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: André Spicer
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“It’s scary to do it again”: the five-year-old fined £150 for running a lemonade stand

Enforcement officers penalised a child selling home-made lemonade in the street. Her father tells the full story. 

It was a lively Saturday afternoon in east London’s Mile End. Groups of people streamed through residential streets on their way to a music festival in the local park; booming bass could be heard from the surrounding houses.

One five-year-old girl who lived in the area had an idea. She had been to her school’s summer fête recently and looked longingly at the stalls. She loved the idea of setting up her own stall, and today was a good day for it.

“She eventually came round to the idea of selling lemonade,” her father André Spicer tells me. So he and his daughter went to their local shop to buy some lemons. They mixed a few jugs of lemonade, the girl made a fetching A4 sign with some lemons drawn on it – 50p for a small cup, £1 for a large – and they carried a table from home to the end of their road. 

“People suddenly started coming up and buying stuff, pretty quickly, and they were very happy,” Spicer recalls. “People looked overjoyed at this cute little girl on the side of the road – community feel and all that sort of stuff.”

But the heart-warming scene was soon interrupted. After about half an hour of what Spicer describes as “brisk” trade – his daughter’s recipe secret was some mint and a little bit of cucumber, for a “bit of a British touch” – four enforcement officers came striding up to the stand.

Three were in uniform, and one was in plain clothes. One uniformed officer turned the camera on his vest on, and began reciting a legal script at the weeping five-year-old.

“You’re trading without a licence, pursuant to x, y, z act and blah dah dah dah, really going through a script,” Spicer tells me, saying they showed no compassion for his daughter. “This is my job, I’m doing it and that’s it, basically.”

The girl burst into tears the moment they arrived.

“Officials have some degree of intimidation. I’m a grown adult, so I wasn’t super intimidated, but I was a bit shocked,” says Spicer. “But my daughter was intimidated. She started crying straight away.”

As they continued to recite their legalese, her father picked her up to try to comfort her – but that didn’t stop the officers giving her stall a £150 fine and handing them a penalty notice. “TRADING WITHOUT LICENCE,” it screamed.


Picture: André Spicer

“She was crying and repeating, ‘I’ve done a bad thing’,” says Spicer. “As we walked home, I had to try and convince her that it wasn’t her, it wasn’t her fault. It wasn’t her who had done something bad.”

She cried all the way home, and it wasn’t until she watched her favourite film, Brave, that she calmed down. It was then that Spicer suggested next time they would “do it all correctly”, get a permit, and set up another stand.

“No, I don’t want to, it’s a bit scary to do it again,” she replied. Her father hopes that “she’ll be able to get over it”, and that her enterprising spirit will return.

The Council has since apologised and cancelled the fine, and called on its officials to “show common sense and to use their powers sensibly”.

But Spicer felt “there’s a bigger principle here”, and wrote a piece for the Telegraph arguing that children in modern Britain are too restricted.

He would “absolutely” encourage his daughter to set up another stall, and “I’d encourage other people to go and do it as well. It’s a great way to spend a bit of time with the kids in the holidays, and they might learn something.”

A fitting reminder of the great life lesson: when life gives you a fixed penalty notice, make lemonade.

Anoosh Chakelian is senior writer at the New Statesman.