Government Welfare Inquiry proposal leads to total ban on profit

NEWS Published

WELFARE SERVICES – The Government Welfare Inquiry led by Ilmar Reepalu presenting a proposal for regulating profits was premised on enabling continued private sector provision of welfare services. The Confederation of Swedish Enterprise begs to disagree, based on a special study we assigned auditors PWC, and as argued by Caroline af Ugglas and Anders Morin.

Caroline af Ugglas, Deputy General Director of the Confederation of Swedish Enterprise

Caroline af Ugglas

Anders Morin, Welfare Policy Specialist for the Confederation

Anders Morin, ansvarig välfärdspolitik.

Foto: Ernst Henry Photography

This is the first comprehensive impact assessment of the proposals issued in the Government Welfare Inquiry. In their figures, PWC show the actual consequences that implementing the proposals would have on continuing operations for most private sector welfare services providers – essentially making them impossible.

The Inquiry proposes to permit a yield of seven percent plus the government borrowing rate – currently 0.35% – on their book operating capital. The Inquiry has not presented any impact assessment showing the consequences this proposal has for private welfare services providers, despite its government directive explicitly calling for this.  

The PWC assessment is clear. Most private welfare services providers will not be able to earn surpluses sufficient enough to run stable operations.

Operating margins (net surplus after paying operating costs) for nearly 80% of all privately operated welfare services providers (privately operated schools, health care, or elderly care) will be restricted to less than two percent. The significant portion of private welfare services providers being limited to such a small operating margin is simply due to these companies’ book value (net assets and equity) being relatively low compared to the size of their operating revenues and costs.

The Inquiry ignores the possibility these companies face  in seeing revenues drastically, and quickly cut, since they cannot guarantee the long-term commitment of their patients or students, and especially that they may lose a tender. But costs are significantly fixed for longer periods, including for premises, leases, and employment contracts.

The limited earned surplus is thereby insufficient to build up the appropriate buffers for the possibility of lost revenues. The PWC assessment shows that a company would need 150 months (12.5 years) to save a buffer corresponding to three months of revenues, if their operating margins are limited to two percent. And it would need 50 years to accumulate a buffer for one year’s revenues.

Moreover, 24% of all private welfare services providers have a negative book value for operating capital. This situation was not addressed at all by the Inquiry. Negative operating capital arises when operating liabilities (including payroll taxes) exceed operating assets (buildings and equipment).

This situation is not unusual in welfare services providers, since they often have little need for assets under ‘property, plant and equipment’, while they do have significant staff expenses. Even so, these welfare services providers can show significant operating value in the form of customer volumes, strong brands, qualified staff and well-functioning processes. But the Inquiry ignores these measures of value.

As well, any company with a negative operating capital would, under this proposal, be forced to operate at a loss. This highlights the unreasonable basis the Inquiry uses in calculating operating capital and its total lack of any impact assessment.

The obvious conclusion for the Confederation of Swedish Enterprise is that the so-called ‘limit’ to operating surplus as proposed by the Inquiry, practically results in a total profit ban for nearly 80% of private welfare services providers and, what’s more, includes a government imposed requirement to show red figures for 24% of these businesses.

The total number of companies affected by this ‘profit ban’ exceeds 14,200. But this figure is only for registered limited companies, even though the Inquiry proposal applies to all types of operations. Most of these – up to 86% – are small businesses with less than nine employees.

The types of operations most affected are pre-schools, elementary schools, and personal assistance providers. In these categories, the percentage of companies which would have their operating margins limited to 2% are, respectively 90, 88 and 94. 39% of all personal assistance providers would be required to report operating losses, as they have negative operating capital. 

The Confederation assessment is that the companies hardest hit by any limit on surplus would be the smaller ones. Larger companies have greater capability to purchase the properties where they operate to increase their operating capital, and thereby raise their permitted operating margin, a strategy smaller companies cannot take.

But the Confederation sees that the services users – the customers who are students, patients, elderly and physically disabled – are those impacted most. If the proposal is implemented, the fewer surviving providers will significantly reduce diversity and freedom of choice. This would also eliminate the possibility for new operations to start and to innovate or meet the specific needs of service users.

How could this be an outcome? Was the original purpose of the Inquiry to eliminate entirely private provision of welfare services? There are two clear indications this was, indeed, the case. First is the remarkable nonchalance the Inquiry showed in rejecting the shattering criticism issued by active researchers in the fields – including Joachim Landström, Thomas Hjelström, Per Strömberg och Mikael Runsten. 

Second, is the political storm unleashed against all profits earned by private welfare services providers – despite these representing only 0.6% of the total cost of all publicly financed welfare services. Moreover, this small portion is likely overestimated, since it includes companies’ operating surplus from operations that are not tax financed. And, these companies and shareholders pay tax on any profits earned, which the Inquiry ignored.

Implementing the proposal would cause a return to the public monopoly in provision of welfare services. This will cause the loss of prerequisites for activities designed to improve quality and resource efficiency. It will also make nearly impossible joint financing of welfare services as the share of elderly increases. But those most affected will be the service users, who will lose their freedom of choice among a wider diversity of providers, thereby reducing quality competition. 

Attacking the profits of private welfare providers is not the way to address any problems in this field. Instead, general quality requirements that apply to all providers – private and public – should be seen as the appropriate approach. Policy debate should now leave this narrow focus on profit, and instead concentrate on improving quality in provision of welfare services.

Caroline af UgglasAnders Morin

News

NEWS Published:

American tariffs hurt Swedish and European industry

"President Trump’s decision to impose tariffs on steel and aluminum imports is very unfortunate. It will hurt Swedish industry both directly and indirectly", says Carola Lemne, Director General of the Confederation of Swedish Enterprise.
NEWS Published:

The EU-commission wants to go big on AI

AI  The US and China are way ahead of Europe regarding development of autonomous computer systems. That disadvantage must change if European business and industry is to retain its competitive edge into the future, writes Olof Erixon, Senior legal counsel.
NEWS Published:

EU – the clearest voice for free trade

In the beginning of May, the Free Market Road Show (FMRS) took place in Stockholm. Jens Hedström, Head of Brussels Office, International Director, Swedish Enterprise, was one of the panellists together with PJ Anders Linder, CEO Axess Foundation, the British economist Richard Teather among others.
NEWS Published:

Sweden should oppose the digital tax proposals

TAXES The Swedish Government should oppose the controversial digital tax proposals from the EU Commission and work with the OECD to find an internationally acceptable solution.
NEWS Published:

Controversial EU tax proposal on digital services causes concern for small exporting economies

TAX The Director Generals for the Swedish, Danish and Finnish business federations have, in a joint letter addressed to the Finance Ministers of their respective countries, expressed their concern for the EU Commissions digital tax plan.
NEWS Published:

Protectionism only produces losers

The impact of globalisation has been positive for most of the world’s population. However, the economic integration of economies also accelerates change which puts increasing pressure on societies to be able to adapt to such change. We need to stand up for the clear advantages of globalisation, while making sure our societies have the flexibility necessary to adapt to rapid changes in technology and labor markets. These were the main conclusion at a seminar about free trade and globalization in times of protectionism, organized by The Society for Business and Politics in the European Parliament.
NEWS Published:

Let’s talk about the losers of protectionism

European politicians have a big role to play in communicating why globalisation matters. We need politicians that are brave enough to talk about the losers of protectionism, not just the losers of globalisation, writes Carola Lemne.
NEWS Published:

The European Commission: Swedish companies best at innovation

Within the framework for the European Commission’s EU Industry Day February 22-23 in Brussels, Teknikföretagen and RISE was chosen to present how Swedish enterprise and academy cooperate around invention under the headline TESTBED Europe, accelerating innovation and strengthening eco-systems. The seminar proved to be one of the events most popular, and gathered experts from all over Europe. The participants all agreed that Sweden is the leading example of innovation, but why?
NEWS Published:

OECDs ambassadors meeting – act for growth and prosperity

January 19th marked the date for BIACs annual meeting with the ambassadors of OECD. This year’s theme was ”Business priorities for OECD action: a call for growth and prosperity” and tackled subjects like entrepreneurship, multilateral framework for trade, tax and investments, creating opportunities for business to create the jobs of the future and developing high quality regulation that strengthens businesses competitiveness. 
NEWS Published:

Trilogue negotiations – striking the right balance between transparency and efficiency

A trilogue is just what it sounds like – a dialogue between three parties. In a European context the three parties in question are the European parliament, the European Commission and the Council. There are advantages to these trilogues; it’s a quicker decision process which can be used ad hoc with the three most important parties present. But the opposition is growing against the increased frequency, particularly because of lack of transparency that trilogues entail.
NEWS Published:

Entrepreneurship crucial for successful companies in Europe

We need a holistic perspective to be able to create a better European ecosystem for entrepreneurs. Innovation is not enough, the products must be commercialised and reach the market if companies are to be able tocreate growth.
NEWS Published:

A framework for free flow of non-personal data in the European Union

COMMENT The Confederation of Swedish Enterprise welcomes this regulation with its aim to ensure the free data flow within the European Union. Europe can no longer afford to keep the Digital Single Market held back by protectionism and fragmentation, says Göran Norén, Head of Department, Industrial Affairs, and Carolina Brånby, Digital Policy expert.
NEWS Published:

Nordic labour market models and the Social Pillar – complementary or colliding?

SOCIAL PILLAR The Nordic employer organizations organised a seminar in Brussels where invited representatives from the EU institutions, industry and trade union discussed their views on the Social Pillar taking into account the Nordic labour market models.
NEWS Published:

Connected consumers: risk or opportunity?

New technology and data-driven innovation create new business models and services that enable companies to help their customers by adjusting their products and become more relevant. At the same time, access to and analysis of data challenges the personal integrity and the view of how integrity should best be safeguarded. How shall development of new services and personalisation be balanced with demands of personal integrity? Do consumers have access to relevant information? And who is responsible for what?
NEWS Published:

Business and politics hand in hand to solve environmental challenges

The world and humanity are facing some of our greatest challenges. More people are using more natural resources. Fish stocks are running the risk of extinction, freshwater resources are far from adequate, carbon dioxide in the atmosphere is increasing and biodiversity is becoming depleted. Never before has a creature been able to affect our planet to the extent humanity does today.All of this constitutes major challenges - but there is hope for our future. And many solutions can be found within the business community.
 
NEWS Published:

The recipe for a competitive EU

The success of the EU’s can be measured largely in the level of exchange in goods, services, people, and capital. The complete implementation of the Single Market is key. Much remains to be done in many areas, such as the free movement of services and labour, eliminating restrictive national processes, regulations and standards, and ensuring that common legislation is applied uniformly and consistently. As long as barriers to the four freedoms remain, European competitiveness will continue to be held back.
NEWS Published:

Trump cannot kill climate hope

As the USA now plans to exit the Paris Climate agreement, the EU and Sweden can have the greatest impact by demonstrating that combining competitiveness and high levels of prosperity with continuing to reduce climate emissions is possible. The entrepreneurial sector will drive climate issues forward, more than policy makers. Technical innovation is advancing quickly in many fields, reducing costs for new technology. Even US President Donald Trump cannot change these facts despite his misguided passion for coal, writes Maria Sunér Fleming, Head of Energy and Climate Policy at the Confederation of Swedish Enterprise.
NEWS Published:

Do we need a more social Europe?

Is a “Social Europe” the right medicine to stop growing populism? Can new social rights and social legislation foster growth and jobs? Is the fight against social dumping in fact a pretext for protecting domestic workers? What is the role of the EU and the Member States?
NEWS Published:

Trust in the European Union at a crossroads – Europaperspektiv 2017

Swedish universities have since 1998 cooperated in national networks within political science, economics and law. The purpose is to enhance the interest and knowledge in the European Union. Each year a book is published to disseminate knowledge to a broader audience. The book is divided into three main areas, political science, economics and law and each year grasps a specific topic. The topic of the year is trust, which incorporates trust both between member states but also between citizens and institutions.
NEWS Published:

How the Nordics achieved an integrated electricity market – Lessons for Europe?

Last November, the European Commission presented its package "Clean Energy for All in Europe". Among the proposals currently being discussed in the Council of Ministers and in the European Parliament are the draft legislation on the electricity market design, security of supply and governance of the energy union.