Pterois volitans - or 'common lionfish' - a venomous fish notable for being a particularly invasive species in the the Caribbean Sea around the Cayman Islands, shown here in striking effect against a Carribean-blue background, its brown and white spines fanning out before the camera from its gruff-looking, down-mouthed face

Tax haven drives public sector’s smart city transformation

Image credit: by Jens Petersen :

An investment fund from an offshore tax haven is pushing the ‘smart city’ transformation of public services into business ventures from which its secretive investors can make a profit.

The fund, working with US tech giant Cisco, put up £100m of private finance on the premise that public authorities cannot raise enough money of their own from taxes to buy technology they need to modernise public services. But the fund is channelled through the Cayman Islands, an offshore haven blamed for helping global corporations avoid paying tax, thereby denying public authorities money they need for public services.

Cisco, whose innovations in network hardware helped build the internet and turned it into one of the largest companies in the world, put the offshore fund behind a plan to make the same kind of changes to public services as the internet had made to business and society – stimulating commerce and entrepreneurialism, and breaking open established centres of power.

Metropolitan councils in the north of England have taken up the idea that ‘smart city’ technology will turn the public realm into a kind of internet platform that will give businesses a way to innovate alternative ways of delivering public services.

Digital Alpha Advisors LLC, a US-based investment manager, pooled $145m from two Cayman Island investment funds to lend UK cities money to buy network and software infrastructure they would need to run smart city services, and to invest in UK companies that would build it.

It did its first UK deal in collaboration with Cisco on 26 September 2017, investing £10m to become the single largest shareholder in Connexin, an ambitious network firm based in Hull, with which it has since trialled smart-city projects in Hull and Newcastle. Cisco also led a smart-city pilot scheme in Manchester.

The Cisco fund channelled its Connexin investment through a Cayman Islands shell company called Connexin CayCo 2 Ltd, according to company statements, documents filed at Companies House, and at the Cayman Islands company registry, and the US Securities and Exchanges Commission (SEC). It acquired 43 per cent of the Hull company.

The money came from two Cayman registered investment funds called Digital Alpha Fund LP and Digital Alpha Fund A LP, according to the documents.

Rick Shrotri, investment manager at Digital Alpha Advisors, set it up in January 2017 to work exclusively with Cisco in funding a “new class of digital infrastructure asset”. It would do this by investing in companies, and by doing “revenue-sharing deals”, according to his LinkedIn page. Cisco offers public authorities revenue-sharing deals as a way for them to pay back money it lends them from Digital Alpha funds.

Shrotri spent three years prior to 2017 lining up private financiers for such deals, as global head of business acceleration at Cisco, according to his LinkedIn career history. He persuaded Cisco executives to create a world-wide programme to put private equity finance into “NewCo opportunities” and “revenue-sharing transactions”, having first done a deal to prove the concept.

Within weeks of investing in Connexin last year, Cisco announced it had created a $1bn (£780m) global investment fund, called the City Infrastructure Financing Acceleration Program, to put private equity behind public-sector smart-city programmes, and into companies that would carry out the work. Digital Alpha said it had dedicated £100m to funding the digital transformation of public services in the UK.

Cisco was among the top 50 US corporations that charity Oxfam criticised in 2016 for putting $1.6tn (£1.25tn) of money into secretive offshore investment funds. Doing this allowed them to avoid paying $135bn of tax that could have been used to pay for public services that gave vital aid to people with little of their own means and resources, it said. They used legitimate means to cut their tax bills. But Oxfam raised questions about its morality.

“Big business is dodging tax on an industrial scale, depriving governments across the globe of the money they need to address poverty and invest in healthcare, education and jobs,” said Oxfam in a follow-up report about its tax haven research. “The only beneficiaries are corporations and their wealthy shareholders and owners.”

Cisco held $58bn (£45bn) in offshore tax havens between 2009 and 2015, while earning profits of $67bn, Oxfam said. The charity’s critique followed the ‘Panama Papers’ scandal, in which an immense collection of corporate tax-haven records were leaked, exposing the extent and means of tax dodging. One way large corporates dodged tax, according to reports, was by setting up anonymous offshore companies through which they would re-channel investments back into the real economies they came from, to avoid paying tax on their investments.

The beneficial owners of Digital Alpha’s Cayman funds – the backers who put up the money it held – are not known. The Cayman Islands does not require companies and funds registered there to reveal their owners, and it publishes minimal information about them on its public register.

Shrotri did not respond to personal requests for information about ownership of the Cayman fund, its purpose, whether it might not be designed to dodge tax, and whether there might be good reasons to maximise investment by routing it through a tax haven. Digital Alpha did not return calls from the Silicon Valley telephone number it registered with the SEC.

Arvind Satyam, Cisco’s managing director of smart cities and digital transformation, who has been selling its smart city tech and finance to cities in the North of England, did not respond to similar questions, though he had responded to requests that more directly addressed his sales pitch. Connexin CEO Furqan Alamgir likewise did not respond to requests for information about its Cayman backers.

Yet Cisco put its first smart-city investment into one of the most impoverished regions of the UK.

Hull is the third most deprived council region in the country, according to a multiple of government indicators. It has the lowest average levels of education among 152 council regions. Its levels of income, employment, crime, and the number of children living in poverty, are among the 10 per cent most deprived. The general health of its people, their living conditions, and poverty amongst its elderly are among the worst 20 per cent. Its access to housing and services are little better than the worst third of all councils. But it is also among those with the most advanced telecoms sectors, that has nurtured start-up companies such as Connexin.

Hull City’s Council Cabinet reported in September that its “key challenge” was the “significant increase in the gap between what it needs to spend and how much money is available”.

Its solution, according to its Corporate Plan for 2018-2022, was to boost economic growth by investing in infrastructure, and forming partnerships to create digital services.

Cisco’s Satyam told a smart-city sales conference, which Connexin held for north-eastern council officials in Hull on 4 October, “It wasn’t about the technology for us, but to improve the quality of life for citizens”.

Nevertheless, he told E&T after the event, “At the end of the day, we created the fund to drive Cisco business. And we are going to make a lot of business”.

Cisco proposed public authorities should form joint business ventures with private financiers and local tech entrepreneurs, to reorganise overstretched public services using smart-city technology, to make them more effective, and to cut the cost of running them. A share of ownership, and a share of the savings, would be given in fees and profit to those doing the work. It told councils they can raise money from smart-city tech as well, primarily through more intense collection of car-parking fees. Satyam told the Hull conference that the city of Barcelona increased its parking income by $50m a-year through a Cisco joint venture. Local authorities have pitched their smart-city schemes as a way to invigorate the local economy.

Oxfam’s critique of corporate tax dodging blamed US corporations for depriving public budgets by cutting their tax rates to 26 per cent, from 35 per cent they were due at the time it wrote, in April 2017. Moreover, it said, governments around the world had raised people’s personal income tax and VAT to recover money they lost from cutting corporate tax rates. The total average personal tax rate was 24 per cent in 2014 – higher than at any time since 1965, yet still equivalent to the average rate paid by global corporations.

The average global corporate tax rate was 24 per cent in 2018, according to accounting firm KPMG. The US charged corporates 27 per cent, while the UK charged just 19 per cent – less than the 20 per cent average for countries in the European Union. Nevertheless, EU countries lose 20 per cent of their tax revenue to companies shifting their profit to offshore tax havens, according to Gabriel Zucman, a professor of economics at Berkeley University in California. US corporates shifted two thirds of their profits to tax havens in the last 30 years, while EU and US public bodies lost £53bn from corporates shifting profit overseas to avoid tax, he said in a paper last year.

Ronan Palan, an economics professor at City University London, said offshore arrangements of the type that now own Connexin would give the UK company itself no tax advantages, though they might cut the tax bill for its offshore owners.

Sign up to the E&T News e-mail to get great stories like this delivered to your inbox every day.

Recent articles