Which is more valuable — Apple or Wales?

“Why Richard, it profits a man nothing to give his soul for the whole world — but for Wales?” — Thomas More, in “A Man For All Seasons”.

A noble sentiment, of course. But those of us who put a slightly lower valuation on our immortal souls might be forgiven for asking … how much is Wales worth, exactly? For example, if you had the choice between owning one hundred per cent of Apple Inc, (the most valuable corporation in the history of capitalism) or owning Wales (the third most valuable entity in the United Kingdom), which would you choose?

Well, we know how much Apple is worth in dollar terms, give or take, because it’s quoted on the stock exchange and the market capitalisation is around US$750bn. But working out how much Wales is worth is a bit more difficult. What’s in Wales?

Well, to start with, the 3m population of Wales is made up of 1.3m households, at the last census. We can assume, for broad-brush, order-of-magnitude purposes, that each household lives in a house, and so ignoring empty properties, there are 1.3 million households in Wales. The average house price in Wales is £171,000, which is US$263,000 at current exchange rates. So there is US$341bn of value just in the houses. (If I was doing this about London, it would be game over by now. Savills estimate the value of the London housing stock at £1.485trn, which is US$2.3trn, almost exactly three Apples. The total housing stock of the United Kingdom could buy you half the S&P500).

What else is there in Wales? Well, there’s quite a lot of agricultural land — about 1750m hectares of it as of 2012. And Welsh agricultural land is worth, on average, £5350 per acre, which is £13214 per hectare (or just over US$20,000 per hectare). So there’s another US$35bn there for the farmland. So we’re half way there already and we’ve only got the homes and farms.

So, to move on, we’ve got to consider what the value would be of all the businesses and industrial assets you would take ownership of as you became King Of Wales. HMRC took in a little bit more than £1bn of corporation tax from Wales in the 2013–14 tax year (£893m onshore and £171m offshore). If we assume an effective tax rate of 24% (the large company marginal rate — this is lowballing things as a lot of Welsh businesses would be SMEs and get the 20% rate), that means that you get about US$6bn of corporate profits per year from your business assets. Capitalise this at the long run average PER of the FTSE Allshare (15x) and your business assets are worth US$90bn.

But hang on, those corporate profits are net of value added tax. And that’s a lot — £4.2bn of VAT was collected in Wales in 2013–14. The incidence of VAT is a fiendishly difficult thing to calculate, but it’s definitely money that’s been taken out of the economy of Wales, and so would at least in principle be available to an absolute ruler. So I don’t think it’s too wrong to capitalise it in the same way we did with corporate profits — US$6.5 times a 15x multiple would give you another US$95bn. Similarly, Wales collects £1291m in total from tobacco duties, alcohol duties, insurance premium tax, aggregates tax, gambling levy, miscellaneous customs duties, air passenger duty, landfill tax and their share of the Swiss banking settlement. Treated as a corporate cash flow in the same way, this would be worth US$30bn. Adding the tax back in to the corporate profits raises the value of your business and industrial assets to US$215bn.

So, so far we’ve got US$341bn of housing, US$35bn of farmland and US$215bn of business assets. That’s US$590bn of value of Wales, plays US$750bn of Apple. But now we get on to the rather tricky subject of taxation. Although the days of vassal slavery are more or less over, it surely has to be the case that if you own Wales, you have the right to tax the Welsh. How much is that worth on the open market?

Going back to the HMRC breakdown, you can see that under its current management, Wales generates £4785m of income tax and £3850m of National Insurance Contributions ( a tax in all but name), an total of just under US$13.5bn. If we were to multiply that up by 15x, that would be US$200bn, filling the rest of the gap right there and about 5% more. Can we do that?

Well, not really. If you’re going to collect that tax on an ongoing basis, you would need to spend a considerable amount of money on maintaining the infrastructure of Wales, and possibly even providing the Welsh arm of the National Health Service. It’s not free cash flow that a feudal lord could just have away and spend on sweetmeats. In fact, Wales tends to run with considerably negative operating cash flow (it receives more from the UK treasury than the tax revenue it puts in) — how much is not obvious as a lot of central government expenditure isn’t allocated regionally, but reasonable estimates would say about £9bn.

On the other hand … hang on here. Apple can’t spend all its profits on sweetmeats and greyhounds either. If it wants to keep its US$750bn valuation, it has to spend a lot of its profits on research and development. Apple does pay about US$10bn of dividends a year now, but there have been substantial periods in its history (basically, between 1995 and 2012) when it didn’t pay a dividend at all. And set against the negative free cash flow on Wales, we have to take into account the fact that although fashions in consumer electronics come and go, Wales has been generating tax revenue since the Dark Ages — it’s “Yma O Hyd” (“Here after all”). If you wanted to cash out and run away, you could borrow a lot more against the tax revenue of Wales than you could against the operating cash flow of Apple. Even if you only took a fifth of the tax take and mortgaged it away, at current bond yields you would be doing badly to do so at a yield of much more than 2%. That would get you a lump sum of US$130bn, taking the total value of Wales to US$720bn, plus whatever you might get for the national parks, fishing rights, historic castles, mineral deposits, hydroelectric schemes and so on. Basically, it looks to me like a wash.

This is all a bit daft, but there is a serious point underlying. I could have spared everyone a lot of trouble by simply comparing Apple’s 2014 gross profit (US$70bn; Matt Klein at Alphaville reckons you need to add in $10bn of workers’ compensation) with the 2013 workplace-basis Gross Value Added for Wales (£52.1bn, or US$80bn). The key idea here is that an OECD country is an unimaginably big economic entity compared to nearly any corporation, and even a relatively small administrative region of one is about the size of the very biggest private sector entities.

Think about it this way — Wales has a population of 3m, while Apple has 73,000 direct full time employees and, even on the most comically optimistic basis dreamt up for PR purposes, no more than a million direct and indirect suppliers. In order for such a small population to be creating more economic activity than such a big one, the gap between the average Apple employee and the average Welsh employee would have to be roughly equivalent to that between the average Welsh employee and a subsistence farmer. And of course, if you take any population even a bit bigger than Wales — Scotland, say or Ireland, both of which are orders of magnitude smaller than London, or Belgium — then the value is going to be way more than even the most valuable corporation in the history of capitalism.

The big lesson here is that states are much more important than corporations. You occasionally see people making the opposite claim, but it’s almost always based on a comparison of market capitalisation to GDP, which is always going to be out by a number of orders of magnitude roughly equal to the market price/earnings ratio. Which would you rather sell your soul for — to rule the Bardic Kingdom, or a bunch of $AAPL stock?