What is there left to say?

So, the Tories are in coalition with the Lib Dems, the arguments in favour of Gay and Women's rights have achieved axiomatic status and the central political issue of the time remains the economy, stupid. The long term ambitions of most politicians seem remarkably cohesive; sustainable economic development, a society with progressively increasing levels of equality and a set of liberal social values. Surely, then, the UK's political discourse must be dominated by rational discussion of how best to reach these shared goals? There will be areas of disagreement but also areas of great unity of purpose.

In this environment, there must be no space for the voice of a center-right liberal blogger, someone who quite likes low taxes but hates discrimination, who likes public services but doesn't want the state to dominate the economy, who likes the rule of law but is aware that hanging and flogging doesn't really work. In other words, there should be no room for a Liberal Tory.

And yet, this is not the case. Modern politics is dominated by accusations that each side is evil or mad or both. Indeed, I am constantly struck by the feeling that most politicians (of all political stripes) have been corrupted by the process of opposing each other. Too many have lost their ability to examine and develop a rational argument. Instead they appear pathetically petulant children screaming for the attention of a rather bored public.

This blog is my small contribution to exposing this depressing state of affairs.

Tuesday, 5 November 2013

Today's most depressing piece of journalism?

Now I know this is probably an insanely futile exercise but I read something today that I could scarcely believe and feel must be responded to. I feel this way not because I have particularly strong feelings about trains (despite what follows). Rather, it’s incredibly depressing that journalists are willing and able to publish coruscating opinion-forming pieces with almost no interrogation of the facts presented. I’m sure similar pieces get published every day in every paper, informing people’s views and, ultimately, changing the way they vote. And that’s sad.

Anyway, for those wanting to know what brought this on, here goes:

A quite extraordinary article was published today in the Guardian [EDIT, here's a link http://www.theguardian.com/commentisfree/2013/nov/04/rail-privatisation-train-operators-profit?CMP=twt_fd]. In it, this esteemed journal’s Economics Leader Writer, Aditya Chakrabortty, described rail privatisation is “legalised larceny”. Fair enough, that’s an opinion of sorts and not, on its own, worthy of comment. However, the basis for this claim was something bizarre. According to Chakrabortty, the proof of this theft lies in the lamentable record train companies have of investing in services. He came to this conclusion on the basis of some analysis by the Centre for Research on Socio-Cultural Change (Cresc). This analysis looked at the average the return on capital employed (ROCE) for train companies last year (2012). The idea was to show how much profit the companies earned for every pound invested in the business. If the number was low, they’d be investing lots and not earning a huge profit. A high number would be proof that the industry was busy bleeding the country dry while lining shareholders’ and executives’ pockets. Cresc’s answer was that last year, the average return was 147%.

147%!!!

Chakrabortty accurately identifies this as an astronomical number – comparing it to Barclays’ ambitions of a ROCE of 10%. To give you an idea of what that means, a pound invested in a train company would generate almost 15 times the profit of a pound invested in one of the UK’s largest banks. Chakrabortty makes the comparison of buying a house and selling it the following year at a 147% markup. Wow.

The problem is that this number seems quite crazy. How do we know? By applying something Chakrabortty clearly doesn’t bother with when having his biases confirmed – a little scepticism.

Because I clearly have remarkably little in the way of a life, I looked at the annual report for First Group for 2013 (available here). This isn’t perfect. First Group is a big business and the report doesn’t give me a detailed breakdown of the balance sheet of its UK Rail business. However, it does tell me the revenue and operating profit of the UK Rail business and the ROCE of the group as a whole. Here are a few things I found out:
  • First Group’s overall ROCE is between 10% and 12% (or between 12 and 15 times smaller than Cresc’s claims its UK Rail business generates). This is possible – its other divisions could be loss making, for example [they’re not].
  • In 2012, First Group’s UK Rail division made an Operating Profit of £110.5m from Revenue of £2.5bn – a 4% profit margin.
  • This is pretty strange for a business with such an incredible Return on Capital.
  • If Cresc’s numbers are right, then First Group has only £75m of capital employed in its business of transporting hundreds of thousands of people across the country every year.
  • Wikipedia tells me First Group has about 260 trains in the UK. That works out at £289,000 per train. A whole train for less than £300k! And yet, Kent Rail tells me that First Group’s most common train (the British Rail Class 319) costs £306k a year to rent (here).


All of this makes Chakrabortty’s claims pretty hard to believe. I could be wrong. But if I am, this is a truly incredible story worthy of more than a spurt of criticism on the comment pages of Tuesday’s Guardian. It might be that First Group is totally unrepresentative of the industry but it’s the industry’s biggest player so this seems unlikely.

I don’t know where Cresc got their figures because they’re not provided in the article. My guess would be they’ve misunderstood how to calculate ROCE and have ignored the long term debt that provides most of the funding for many businesses and around 75% of First Group’s total capital employed.


If I’m right, this article should be retracted immediately.
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