Lies, Damned Lies And Profit Margins At Children's Homes
They ain't 23%, whatever The Times says
It is possible to perpetrate a lie, a political lie, without lying at all. Which is what has happened here about profit margins at children’s homes. This is distressing, of course, but it’s also how we are ruled now. By lies being allowed around the world before the truth has his boots on and thereby we all end up with laws and policies based upon lies, not upon that tardy bootpuller.
The example for today is profit margins on children’s homes:
According to an investigation by The House Magazine, the average annual cost of a private residential placement in 2023-24 is £281,000, five times more than it costs to keep an adult in prison. There has been a 25 per cent increase in prices in two years, with a 23 per cent profit margin taken by the biggest operators.
….
What can councils do? Scotland no longer allows companies to profit from children’s services but in England the private sector continues to expand. Anne Longfield, the former children’s commissioner, said: “The obscene, eye-watering cost of some of this residential care is public-purse money which may be leaving the country when it should be being reinvested into the system.”
We can see how the argument is going, right? The capitalists are walking off with near a quarter of the cash, we should stop that and thereby make childcare cheaper. Huzzah!
This is also a column in The Times and therefore it must be right. So, off with the heads of the capitalist bloodsuckers!
Except that 23% number is not correct. In fact it’s not just wrong it has been deliberately constructed to mislead us.
Please note a couple of things here. No, I’m not happy that kiddie homes cost so much. Nor am I insisting that they should be private market provided, public, charitable, not for profit or anything else. My point here is not about how children’s homes should be. It is about how we are being manipulated by politically constructed numbers.
The 23% is the EBITDA margin, the gross profit close enough. To get from this number to net profit - the bit the capitalists get to keep and surf down a la Scrooge McDuck - we have to include, or even subtract, the interest, tax, depreciation and amortisation.
What’s a pretty big cost of running a home? The interest you pay on the mortgage, the depreciation of the building - new roof every 30 years, that sort of thing - and the writing down, the amortisation, of the original purchase price. What’s not included in EBITDA? All those costs of having a children’s home in which you can run a children’s home.
Pretty bloody useless measure of profit for any political decision making process. Unless, of course, you’re the people who run the bureaucratic alternative to private children’s homes. Then it’s just great.
The source of that 23% is this report from Revolution Consulting. Which is funded, as it says, by the LGA. The, erm, Local Government Association. The people who would run the council sector children’s homes if the private sector didn’t run any.
Now imagine, just for a moment, that you had a malevolent view of bureaucracy. Say, you were at the Adam Smith Institute. Even, that you believed in the malevolence of bureaucracies. Possibly milder, that you had read and understood C Northcote Parkinson. The motivation of a bureaucracy is to expand the headcount, increase the budget. Nothing else - as with any other organism it is continued existence and growth which drives matters on.
So, when you see these private sector wallahs infringing upon your just and righteous ability to employ penpushers whaddayagonnado?
Write a report, obviously. Or get one written for you. Which deliberately and with malice aforethought - recall, this is only a possible opinion of someone who is a Senior Fellow at the ASI - constructs an entirely misleading number which will influence public policy. Possibly, even, knock those private sector wallahs entirely out of the picture and return to those sunlit uplands of local councils being able to spend all the loot.
Which is, in this opinion, what the LGA has been doing these past four years. Yes, it does go back that far - or only that far if you like.
The report manages to believe two wildly different things. One is that these companies running children’s homes have debt levels so alarmingly high that they’re all about to go bust. Quick, nationalise them, bring children’s care back into local council control before the poor tortured orphans and waifs are left on the street! They’re also so wildly profitable that they’re making 23% profit margins!
As to why include both claims in the one report, that’s obvious enough. The problem with constructing such numbers to mislead is that you’re never quite sure which one will stick. Is it going to be the tottering tower of debt that convinces? Or the river of gold going to - gasp, offshore! - private equity? So, damn logic and let’s include ‘em both, eh?
Which is what is done. This is also how the circle of those numbers is squared. We measure profitability by not including all those costs - interest, depreciation, amortisation - of having a building, but do include all the debt of having a building.
Pretty cool, hunh!
And look. Only four years later, just those four short years from our first attempt to mislead, here we’ve got it stated as truth in The Times. Surely the policy wheels will change now that we’ve been able to establish, as fact, that kiddies’ homes make vast profits?
The private sector will be wiped out from running children’s homes, they will be back with local councils and my won’t there be rejoicings in the bureaucracy? You know, those local councils that will have to pay interest, depreciation, amortisation, out of their childcare budgets just as if they’d used private sector providers in the first place.
Just to repeat. The 23% profit margin on running children’s homes is the EBITDA margin. Before the costs of having a home to have a children’s home in. In my opinion this is a deliberately, politically, constructed number meant to mislead - as it is doing. Give ‘em the EBITDA number and leave them to it as they drop the qualification and start thinking it’s the net margin, not the gross.
Which is working, isn’t it?
That it does work is just one of those little failures of humanity. As others have said in other contexts lie loud enough and often enough and folk will believe you.
But it’s not the way to run a country, is it?
Indeed, it is no way to run a country. But it’s symptomatic of the way the country is run today, based on fluffy feelings (public sector, altruistic, good; private sector, self interested, profit focussed, bad) which trump the inconvenience of facts.
Not so many years ago we would have had journalists on the prestigious papers (looking at you, The Times of London) who would rubbish such blatant distortion of the facts and at least one political party that recognised the advantages of the private sector in a competitive environment over the public sector in terms of efficiency, motivation to innovate and improve over a bureaucracy with none of these motives; a party that wasn’t ashamed to say that profit isn’t a dirty word.
And if “experts” writing in “quality” press aren’t prepared to make the effort to report accurately and educate their readers, then there is little hope for many of the readers for whom the concepts of debt and equity, and the returns required to them, are mysteries and who quite readily accept that profit returns to equity owners are dead weight costs that would disappear if the enterprise were instead 100% publicly owned, rather than manifesting differently as government debt service costs (probably not hypothecated and therefore invisible), opportunity costs of alternative public sector activities and marginal tax charges.
That £281,000 is made up as follows: £200,000 complying with government regulation, including nonsense like environmentally approved hot water system, insulation, and the right demographic mix of carers. £25,000 providing the roof, furniture, kitchen and cleaning equipment, linen, plumber & electrician to change tap washers and light bulbs, consumables of various sorts. Another £25,000 to pay the wages. £10,000 is the cost of actually feeding the elderly person and keeping their body odour at acceptable levels, as any family with an aged parent quietly going batty in the attic can tell you. That leaves £21,000 for the entrepreneur, which is what the fight is about.