Thursday, 18 January 2018

Four lessons the Carillion crisis can teach business, government and us

Larry Elliott in The Guardian


Carillion’s collapse was capitalism in action. Profits are the reward for taking risks, and sometimes the risks materialise. Carillion’s problem was not that its profits were too high, but that they were too low when things started to go wrong. In a free-market system, it’s that simple.

Except that it isn’t quite that simple in this case, because much of Carillion’s work was for the government: building roads and hospitals, running prisons, providing school meals. Whitehall didn’t want the company to go bust, so bunged it a few new contracts when it was already in trouble in the hope that something would turn up. Instead, Carillion staggered on for six months as a zombie company before the banks pulled the plug.

What’s more, the directors of the company took steps to shield themselves from financial risk. The Institute of Directors – which strongly believes in free markets and the profit motive – described a 2016 change to pay policy that made it harder to claw back bonuses as “highly inappropriate”, which of course it was. The company’s workforce, its subcontractors and its pensioners have not been so fortunate.


PFI has been an attempt to prove that it is possible to get world-class public services on the cheap. This is a delusion


Jeremy Corbyn says the demise of Carillion is a watershed moment, and he could well be right. The reputation of business is already at a low ebb and the Carillion saga has everything to get the public fired up: mismanagement, dividends for shareholders and boardroom fat-cattery leading to job losses, pension cuts and more expensive public services. Voter resistance to local councils taking previously outsourced services back in house is likely to be minimal.

The time has come to have a hard look at the private finance deals that have been the vehicle of political choice for delivering infrastructure projects – and, increasingly, public services – for the past quarter of a century. Public-private partnerships started as an accounting wheeze in John Major’s government when it needed a way to prevent spending on capital investment boosting high borrowing built up in the early 90s recession.


‘Gordon Brown (left), chancellor under Tony Blair (right), needed to find a way of building new schools and hospitals promised in opposition.’ Photograph: WPA Pool/Getty Images

But the Conservatives became less wedded to them when an improving economy led to an improvement in the public finances as the 90s wore on. It was Labour’s arrival in office in 1997 that gave private finance a new lease of life. Gordon Brown, Tony Blair’s chancellor, pledged to stick to the tough spending targets inherited from the Tories for two years, but still needed to find a way of building the new schools and hospitals promised in opposition. PFI (the private finance initiative ) – under which the private sector would pay for a new project up front and be paid back by the government over the coming decades – was the answer.

PFI, essentially a live-now pay-later approach, was always an expensive way to fund infrastructure, and the private sector did well out of them.

Life became a lot tougher after 2010, when the coalition government decided its first priority was to reduce a budget deficit at 10% of GDP. Spending on infrastructure was cut, and private sector contractors such as Carillion found Whitehall more miserly when negotiating contracts. Local government, which bore the brunt of government spending cuts, came under pressure to outsource services to save money.

Austerity and PFI was an unhappy marriage. To be sure, taxpayers saved money by getting the private sector to provide services more cheaply. But savings came at a price. Prisoners turned up late for court appearances; schools were built to a lower specification; PFI contractors cut corners to save money whenever they could because the bids put in to win contracts were barely enough to cover their costs. This was a race to the bottom, and Carillion won it.
George Osborne, who masterminded the coalition’s austerity strategy, says the problem was a failure to use more small- and medium-sized companies instead of relying on the big beasts. This is absurd: only large outfits could contemplate taking on large PFI contracts. And in many cases, multifaceted companies such as Carillion used profits from one sector to subsidise losses elsewhere in their portfolios.Q&A
How are you being affected by the Carillion liquidation crisis?Show

There are lessons to be learned from Carillion’s collapse, but the idea that SMEs should be building billion-pound hospitals is not one of them. Lesson one is that governments can have austerity or they can have PFI, but not both together. For the past eight years, it has been possible for the state to borrow for long periods at historically low interest rates. This would have been – and still is – a more cost-effective way of financing big infrastructure projects.




London libraries assess impact of Carillion collapse


Lesson two is that the state is not well equipped to manage big infrastructure projects. There are plenty of examples – the abandonment of the NHS IT project at a cost of £12bn, for example – of official incompetence. Whitehall’s handling of Carillion has left a lot to be desired. No matter what Labour says, the private sector will inevitably have a big role in the delivery of major projects. Even under a Corbyn-led government, there would inevitably be a role for it.

Given that, lesson three is the need to rethink company law. Trade unions felt the full force of the law when they were deemed to have acted badly in the late 70s and 80s; a similar approach for corporate wrongdoing is long overdue. It might simply mean enforcing existing laws more strongly, but the step that would send a shiver through boardrooms would be the end of limited liability for directors of limited companies. Limited liability is supposed to encourage entrepreneurship. In Carillion’s case it seems to have created moral hazard.

The final lesson is for the public. PFI has been an attempt to prove that it is possible to get world-class public services on the cheap. This is a delusion. If we want world-class public services, one way or another they will have to be paid for.


UK finance watchdog exposes lost Private Finance Initiative (PFI) billions

Henry Mance and George Parker in The Financial Times

Britain has incurred billions of pounds in extra costs for no clear benefit by using the private finance initiative (PFI) to build much of its infrastructure, the National Audit Office has said. 


Recent PFI contracts — for schools, hospitals and other facilities — are between 2 and 4 per cent more expensive than other government borrowing, and involve significant additional fees, the watchdog said in a report published on Thursday. 

The GMB union said the NAO’s report showed that PFI was a “catastrophic waste of taxpayers’ money” and projects were “financial time bombs”. 

Political criticism of PFI has intensified this week following the liquidation of Carillion, a leading provider. Jeremy Corbyn, the Labour leader, told parliament on Wednesday that Carillion was evidence of a “broken system” and “costly racket”, and called for some companies “to be shown the door”. 

Although Theresa May, the prime minister, accused Labour of opposing “the private sector as a whole”, some Conservatives have joined in criticism of PFI. 

Former cabinet minister David Willetts, a one-time Treasury official, was a key promoter of the scheme, but this week admitted that some recent projects had gone awry. Carillion’s collapse exposed cases where, in the end, the risk reverted to the government, which had to maintain public services, he said. 

Labour has promised to bring many PFI contracts back in-house “if necessary” if it wins the next general election. But terminating PFI deals could involve billions of extra fees because most contracts do not include break clauses. 

In one example, Liverpool City Council is due to pay a further £47m in fees for Parklands High School in Liverpool, even though the school cost only £24m to build and was shut after 12 years owing to poor teaching standards. 

“Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change,” said Meg Hillier, chair of the Commons public accounts committee. 

Breaking these contracts would involve settling interest rate swaps. The largest 75 PFI schemes would cost £2bn to break, a quarter more than the outstanding debt, even before compensation to shareholders is considered, the NAO said. 

PFI can be attractive to government as recorded levels of debt will be lower five years ahead even if it costs significantly more over the full term of a 25-30 year contract, National Audit Office 

Stella Creasy, a Labour MP, said the government should negotiate directly with PFI providers or impose a windfall tax on the special purpose vehicles (SPVs) involved. “It might seem that our hands are tied, but they’re not. What we can do is use our tax system,” she said. 

PFI was devised in the UK in 1989 but its use jumped while Tony Blair was prime minister in the late 1990s and early 2000s. 

It refers to deals where SPVs are set up to finance construction projects. The SPV borrows money to fund the construction, but that debt is mostly not included on the public sector balance sheet. In the last financial year, Britain paid £10bn in PFI fees; future charges amount to £199bn spread over the next three decades. 

“PFI can be attractive to government as recorded levels of debt will be lower over the short to medium term (five years ahead) even if it costs significantly more over the full term of a 25-30 year contract,” said the NAO. 

Off-balance-sheet public-private partnerships, such as PFI, now represent 1.7 per cent of Britain’s gross domestic product, the third highest ratio in Europe, behind Portugal and Hungary. 

The NAO report detailed how the government’s decision-making was slanted in favour of PFI. While the US and Germany compare the cost of private finance with government borrowing costs, Britain’s value-for-money assessment compares it instead with the government discount rate of 3.5 per cent, which is significantly higher. 

Overall, any public body “has an incentive to show that private finance offers better value for money than the [public sector comparator] as unless alternative capital funding is made available the project is unlikely to proceed,” the NAO said. 

The NAO found that, after former chancellor George Osborne’s relaunch of PFI in 2012, the “fundamentals of the financing structure and contract remain the same”. Ms Hillier said she was concerned the Treasury had not addressed “most of [PFI’s] underlying problems”. 

The Treasury argued that PFI contracts have benefits — including making the private sector bear the risk of cost overruns, and introducing an incentive to reduce long-term running costs. 

But the NAO collated evidence suggesting that such benefits have failed to materialise. It cited research by the Treasury select committee, which found PFI projects charge higher prices to cover unforeseen costs, and by the Department for Education, which found a school’s construction cost was not affected by how it was financed. 

On the question of efficiency, three government departments surveyed by the NAO said operating costs were higher under PFI, while one department said the costs were the same. 

The additional costs of PFI were easier identify. Deals and equity investors in agreements signed since 2013 are forecast to receive returns of between 2 and 4 per cent above government borrowing. But on some deals the level is above 5 per cent. In addition, PFI contracts entailed other costs — including fees for arranging the borrowing, which average around 1 per cent of the principal, and management fees, amounting to 1-2 per cent of the total payment. 

The value of new PFI deals peaked in 2007-08 at £8.6bn and has declined since, a trend that the NAO attributed to the greater cost of private finance after the financial crisis.

Wednesday, 17 January 2018

Carillion may have gone bust, but outsourcing is a powerful public good

John McTernan in The Guardian


What has outsourcing ever done for me?

In a parody of the Monty Python skit from Life of Brian, that is what critics and commentators are asking about the collapse of Carillion – formerly one of the UK’s biggest companies.

The answer – the true answer – is that we should always be grateful that private companies have delivered better public service for less money. And therefore have done three important things for us all.

First and foremost, it has delivered vital public services – and delivered them well. Notice that in the fallout over the collapse of Carillion few questioned the quality of what it has been doing in the public realm. From the NHS to HS2 the company’s record of delivery is positive.

Second, the company has taken risk out of the public sector and absorbed it themselves. It is one of the oldest criticism of public private partnerships that the transfer of risks is never achieved properly – profits, we are told sanctimoniously, are privatised, while risk remains nationalised. In the case of Carillion we can see that is utterly and demonstrably false. How? In the simplest possible way – the company has gone bust. There can be no starker demonstration that risk has been fully transferred than to see it crystallise – which has just happened.

And last, but not least, we have had a bargain – we have paid substantially less for services than they cost to deliver. How can we be sure about that? Again, it is the collapse that is the proof. If the directors had driven exploitative bargains with the public sector then they would be driving round in Maseratis rather than polishing their CVs and wondering how to explain their catastrophic failure to future prospective employers. Saving money in the provision of public services is a good thing. On the one hand, there are always too many demands to answer. On the other, at a time when the public books still have a massive overhang of debt following the Great Recession, every little bit of efficiency helps.

The problem is that we are all a little squeamish. Companies going out of business is part and parcel of how capitalism works – it is essential that there is both creativity and destruction. For individual workers whose pay and pensions depend on the continued success of the company that is disruptive.

But where public services are being delivered, government is continuing to underwrite employment and contracts will be taken over by another provider – public or private. This is, remember, the tightest labour market since the mid-70s. There is no reserve army of labour to take over these jobs at a lower price. After some turbulence, things will settle down again. Shareholders will have lost a lot of money. And senior managers will have lost jobs. Forgive me for not weeping over either of those facts.

The alternative is worse. Far worse. It is that repeated failure is bailed out – and, in effect, rewarded rather than punished. What does that look like? The life of the average government department. Millions of people are being immiserated by the failures of universal credit (UC). And this is not because of flaws in the new system but because of features of the new benefit. UC is failing and the only people paying the price are hard-working families who can least afford it.

The same is true of the Home Office. If the same combination of malignity, incompetence and out-and-out racism was being demonstrated by any private company it would not only be in court repeatedly, it would be bust. As it should be. The lack of contestability and accountability in direct government provision of services is a huge problem. Having a small amount of it brought into the system by contracting out is a powerful public good.

Carillion's Directors Ticked all the Good Governance Boxes

Kate Burgess in The Financial Times



Following the collapse this week of Carillion, with less than £30m in the bank and liabilities of more than £2bn, the board of the construction company has been accused of being either deluded or just plain inept. 


On paper, the directors looked well qualified to steer the outsourcer. As chairman, Philip Green was a former chairman of United Utilities, the UK’s largest listed water company. Not only had he run a large contracting company, he was also a fully paid-up member of the great and good as a former adviser to then prime minister David Cameron on corporate responsibility. 

The directors did not lack experience, sitting on boards from Royal Dutch Shell to Premier Farnell. 

Alison Horner, head of the remuneration committee, was formerly operations director at Tesco and a non-executive director of Tesco Bank. The head of the audit committee was an accountant, as were three other directors. 

And none were entrenched. The chief executive, Richard Howson, who joined Carillion’s board in 2009, was the longest-serving member. 

The board ticked all the boxes in terms of good governance. Carillion’s non-executive line-up included two women. The average age of directors was about 54 years, or 57 excluding Mr Howson (48), and Zafir Khan (also 48), the finance director appointed in January last year. 

Yet just a year ago, the board cheerfully signed off statements from Mr Howson that debt would be below £300m within months. 

With hindsight, the board fell into a series of textbook traps that have, over the years, felled many a construction and contract business: 

- Failing to halt acquisitions and the build up of liabilities 

-Signing off aggressive accounting policies that allowed revenues to be booked early and costs to be delayed 

-Not tapping shareholders for help and instead continuing to pay out dividends even as cash haemorrhaged out of Carillion 

- Signing off on hefty pay packets and bonuses for top executives even when they scored zero on key performance targets introduced to instil capital discipline 

-Allowing clawback conditions to be changed a year ago, striking out corporate failure as a reason to take back bonuses 

The board had seemed to be everything UK investors might want for a youngish business in a youngish sector. Carillion may have been formed from the construction divisions of Tarmac, Wimpey, Alfred McAlpine and Mowlem, which have been around for decades, but the company itself was formed in 1999. It engaged well with investors, even those who had shorted Carillion stock. Notably, shareholders approved directors’ elections without a murmur. 

It is worrying to think the construction company’s board was such a model of good governance. If the line up had been different, would another cast of characters have done any better? 

And how many other supposedly well-run boards are presiding over impending corporate disasters elsewhere?

Ronaldinho - He Always Brought a Smile to Your Face

Sid Lowe in The Guardian


Ronaldinho. See? You’re smiling already. Just thinking about the things he did and the way he did them, the way he was, gets you giggling. Look him up on YouTube and maybe you’ll fall for him all over again, a bit like all those defenders. Watch for long enough – it won’t take long – and you might even feel like standing to applaud, just like the Santiago Bernabéu did, an ovation for a Barcelona player, as if for all the rivalry they hadn’t so much been beaten by his genius as shared in it. Sergio Ramos was on the floor, they were on their feet. Cameras zoomed on a man in the north stand with a moustache and a cigarette hanging limp from his lip. Bloody hell, did you see what he just did?





Golden Goal: Ronaldinho for Barcelona v Chelsea (2005)



It’s a question that was asked a lot. What Ronaldinho did, no one else did. And it wasn’t just what he did; it was the way he made people feel. Nostalgia, memories, are about that: not so much events but emotions. Watching Ronaldinho was fun, it made people happy. Those may be two of the most simple, childish words of all but they are the right ones. Football stripped right down to its essence: happy, fun.

Funny, too.

There may never have been a player who made the game as enjoyable as Ronaldinho, in part because he played and it was a game. “I love the ball,” he said. One coach, he recalled, told him to change, insisting that he would never make it as a footballer, but he was wrong. It was because he played, because he enjoyed it, that he succeeded: the grin on his face was not just there after he won the league, the Champions League, the World Cup and the Balon d’Or, it was there while he won them. It became contagious. “He changed our history,” Barcelona midfielder Xavi Hernández said.

One Real Madrid director claimed that Madrid hadn’t signed him because he was “too ugly” and would “sink” them as a brand. “Thanks to Beckham, everyone wants to shag us,” he said. He, too, was wrong: everyone wanted to embrace Ronaldinho, enjoy him. The long, Soul Glo hair, the goofy grin, that surfer’s “wave”, thumb and little finger waggling – a gesture so his, so symbolic of Barcelona’s revival that is was fashioned from foam and sold in the club shop.

An entire publicity campaign was built around him, the embodiment of “jogo bonito”. He might not have been beautiful but his game was and no one was more attractive, a marketing dream Madrid missed. Almost a comedy cartoon character himself, he inspired the “BarcaToons” and on Spain’s version of Spitting image his puppet giggled and laughed and repeated one word over and over: fiesta!. “I am like that,” he admitted.

On the pitch, too, an extension of that expressiveness. “When you have the ball at your feet, you are free,” Ronaldinho wrote in an open letter to his younger self, repeating a mantra: creativity over calculation. “It is almost like you’re hearing music. That feeling will make you spread joy to others. You’re smiling because football is fun. Why would you be serious? Your goal is to spread joy.” He said that was the way his father, a shipbuilder and football fan who worked weekends at Gremio’s ground, had told him to play. His older brother Roberto was at Gremio too. And then, growing up, there was Bombom, his dog. He also played.

Ronaldinho’s brother was his idol but he ended up better than him. He was better than anyone at the time: you genuinely wondered if he might end up better than anyone else ever. It didn’t last long enough for that but it lasted because he did things you’d never witnessed before, skills most never imagined let alone replicated, and that emotion remained. “His feet are so fast he can touch the ball four times in half a second. If I tried to do what he can do, I’d end up injuring myself,” Philippe Cocu said.


He might not have been beautiful but his game was and no one was more attractive, a marketing dream Madrid missed.


For three years no one could match the wow, the wonder, the silliness, the jaw-dropping, laugh-out-loud daftness of it all. The back-heels, step-overs and rubber ankles, the power too, the change of pace, the passes without looking. The passes with his back, for goodness sake. The free-kicks over the wall, round the wall and under it. Nutmegs, lobs, bicycle kicks, everything.

An advert featuring Ronaldinho showed him ambling to the corner of the penalty area, pulling on new boots, flicking a ball into the air and keeping it there. Strolling around the area, he volleys the ball towards goal. It hits the bar and comes straight back to him, he controls it on his chest, swivels and volleys it goalwards. Again, it hits the bar and comes back. He controls it again and, still without letting it drop, hammers it goalwards a third time. For a third time, it thuds off the bar and sails straight back. Without letting the ball drop, he strolls back to where he started, sets it down and smiles. On the boots is stitched the word “happiness.”



Ronaldinho surrounded by four Celtic players during a Champions League match in March 2008. Photograph: Dave Thompson/PA

It is quite astonishing; it is also a fake, a montage. Or was it? There was a debate. You didn’t know – and that was the point, the measure of him. The fact that anyone could even begin to believe that such a nonchalant demonstration of mastery might be genuine was eloquent – and only with Ronaldinho would they. That didn’t happen, no, but the Bernabéu ovation did. So did the shot thundering in of the bar against Sevilla – at 1.20am. The goal against Milan. That toe-poke against Chelsea. “It’s like someone pressed pause and for three seconds all the players stopped and I’m the only one that moves,” he said.

The Brazilian legend Tostao claimed: “Ronaldinho has the dribbling skills of Rivelinho, the vision of Gerson, the spirit and happiness of Garrincha, the pace, skill and power of Jarzinho and Ronaldo, the technical ability of Zico and the creativity of Romario.” Above all he had one, very special ability: he made you smile.

Carillion collapse a ‘watershed’ for outsourcing

George Parker and Gemma Tetlow in The Financial Times

The collapse of Carillion, the company responsible for everything from building hospitals to providing school meals, is a “watershed” moment that proves that the private sector should not be running swaths of Britain’s public services, according to Labour leader Jeremy Corbyn. 

The revolution in outsourcing public services started by Margaret Thatcher, which by 2014-15 accounted for about £100bn or 15 per cent of public spending according to the National Audit Office, faces a thorough reappraisal, with Mr Corbyn standing ready to disrupt the industry altogether. 

“It is time to put an end to the rip-off privatisation policies . . . that fleeced the public of billions of pounds,” said Mr Corbyn, in a video that was watched almost 300,000 times in 24 hours on Facebook. 

“Across the public sector, the outsource-first dogma has wreaked havoc. Often it is the same companies that have gone from service to service, creaming off profits and failing to deliver the quality of service our people deserve,” he added. 

Outsourcing of public services to the private sector was virtually non-existent in the 1970s, but Mrs Thatcher changed that in 1980 when local authorities — which had previously directly employed blue-collar workers to build roads and houses, and collect refuse — were required to put the work out to tender. 

David Willetts, a former Treasury official, policy wonk and later Tory MP, was a key promoter of the private finance initiative, but admits that in some recent projects the scheme has gone awry. 

He argues that it was right to hand projects to the private sector if there was a genuine transfer of risk, but that the Carillion collapse had exposed cases where in the end, the risk reverted to the government, which had to maintain public services. 

Last year John McDonnell, shadow chancellor, vowed at the Labour conference to nationalise such contracts as part of a wider plan to roll back private sector involvement in public services. Carillion has strengthened his resolve. 
 
In a more detailed email briefing, the party’s position seemed more nuanced. It said Labour would “look to” take control of PFI contracts and that it would review all of them and — “if necessary” — take them back in-house. 

This has unsettled some Labour moderates. “Where is the element of choice if everything is done in house by a public sector body?” asked one Blairite former minister. “Could things be done differently? All that would be lost.” 

Since 1980 huge swaths of services — from providing school meals to refuelling RAF aircraft — have been outsourced to the private sector under Conservative and Labour governments. 

This outsourcing boom led to the creation of new companies, such as Capita, that specialise in serving public sector clients but it also attracted existing overseas municipal providers, such as Veolia. 

NAO figures suggest the bulk of central government spending on outsourcing goes to pay for IT, facilities management and professional services. Local authorities rely on the private sector to provide a range of services from social care to waste disposal, and the private sector provides healthcare to NHS-funded patients. 

Several high-profile outsourcing failures have raised questions about whether the taxpayer is getting best value for money from some contracts. Carillion’s collapse is the most recent, but not the only example. 

Members of the armed forces were drafted in to provide security for the 2012 London Olympic Games after G4S was unable to provide sufficient numbers of staff.

The failure of Metronet, which had been contracted to maintain and upgrade the London Underground, in 2007 cost the taxpayer at least £170m. Several privately run prisons have hit the headlines over the past 18 months as levels of violence have increased while spending and staff have been cut. 

But many other public services have been successfully outsourced with little or no public comment. 

“Most people in Britain are endlessly using contracted-out services without really noticing it,” said Tony Travers, a professor at the London School of Economics. “The question is what is the contract mechanism to ensure that what is done is done appropriately.” 

He said at least two lessons could be drawn from recent failures. The first is that overzealous efforts by government to drive down costs in contracts are not necessarily a good thing. 

Carillion is not the only private provider to have signed up to contracts committing to providing services at implausibly low cost. At the end of last year, the Competition and Markets Authority highlighted concern that private providers of social care that serve mainly the public sector were “unlikely to be sustainable” unless local authorities paid more for their services. 

The second lesson is that ministers and civil servants need to carry out proper due diligence on companies tendering for public contracts.

The “Inefficient” State Mops up the Disasters caused by “Efficient” Private Companies.

George Monbiot in The Guardian


Again the “inefficient” state mops up the disasters caused by “efficient” private companies. Just as the army had to step in when G4S failed to provide security for the London 2012 Olympics, and the Treasury had to rescue the banks, the collapse of Carillion means that the fire service must stand by to deliver school meals.

Two hospitals, both urgently needed, that Carillion was supposed to be constructing, the Midland Metropolitan and the Royal Liverpool, are left in half-built limbo, awaiting state intervention. Another 450 contracts between Carillion and the state must be untangled, resolved and perhaps rescued by the government.




Fire services ready to deliver school meals after Carillion collapse


When you examine the claims made for the efficiency of the private sector, you soon discover that they boil down to the transfer of risk. Value for money hangs on the idea that companies shoulder risks the state would otherwise carry. But in cases like this, even when the company takes the first hit, the risk ultimately returns to the government. In these situations, the very notion of risk transfer is questionable.

Nowhere is it more dubious than when applied to the private finance initiative projects in which Carillion specialised. The PFI was invented by John Major’s Conservative government, but greatly expanded by Tony Blair and Gordon Brown. Private companies finance and deliver public services that governments would otherwise have provided.

The government claimed that the private sector, being more efficient, would provide services more cheaply than the private sector. PFI projects, Blair and Brown promised, would go ahead only if they proved to be cheaper than the “public sector comparator”.

But at the same time, the government told public bodies that state money was not an option: if they wanted new facilities, they would have to use the private finance initiative. In the words of the then health secretary, Alan Milburn: “It’s PFI or bust”. So, if you wanted a new hospital or bridge or classroomor army barracks, you had to demonstrate that PFI offered the best value for money. Otherwise, there would be no project. Public bodies immediately discovered a way to make the numbers add up: risk transfer.


Nurses might be laid off, but the walls will still be painted


The costing of risk is notoriously subjective. Because it involves the passage of a fiendishly complex contract through an unknowable future, you can make a case for almost any value. A study published in the British Medical Journal revealed that, before the risk was costed, every hospital scheme it investigated would have been built much more cheaply with public funds. But once the notional financial risks had been added, building them through PFI came out cheaper in every case, although sometimes by less than 0.1%.

Not only was this exercise (as some prominent civil servants warned) bogus, but the entire concept is negated by the fact that if collapse occurs, the risk ripples through the private sector and into the public. Companies like Carillion might not be too big to fail, but the services they deliver are. You cannot, in a nominal democracy, suddenly close a public hospital, let a bridge collapse, or fail to deliver school meals.

Partly for this reason, and partly because of the inordinate political power of corporations and the people who run them, governments seek to insulate these companies from the very risks they claim to have transferred to them. This could explain why Theresa May’s administration continued to award contracts to Carillion after it had issued a series of profit warnings. Was this an attempt to keep the company in business?

If so, it was one of a long list of measures designed to privatise profit and socialise risk. PFI contracts specify that if there is a conflict between paying the private provider and delivering public services, the payments must come first. However deep the crisis in the NHS becomes, however many people must have their cancer operations postponed or be left to rot on trolleys, the legal priority is still to pay the contractor. Money is officially more valuable than life.

If a PFI consortium is contracted to deliver maintenance and ancillary services, these non-clinical functions are ringfenced, while the clinical services delivered by the public sector must be cut to make room for them. This forces public bodies to respond perversely to a funding crisis: nurses might be laid off, but the walls will still be painted. Many of the contracts cannot be broken for 25 or 30 years, regardless of whether or not they still meet real needs: again, this insulates the private sector from hazard, leaving it with the public. The risk lands not only on the state but also on the people. Carillion leaves behind a series of scandals, such as the food hygiene failure at Swindon’s Great Western Hospital, and the failings at the Surgicentre clinic it ran in Hertfordshire, revealed in a horrifying report in the Observer. Similar crises have attended many other deals with private providers: operating theatres flooded with sewage, power cuts which have left nurses to ventilate patients on life support by hand, school buildings falling apart, useless services continuing to be delivered while essential services are cut.

None of this was unforeseen. Some of us warned again and again during the New Labour years that this programme would prove to be an expensive fiasco. Even the Banker magazine predicted, in 2002, that “eventually an Enron-style disaster will be rerun on a sovereign balance sheet”. But the government didn’t want to know. Nor did the Conservative opposition, whose idea it was in the first place. Nor did the other newspapers, now apparently scratching their heads and wondering how this happened. There is no joy in being proved right, just immense frustration.

Risk to a company is not the same as risk to those who own and run it. The executives keep their payoffs. The shareholders take a hit on part of their portfolios, but limited liability ensures they can walk away from any debts. The company might disappear, but ultimately it’s just a name and some paperwork. But the risks imposed on the people – including the company’s workers – are real. We pay for these risks twice: first, when they are nominally transferred to corporations; then again, when they are returned to us. The word used to describe this process is efficiency.