Canary Wharf skyscrapers on the Isle of Dogs. Photograph: Getty Images.
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Why "skin in the game" could be the key to reforming markets

Those with the power to make decisions on your behalf should share in the risks, not just enjoy the rewards.

"We are all in this together" has become the political catchphrase of this parliament. The phrase has come back to haunt a government that has introduced tax breaks for millionaires in an era of austerity, but Labour’s critique runs wider than this. Our argument at the next election will be about the way our economy works so that we tackle the causes of the cost-of-living crisis, not just the government’s priorities on tax and spend.

The campaign for a living wage embodies this idea. The question is not just whether tax credits can be protected, but whether companies will pay people a wage they can get by on. The debate on energy prices is another example. The job is not just to fund winter fuel payments but to reform the energy market so that customers are not taken for a ride. Occupational pensions typify the challenge: the difference between a 1 per cent and a 1.5 per cent charge from a provider can be tens of thousands of pounds more in a pension pot at the end of a working lifetime. Sharing in prosperity is about how our economy works, not just what the government spends.

In this context, a new paper by Duncan O'Leary published this week by the think-tank Demos is a welcome contribution to the debate. The paper explores a new idea for reforming markets: "skin in the game". The phrase comes from Warren Buffet, who demands that people investing his money have some of their own money at risk. They must have some skin in the game. The principle is that people who have the power to make decisions on your behalf should share in the risks, not just enjoy the rewards. Only then can they be truly accountable.

In the US, the government is already experimenting with the skin in the game idea. Banks can no longer package up and sell on all the debt from the mortgages they offer. They must retain some skin in the game: 5 per cent of every mortgage must stay on their balance sheets. The idea is that lenders start to consider not just whether they can sell a loan on to others in the market, but whether the loan itself is a good one. The hope is that more skin in the game will encourage more responsible lending.

O'Leary explores what this idea might mean in different policy areas. Is it right, for example, that half of FTSE 100 chief executives are not invested in the pension schemes that more than 90 per cent of their new staff are auto-enrolled into? Would companies pay more attention to pension charges if they were coming out of the CEOs pocket too? Is it sustainable that ratings agencies are paid by the organisations whose financial products they are rating? Should at least some of the fees be held back and paid according to how accurate the ratings prove? Perhaps some skin in the game would lead to greater accuracy.

The idea has the most obvious applications in finance. Is it fair that all financial services companies should pay the same industry levy to fund debt advice, regardless of their lending practices? Shouldn’t the lenders who drive people to debt advice, through hiking up rates when people miss payments, contribute more? Some skin in the game might encourage lenders to adopt a less adversarial approach with their customers.

But O'Leary also examines what it might mean in other areas too. Could companies be given more of a stake in whether the staff they make redundant find work when they leave? Could the skin in the game idea improve back-to-work support for those who find themselves off work through illness or accident? In Holland, for example, companies must pay up to an extra year’s sick pay if they do not take reasonable steps to reintegrate staff who suffer illness or disability. Here we have around 300,000 people flowing from work onto state benefits each year because of health-related issues, adding to the welfare bill.

The value of the skin in the game idea is twofold. First, it avoids the kind of top down micro-management that belongs to the politics of the last century, not this one. The task is to ensure that we really are "all in this together", but through reforming the incentives within markets, not tying business up in complex rules and regulation. The skin in the game idea has a simplicity to it that is attractive. Second, the principle seeks to prevent problems occurring and to align power and accountability where they have become detached from one another. Both are organising principles of Labour’s policy review that I lead, whether in the public or private sectors.

For Britain to become the global standard for an inclusive economy we must create a system that is fair from the start. The policy review will need to look at the skin in the game principle in more detail. But at first sight it looks like a key ingredient in the "recipe for responsible capitalism".

Jon Cruddas is Labour's policy review coordinator and MP for Dagenham

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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.