Economics and politics - comment and analysis
16. February 2018 I Will Denayer I Economic Theory, Europe, General, General Politics

Carillion and the dead-end of the privatisation of public service

Carillion and the dead-end of privatisation of public service

The Carillion disaster takes place, and is part of, a larger background of almost unfathomable breakdown. It is now almost ten years ago since Lehman Brothers went under. The banks broke, governments stepped in, making it clear for all that the rhetoric about private companies being much more efficient than the ‘moloch state’ was nothing but ideology. Yet, a decade later, the dogmas that have been cracked beyond repair are still in business. Austerity, an economic monstrosity, was justified by empty talk about how private initiative was “crowded out” by the inefficient public sector and that countries should be run like households budgets.

The results of these mad policies have become obvious in the meantime. According to Blanchflower, former Bank of England rate-setter, austerity led to the severest squeeze on living standards since the Napoleonic wars (see here). The average worker is earning less than a decade ago. The link between growing GDP and rising weekly wages has been severed, for what the Institute for Public Policy Research calculates is the first time in recorded history. London boasts more billionaires than any other city in the world, yet one in five of the country’s workers earn less than the living wage. The regional wealth gap in the UK is bigger than in any other EU country: no other area is as apart in wealth as west London and the devastated Welsh valleys. Renewing the industrial infrastructure could go to hell (see here). There was money to be made by other means. £435bn has been pumped into financial markets through quantitative easing; tens of millions chucked at corporations, the rich and property developers. But the state “had no money” for public services. So there is PFI.

Carillion used to be Tarmac – it was a builder of tarmac – until it started to ‘specialise’ in the construction of roads, rail and bridges, broadband provisions, prisons, hospitals, army barracks and health services. Carillion won many projects under the PFI, as its bids were low. But its profits margins were too narrow. So debt issuance rose, profitability disappeared and cash haemorrhaged – Carillion’s total liabilities are estimated to be around £5 billion (see here). This did not stop its board from lying about their overall financial situation. They continued to pay themselves exorbitant salaries and bonuses and fat dividends to their shareholders. The recently sacked CEO took home £660.000 a year plus bonuses (see here and here). By liquidating, they destroyed thousands of jobs, put pensions of their 40.000 global staff in jeopardy, the invoices of up to 30.000 sub-contractors will never be met and tax payers will have to pick up the bill of maintaining necessary services.

Carillion confirms what even today, incredibly, some deny and others accept only reluctantly, namely that outsourcing public services to ‘save money’ on ‘inefficient’ public sector operations does not work. For the last 35 years, successive UK governments have resorted to private finance initiatives to fund public sector infrastructure. Banks and hedge funds fund the projects in return for interest and income paid by the operators of the projects, with payments spread over 25 years. There has never been any substantial evidence that there were any financial savings in doing PFI (see here and here for a report of the National Audit Office). As a recent Public Services & the EU report concludes:

“there is (…) extensive experience of all forms of privatisation and (…) evidence on comparative technical efficiency. The results are remarkably consistent across all sectors and all forms of privatisation and outsourcing: there is no empirical evidence that the private sector is intrinsically more efficient” (see here).

The largest study of the efficiency of privatized companies looked at all European companies (electricity, gas, telecoms, water and rail) privatized during 1980-2009. It compared their performance with companies that remained public and with their own past performance as public companies. The privatized companies performed worse than those that remained public and continued to do so for up to 10 years after privatization (see here). Roberts adds that evidence from developing countries points to the same conclusion (see here).

So, okay, private companies do not perform better than public companies. But that is not even half of the whole problem. The argument that Carillion does not prove the failure of PFI, that it is only one company which has been run into the ground by favouritism, cost escalation, excessive risk, and obscene remuneration is incorrect (it has been made in the Financial Times for example (see here)). Successive governments told public bodies that if they wanted new facilities, they would have to use PFI. State money was not an option. Bodies had to demonstrate that PFI offered the best value for money (see here). But ink is patient and with a bit of ‘creativity,’ a case for almost any value can be made. A study in the British Medical Journal revealed that, before “risk” was introduced, every hospital scheme it investigated would have been built much more cheaply with public funds. However, once notional financial risks had been added, building them through PFI came out cheaper every time (see here). Not only was this exercise, as some prominent civil servants warned, intrinsically bogus (if not outright fraudulent), but, as Monbiot writes, the entire concept is negated by the fact that if collapse occurs, “risk” creates disaster in society at large (see here). It is simply unacceptable to close a public hospital, let a bridge collapse or fail to deliver school meals – these are essential public services, regardless of who provides them. The truth is – and this is the point – that under PFI the public can go to hell. PFI contracts specify that if there is a conflict between paying the private provider and delivering public services, payments must come first (see here). Regardless of how many people have their cancer operations postponed or are left lying on trolleys in the corridors of NHS hospitals, the legal priority is to pay the contractor (see here). Many of the contracts cannot be broken for 25 or 30 years, regardless of whether they meet real needs. And risk to a company is not the same as risk to those who own and run it. The executives keep their pay-offs. The shareholders take a hit on their portfolios, but limited liability ensures that they walk away from any debt. The whole system is devised to insulate the private sector from responsibility and liability.

The question why Carillion went for liquidation and not for administration proves this. Administration allows a company to operate while its administrators attempt to find buyers for its viable parts. But Carillion liquidated because there was nothing worth buying. All it had were contracts, on which the margins were too low to cover liabilities. There was no viable business left to sell, no meaningful assets. Why did the government allow it to continue to win bids on disastrous terms? Under procurement rules, the government is required to exclude any outsourcer whose bid is “abnormally low” (see here). Let’s deal with individual culpability in a moment and concentrate upon systemic failure for now: from its very birth the privatisation industry has been based on implicit state guarantees. The free marketeers cannot do it without the state. As Paul Mason writes, this is no longer economics in any real sense, it is sheer extraction, a perverse, unfathomable, performance ritual: firms ‘bid’ for work; government ‘awards’ contracts; accountants sign-off the books of companies that have insufficient liquidity left; banks collude in the shunting of debts off balance sheets; vulture hedge funds bet on the passing of dying companies, while an army of ideologues and government officials praise the mechanics of an efficient market economy (see here).

The truth is that Carillion was a machine for turning public money into profits for shareholders, bonuses for managers, eviscerating democratic control in the process. Once profit was guaranteed, it could be borrowed against and speculated upon, generating profits for banks and hedge funds. Carillion was infamous as an anti-union employer, using blacklists to stop union activists from working. Illegal yes – it issued an “unreserved apology” for doing so to the High Court in 2015. There has never been a reaction (see here).

Former chancellor George Osborne, the great light of austerity, helped Carillion to win contracts in Dubai as recently as 2014 as part of his “long-term economic plan”. Blackrock, which hired Osborne as an advisor for a yearly salary of £ 650.000 a year for one day a week, took out bets on Carillion’s downfall (see here). In his Evening Standard editorial, Osborne passed responsibility for Carillion’s demise to civil servants. There is no shame left: a journey from signing off deals for a company, to advising another company to speculate against it, use the press to blame people who worked under you for blunders you are responsible for, while personally profiting from it (see here). The “investment” giant BlackRock “made” over £16 million from Carillion’s passing. In all, hedge funds have made around £300 million since spotting that the Government’s favourite contractor had become an empty shell (see here).

The person who ‘advised’ both David Cameron and Theresa May on corporate responsibility was Carillion chairman Philip Green (see here). It is not a circus, although it is that too, it is a syndicate whose primary activity is racketeering, it is to say, a mafia.