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.

Getty
Show Hide image

For the Ukip press officer I slept with, the European Union was Daddy

My Ukip lover just wanted to kick against authority. I do not know how he would have coped with the reality of Brexit.

I was a journalist for a progressive newspaper.

He was the press officer for the UK Independence Party.

He was smoking a cigarette on the pavement outside the Ukip conference in Bristol.

I sat beside him. It was a scene from a terrible film. 

He wore a tweed Sherlock Holmes coat. The general impression was of a seedy-posh bat who had learned to talk like Shere Khan. He was a construct: a press officer so ridiculous that, by comparison, Ukip supporters seemed almost normal. He could have impersonated the Queen Mother, or a morris dancer, or a British bulldog. It was all bravado and I loved him for that.

He slept in my hotel room, and the next day we held hands in the public gallery while people wearing Union Jack badges ranted about the pound. This was before I learned not to choose men with my neurosis alone. If I was literally embedded in Ukip, I was oblivious, and I was no kinder to the party in print than I would have been had I not slept with its bat-like press officer. How could I be? On the last day of the conference, a young, black, female supporter was introduced to the audience with the words – after a white male had rubbed the skin on her hand – “It doesn’t come off.” Another announcement was: “The Ukip Mondeo is about to be towed away.” I didn’t take these people seriously. He laughed at me for that.

After conference, I moved into his seedy-posh 18th-century house in Totnes, which is the counterculture capital of Devon. It was filled with crystal healers and water diviners. I suspect now that his dedication to Ukip was part of his desire to thwart authority, although this may be my denial about lusting after a Brexiteer who dressed like Sherlock Holmes. But I prefer to believe that, for him, the European Union was Daddy, and this compulsion leaked into his work for Ukip – the nearest form of authority and the smaller Daddy.

He used to telephone someone called Roger from in front of a computer with a screen saver of two naked women kissing, lying about what he had done to promote Ukip. He also told me, a journalist, disgusting stories about Nigel Farage that I cannot publish because they are libellous.

When I complained about the pornographic screen saver and said it was damaging to his small son, he apologised with damp eyes and replaced it with a photo of a topless woman with her hand down her pants.

It was sex, not politics, that broke us. I arrived on Christmas Eve to find a photograph of a woman lying on our bed, on sheets I had bought for him. That was my Christmas present. He died last year and I do not know how he would have coped with the reality of Brexit, of Daddy dying, too – for what would be left to desire?

This article first appeared in the 19 January 2016 issue of the New Statesman, The Trump era