We need to talk about profit

Accounting profit is necessary for publicly traded companies to survive; it's not a sign of extortion.

Profit is seen as a pretty ugly thing for public services to be dealing in. Take the Guardian's Terry Macalister in April (only picked because it's the most recent I can find):

The big six energy suppliers have been accused of "cold-blooded profiteering" after official figures showed they had more than doubled their retail profit margins over the last 18 months and were now earning an average of £95 profit per household on dual-fuel bills.

To be clear, the profit motive is a fair target. There's a real debate to be had over whether or not companies providing public services should be operating under a legal structure which requires them to try to maximise the amount of cash (over the long term) they can return to shareholders, rather than, say, maximising the quality of service provided for a given investment, or providing a set level of service at the minimum cost possible.

But given public services are frequently run by private companies, attacking the amount of profit they actually make is concerning, for one simple reason: money costs money.

It's a basic fact of the economy, one which explains why it takes so long to pay off credit card bills, why the bank pays you if you've got a savings account, and why Greece is finding things tricky at the moment.

But while we're all familiar with debt finance – the act of borrowing a sum, and then paying it back with interest – corporations have an alternative way of paying for the money they need: equity finance. Rather than paying interest on top of borrowed cash, they return a share of the money they make with their loans to the people who loaned to them in the first place.

That money being returned – the equivalent of the interest which we all have experience paying – is profit.

If companies don't earn some profit, then the shareholders are likely to cash out, safe in the knowledge that they can earn more by putting their money elsewhere – maybe by buying shares in another company, or putting it in a high interest savings account. The amount of profit that companies have to earn to stop this happening will vary based on the perceived riskiness of investing in them, as well as the value of investments elsewhere, and is known as the "cost of capital".

Power companies need to be able to make investments, frequently valued in the billions of pounds (Macalister quotes one industry analyst who estimates £50bn is needed just to hook up new gas supplies). It's only by making profit today – that is, by rewarding the shareholders who bought in to the companies before – that they can ensure that they have enough funding to carry on paying for investments tomorrow.

None of this is to say that there can't be such a thing as "too much" profit; if Thames Water were to suddenly make Apple-sized margins, we could be pretty sure that they were overcharging or underinvesting. But simply making accounting profit, even at the same time as pleading penury and raising prices, is not a sign of underhandedness. It's just a sign of a business working as normal.

Companies which deliberately and continually make no profit do exist. But they aren't traded on the open market, and have no access to equity finance. That's fine for some, but worrisome if they suddenly need to find large amounts of cash to invest – or to stave off the creditors.

Perhaps public services should be run as non-profits, or not be run privately at all; but if they are, attacking them for making profit is foolish.

Hinckley Point nuclear power station. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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Something is missing from the Brexit debate

Inside Westminster, few seem to have noticed or care about the biggest question mark in the Brexit talks. 

What do we know about the government’s Brexit strategy that we didn’t before? Not much, to be honest.

Theresa May has now said explicitly what her red lines on European law and free movement of labour said implicitly: that Britain is leaving the single market. She hasn’t ruled out continuing payments from Britain to Brussels, but she has said that they won’t be “vast”. (Much of the detail of Britain’s final arrangement is going to depend on what exactly “vast” means.)  We know that security co-operation will, as expected, continue after Brexit.

What is new? It’s Theresa May’s threat to the EU27 that Britain will walk away from a bad deal and exit without one that dominates the British newspapers.

“It's May Way or the Highway” quips City AM“No deal is better than a bad deal” is the Telegraph’s splash, “Give us a deal… or we walk” is the Mirror’s. The Guardian opts for “May’s Brexit threat to Europe”,  and “May to EU: give us fair deal or you’ll be crushed” is the Times’ splash.

The Mail decides to turn the jingoism up to 11 with “Steel of the new Iron Lady” and a cartoon of Theresa May on the white cliffs of Dover stamping on an EU flag. No, really.  The FT goes for the more sedate approach: “May eases Brexit fears but warns UK will walk away from 'bad deal’” is their splash.

There’s a lot to unpack here. The government is coming under fire for David Davis’ remark that even if Parliament rejects the Brexit deal, we will leave anyway. But as far as the Article 50 process is concerned, that is how it works. You either take the deal that emerges from the Article 50 process or have a disorderly exit. There is no process within exiting the European Union for a do-over.  

The government’s threat to Brussels makes sense from a negotiating perspective. It helps the United Kingdom get a better deal if the EU is convinced that the government is willing to suffer damage if the deal isn’t to its liking. But the risk is that the damage is seen as so asymmetric – and while the direct risk for the EU27 is bad, the knock-on effects for the UK are worse – that the threat looks like a bad bluff. Although European leaders have welcomed the greater clarity, Michel Barnier, the lead negotiator, has reiterated that their order of priority is to settle the terms of divorce first, agree a transition and move to a wider deal after that, rather than the trade deal with a phased transition that May favours.

That the frontpage of the Irish edition of the Daily Mail says “May is wrong, any deal is better than no deal” should give you an idea of how far the “do what I want or I shoot myself” approach is going to take the UK with the EU27. Even a centre-right newspaper in Britain's closest ally isn't buying that Britain will really walk away from a bad deal. 

Speaking of the Irish papers, there’s a big element to yesterday’s speech that has eluded the British ones: May’s de facto abandonment of the customs union and what that means for the border between the North and the South. “May’s speech indicates Border customs controls likely to return” is the Irish Times’ splash, “Brexit open border plan “an illusion”” is the Irish Independent’s, while “Fears for jobs as ‘hard Brexit’ looms” is the Irish Examiner’s.

There is widespread agreement in Westminster, on both sides of the Irish border and in the European Union that no-one wants a return to the borders of the past. The appetite to find a solution is high on all sides. But as one diplomat reflected to me recently, just because everyone wants to find a solution, doesn’t mean there is one to be found. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.