Wayne Rooney's tax penalty and the problem with incentivising private investors to do what the public sector could do more cheaply

Why do we continually subsidise the private sector to do things that the state could do better, and at a lower cost?

Wayne Rooney was named as an investor in unused North Shields data centres (Getty)

The data centres that never processed a byte of data have made for a very unhappy Christmas for Wayne Rooney, Arsene Wenger, Jimmy Carr and several other celebrities.

In case you’ve missed the story, they’re among the 675 investors who between them benefited from £131m in tax relief through the empty centres’ construction in the North-east. They got the money through joining an investment scheme, presumably touted by their advisors.

There was a famous episode of Yes Prime Minister in which Sir Humphrey battled to keep a state-of-the-art hospital that had been built at vast expense from ever seeing a patient. While we’re told tenants are being lined up, this looks remarkably similar. It just involves a private sector facility.

What the involvement of celebrities has rather done is obscure the most important part of the story, which is the question of how it was allowed to happen in the first place.

The tax reliefs they took advantage of came via an enterprise zone. These were designed to encourage investment into economically deprived areas and thereby create jobs.

The fact that the data centres created through it stood empty since 2013 is bad enough, but it’s when you consider the numbers that it gets really crazy. The investors received their £131m in tax relief even though they only invested £79m in the first place.

The explanation for this bizarre situation is that they were able to claim relief on the full £263m cost of building the facilities even though most of the money – £184m – was borrowed from a bank in Vienna.

HM Revenue & Customs is now seeking to reclaim some of it, namely the “tax profit” of £52m, via what’s known as accelerated payment (which means you pay upfront, fight about it later). Enterprise zones have, meanwhile, been consigned to the dustbin of tax relief history.

But the whole shabby affair (well the data centres aren’t shabby, I expect they’re quite lovely) does raise an interesting question. Given that the state can borrow at cheaper rates than even a Viennese bank will offer a bunch of rich celebrities, wouldn’t it have simply been better putting up the money for the data centres itself? Or, more to the point, for facilities that might actually have been used.

It’s true that the state doesn’t always spend money terribly well, which is why people counsel against it getting involved in building things like this. But nor does the private sector.

And it’s also true that some of the worst cock-ups involving new public buildings have come from allowing private finance in, with the state then getting landed with what often amounts to a very expensive mortgage for years afterwards.

I remember speaking to a teacher not so long ago who complained about toilets that their young children couldn’t reach and stairs that were frankly dangerous for them to use at their Private Finance Initiative-built school. That’s just your starter for ten when it comes to PFI horror stories. And don’t even get me started on the job private contractors have done when it comes to assessing people for disabilty benefits (and the cost to the state of the disproportionate number of successful appeals).

Meanwhile, for some considerable time one of the few rail operators that actually provided a half decent service while also making money was the state-owned East Coast Mainline. It was taken back into public hands after its private operator National Express couldn’t afford to run it on the terms it had promised. It’s now with Virgin Trains which is planing fare increases of 4.9 per cent.

What’s any of that got to do with dodgy data centres and terrible tax reliefs? All of it could be said to stem from a deeply held belief in Britain that the private sector is good and the public sector is bad. Despite plenty of evidence that it isn’t necessarily so.

It’s not that enhancing the private sector and creating jobs in the North-east wouldn’t be a rather good thing. Lots of people have argued that the state is too big a part of its economy, and they might have a point.

I’m also aware that well designed tax incentives to tempt investors in can have value. Nonetheless, perhaps it’s time to crunch some numbers and take a hard look at where the public sector could do things better itself. Even if that means contracting the job out to, I don’t know, those unused data centres?