
- Spooky23 3y agoProfit is the gain made by the enterprise. Shareholder returns are monies paid out to shareholders. When the board is more like a group of Huns than a Shepard, you find that after you pay out the shareholders, the enterprise is toast. In some cases, like most recently in big box retail, the private equity investors are running an obvious and odious, but legal, fraud. With utilities, the business is all about capitalization and cash flow. They should be stable and boring businesses. When they are exciting, the management is burning the candle at both ends.
- twobitshifter 3y agoYou can return value to shareholders that doesn’t come out of profits. For example, selling off your assets doesn’t make you profit, but gives you cash on hand. If that money is returned to shareholders, you’ve changed your balance sheet, but haven’t made any profit. An even simpler example is just selling the company to someone else. The shareholders get whatever the agreed on price was to take it private.
- inconceivable 3y ago> For example, selling off your assets doesn’t make you profit if it's on the balance sheet and you sell it for more than it cost you, then you have to book it as non-operating income, i.e. capital gains, i.e. profit.
- twobitshifter 3y agoOk, so you make X percent profit but the proceeds are more, and you distribute the proceeds to shareholders. You can also sell at a loss and still make distributions to shareholders. This is Private Equity 101.
- EdwardDiego 3y agoSounds like good "modern" governance. You've got assets? Use them as collateral to take on debt so you can free up capital and give it back to the shareholders. Value!
- lotsofpulp 3y agoThat is inevitable with super low interest rates for a super long time, especially near zero. Your options are to acquire appreciating assets quicker than your competitor, or you get left behind. See people who bought homes at 5% down versus people who waited to have 20% down. The people who took on more debt were rewarded nicely with huge gains, and the people, who were prudent, now decide on paying a few hundred thousand more, if they were even able to keep up with saving a larger down payment.
- etrautmann 3y agoThis is highly specific to the period of time with rapidly rising interest rates - not generally true. It does sting though as someone still looking to buy a house.
- BoiledCabbage 3y agoThis is a very naive reading of the situation - it almost comes across as twisting in knots to avoid placing the blame on the responsible party: the company and its owners who were responsible for this. > Your options are to acquire appreciating assets quicker than your competitor, or you get left behind. This is wrong twice over! First of all, they are effectively monopolies, they have no competitors in their industry. The only thing they are competing against is which company can extract money the fastest (at the expense of the company and English citizens). Second of all, from the article, they aren't spending the raised money on capital investments. > For example, South East Water—thousands of whose customers were left without running water this summer—spent more on dividends and servicing its debt than on infrastructure in the two years to March 2022. Water bills for Britain as a whole have increased by around 360%, more than double the rate of inflation, since privatisation. Over that time, annual capital investment by the ten largest water and sewage companies has fallen by some 15%, according to research by the Financial Times (FT). Privatization is an utter failure here, just as would be predicted given the situation, and it's crazy to see an attempt to rationalize it away.
- twobitshifter 3y agoIt sounds just like the utilities went through a PE buyout experience.
- SCdF 3y agohttps://uploads-ssl.webflow.com/62306a0b42f386df612fe5b9/6373798bfb790ce9de31a93e_Profiting%20Amid%20the%20Energy%20Crisis.pdf https://uploads-ssl.webflow.com/62306a0b42f386df612fe5b9/637... Specifically table 1 on page 2, "The ten industries with the highest profit margin", has the spots 1 (elec: 42.5% profit), 2 (gas: 40.5%) and 8 (water: 32.1%) being utilities.
- edgyquant 3y agoHow is that now extracting profit for the shareholders exactly?
- kazinator 3y agoYou left out the "to shareholders, the majority of whom are international investors". A water company caring about some international investors more than the people they serve, and siphoning money out to those foreign interests, borders on treason.