Nils Pratley in The Guardian
Apart from the junior director who tried to speak against the delusion in Carillion’s boardroom, nobody emerges with credit from the two select committees’ post-mortem on the contracting firm. The other directors, led by chairman Philip Green, chief executive Richard Howson and finance director Richard Adam, were directly responsible for the failure because they were either “negligently ignorant of the rotten culture” or complicit in it. But the entire system of checks and balances failed.
The auditors, KPMG, were useless, as was the audit industry’s passive regulator. The government, in the form of the Crown Representative, was asleep. The Pensions Regulator was feeble. City advisers to Carillion were paid to be supine. Big shareholders were not inquisitive. None of those judgments will surprise those who followed the evidence sessions, but the MPs’ report will count for little unless it forces action from government. Three areas are priorities.
First, reform the auditing industry. The public lost faith in auditors when HBOS and Royal Bank of Scotland collapsed without a squeak of warning from the people signing off the accounts. Now there’s Carillion, where the report accuses KMPG, which had the auditing gig for 19 years, of failing to exercise professional scepticism – the basic requirement of the job.
The MPs’ prescription is not original, but is correct. Get the Competition and Markets Authority to look at two specific proposals: a breakup of the big four auditors or a separation of the auditing arms from their consultancy operations.
Concentration in this market has now reached absurd levels – the big four are auditors to 97% of FTSE 350 companies. Carillion perfectly illustrated the closed shop in action. KMPG approved the accounts, Deloitte advised the board on risk management, and EY was consulted on turnaround plans. That left the field clear for PwC to name its price as adviser to the Official Receiver.Quick guide
All you need to know about CarillionShow
A proper shakeup of the industry would probably mean an increase in the cost of audits, but that will be money well spent if it means more competition and higher standards. “KPMG’s long and complacent tenure auditing Carillion was not an isolated failure,” says the report. “It was symptomatic of a market which works for members of the oligopoly but fails the wider economy.” Spot on.
Second, ministers need to understand the risks they take when they outsource work to companies of Carillion’s size. The failed firm had 450 government contracts and the Crown Representative, looking out for taxpayers’ interests, had no insight into how badly things were going wrong. The huge profit warning in July 2017, which marked the beginning of the end, was a complete shock in Whitehall.
The report is short on specific proposals, other than telling ministers to appreciate that “the cheapest bid is not always the best”. But there are good ideas around, and some have even come from the contractors’ side of fence.
Rupert Soames, the chief executive who led the rescue of Serco to prevent an earlier Carillion-style calamity, has suggested a few: open-book accounting so that the Cabinet Office and National Audit Office have the numbers; bank-style “living wills” so that contracts can be handed back to government without huge costs to the public purse; and a code of conduct that, on the supplier’s side, would involve conservative financing, timely payment of subcontractors, and adequately funded pension schemes.
The government is free to demand all that and more. It just requires the penny to drop that, when you’re buying £200bn of goods and services from the private sector each year, you can change the way business is conducted.
The third priority is pensions, since Carillion dumped an £800m liability on the industry lifeboat. The Pensions Regulator’s threats were hollow and its bluff was called, the report says. The directors were allowed to keep paying a dividend to shareholders that was plainly unaffordable.
It’s now too late for excuses or pleas about insufficient powers. The MPs’ hard judgment is that “a tentative and apologetic approach is ingrained” at the regulator and “the current leadership” may not be equipped for cultural change. That sounds like a call for Lesley Titcomb, the chief executive, to go. It would be personally tough on her, since she arrived in 2015, by which time the worst mistakes on Carillion had been made, but she should take the hint. A pensions regulator needs to be feared.
The overall report is impressive – it drips with anger and is strong on detail. It would be disgrace if it fell between the cracks of Brexit. It is essential that the government makes a point-by-point response – starting with the auditors, who escaped from the scene of the banking catastrophe but whose moment in the spotlight is now.
Showing posts with label Carillion. Show all posts
Showing posts with label Carillion. Show all posts
Wednesday, 16 May 2018
Wednesday, 31 January 2018
Analysts caught off guard by 41% Capita share drop
Cat Rutter Pooley in The Financial Times
There may be some red-faced analysts across the City this morning.
Only two out of 16 analysts polled by Bloomberg had a sell rating on Capita before today, when its shares plummeted 41 per cent on a profit warning and planned £700m rights issue.
Of the rest, 11 had a hold rating and three a buy rating.
One of those buy recommendations came from Numis, which issued its note on the company two weeks ago.
Then, Numis described a meeting with the new Capita chief executive as “positive”, noting that:
It is easy to be critical of the past, but his observations on some of the structural and cultural issues at Capita highlighted some fundamental problems, but also material opportunities. We were encouraged by [Jonathan Lewis’s] comments on the need for great focus, cost reductions (whilst also re-investing for growth), and need to focus on cash.
Numis declined to comment immediately on whether it was reviewing the recommendation in light of the company’s update.
Jefferies, which has also had a ‘buy’ recommendation on the stock, characterised Wednesday’s announcement as a “kitchen sinking”, or effort to cram all the bad news out at once. The revelations could generate a 40 per cent decline in earnings expectations for the full year, it said, adding that the revenue environment remained “lacklustre”.
Shares are current trading around 210p, down 40 per cent.
Meanwhile, the ripples from Capita’s share price drop are leaking across the outsourcing industry. Serco slipped 3 per cent, and Mitie was down 2.4 per cent at pixel time.
There may be some red-faced analysts across the City this morning.
Only two out of 16 analysts polled by Bloomberg had a sell rating on Capita before today, when its shares plummeted 41 per cent on a profit warning and planned £700m rights issue.
Of the rest, 11 had a hold rating and three a buy rating.
One of those buy recommendations came from Numis, which issued its note on the company two weeks ago.
Then, Numis described a meeting with the new Capita chief executive as “positive”, noting that:
It is easy to be critical of the past, but his observations on some of the structural and cultural issues at Capita highlighted some fundamental problems, but also material opportunities. We were encouraged by [Jonathan Lewis’s] comments on the need for great focus, cost reductions (whilst also re-investing for growth), and need to focus on cash.
Numis declined to comment immediately on whether it was reviewing the recommendation in light of the company’s update.
Jefferies, which has also had a ‘buy’ recommendation on the stock, characterised Wednesday’s announcement as a “kitchen sinking”, or effort to cram all the bad news out at once. The revelations could generate a 40 per cent decline in earnings expectations for the full year, it said, adding that the revenue environment remained “lacklustre”.
Shares are current trading around 210p, down 40 per cent.
Meanwhile, the ripples from Capita’s share price drop are leaking across the outsourcing industry. Serco slipped 3 per cent, and Mitie was down 2.4 per cent at pixel time.
Sunday, 21 January 2018
Capitalism’s new crisis: after Carillion, can the private sector ever be trusted?
Will Hutton in The Guardian
It is one of the most spectacular corporate failures of recent years. Carillion’s collapse, with £2bn of debts, threatens to deprive tens of thousands of workers, directly or indirectly, of their livelihood. The company had only £29m of cash left. This broaches new levels of fecklessness and the impact will be felt across Britain.
For Carillion was not only a major construction company: it had entered the lucrative public service delivery business. The shockwaves have been felt not only on building sites but in multiple schools, hospitals and even prisons, where tens of thousands of cleaners, porters and maintenance workers have suddenly found their employer has gone bust.
The hospital and school workers on TV news, worrying about their next payslip, are a forceful reminder of how deeply privatisation has entered everyday life.
Schools are run by private academy trusts and school meals provided by companies like Carillion. Switch on the light, catch the bus, post a letter, turn on the oven, drink a glass of water, register for an apprenticeship, use a train, park the car or eat the food in the hospital canteen – it’s all provided by private companies.
The amount of activity now performed by organisations we all own and whose overriding purpose is public service is minimal. Day-to-day life now depends on private companies with private ambitions.
The intertwining of the public and private is not new: it is as old as the state. Elizabeth I’s navy was built in private shipyards; the warplanes and engines that won the second world war were built in corporate factories. There is nothing novel in contracting out or public commissioning; the debate is where to draw the line – and whether the contractors will deliver what they promise.
It was the advent of Margaret Thatcher that saw the first major redrawing of the line, with a wave of wholesale privatisations.
Private owners would necessarily perform better than any public owners because they were private, it was asserted. But that was only the beginning.
Why couldn’t the same principle be extended to the heartland areas of public provision in central and local government? Private companies, like Capita or Carillion, could accept commissions to run the functions of the state more cheaply than government could itself. The state could become no more than a commissioning and procurement agency. The public services delivery industry was born.
In the 1990s, John Major’s government flirted with going further, getting private companies to own and finance public facilities, such as hospitals and prisons. However, whatever the ideological attractions, private borrowing costs were prohibitively high.
It took New Labour’s zeal to get private borrowing off the public books, at any price, for the private finance initiative (PFI) to boom: nearly all Britain’s PFI deals – more than 700 of them – were done by New Labour.
It is one of the most spectacular corporate failures of recent years. Carillion’s collapse, with £2bn of debts, threatens to deprive tens of thousands of workers, directly or indirectly, of their livelihood. The company had only £29m of cash left. This broaches new levels of fecklessness and the impact will be felt across Britain.
For Carillion was not only a major construction company: it had entered the lucrative public service delivery business. The shockwaves have been felt not only on building sites but in multiple schools, hospitals and even prisons, where tens of thousands of cleaners, porters and maintenance workers have suddenly found their employer has gone bust.
The hospital and school workers on TV news, worrying about their next payslip, are a forceful reminder of how deeply privatisation has entered everyday life.
Schools are run by private academy trusts and school meals provided by companies like Carillion. Switch on the light, catch the bus, post a letter, turn on the oven, drink a glass of water, register for an apprenticeship, use a train, park the car or eat the food in the hospital canteen – it’s all provided by private companies.
The amount of activity now performed by organisations we all own and whose overriding purpose is public service is minimal. Day-to-day life now depends on private companies with private ambitions.
The intertwining of the public and private is not new: it is as old as the state. Elizabeth I’s navy was built in private shipyards; the warplanes and engines that won the second world war were built in corporate factories. There is nothing novel in contracting out or public commissioning; the debate is where to draw the line – and whether the contractors will deliver what they promise.
It was the advent of Margaret Thatcher that saw the first major redrawing of the line, with a wave of wholesale privatisations.
Private owners would necessarily perform better than any public owners because they were private, it was asserted. But that was only the beginning.
Why couldn’t the same principle be extended to the heartland areas of public provision in central and local government? Private companies, like Capita or Carillion, could accept commissions to run the functions of the state more cheaply than government could itself. The state could become no more than a commissioning and procurement agency. The public services delivery industry was born.
In the 1990s, John Major’s government flirted with going further, getting private companies to own and finance public facilities, such as hospitals and prisons. However, whatever the ideological attractions, private borrowing costs were prohibitively high.
It took New Labour’s zeal to get private borrowing off the public books, at any price, for the private finance initiative (PFI) to boom: nearly all Britain’s PFI deals – more than 700 of them – were done by New Labour.
There is now a sense, growing with every successive scandal, that the privatisation of the everyday has gone too far – a mood captured by startling opinion poll majorities of 80% in favour of renationalising utilities. The opposition leader, Jeremy Corbyn, struck a chord when he said Carillion’s failure was a key moment.
Carillion’s failure is part of a wider story of corporate mishaps and debacles. The financial crisis, starting with the run on Northern Rock and culminating with Royal Bank of Scotland teetering on the point of closure, was a tipping point: banks and building societies could no longer be trusted.
Since then, a succession of illustrious British names have become embroiled in varying crises. BT, Tesco and, most recently, GKN have all suffered from multimillion-pound accounting irregularities, with the resulting fall in GKN’s share price exposing it to an opportunistic £7bn hostile takeover last week.
The public service delivery industry, of which Carillion is part, is not exempt. Serco and G4S have had to repay £180m for the overcharging of tagged prison offenders.
Learndirect – privatised and sold to the private equity arm of Lloyds Bank in 2011 and, until recently, Britain’s biggest training provider – proved to be systematically failing up to a third of its apprentices; it is being investigated by the National Audit Office.
Stagecoach and Virgin say they will walk away from their East Coast mainline contract unless the government waives up to £2bn of contract payments.
PFI, aimed at getting debt off the government’s books, turns out to be organised hugely in the private sector’s interest. The taxpayer is up to £150bn out of pocket. And now Carillion.
But is it capitalism, or capitalism British-style, that is at fault? The Conservative party, as the promoter of capitalism and the private sector, sees no differentiation – and neither does the current leadership of the Labour party, who are in receipt of a political gift.
There must be an end to privatisation’s dogma and rip-offs, runs the attack by Jeremy Corbyn and John McDonnell: the answer is plainly nationalisation and bringing contracts back “in-house”, which, if Labour were elected, would become a statutory requirement. There will be no more indulging of the private sector with the taxpayer picking up the bill. How could Carillion continue to be awarded contracts last year, including for HS2, after issuing a series of profit warnings? Above all, says Labour, it seems to be one law for workers and another for overpaid directors.
These are telling criticisms, but they do not get under the skin of why so much has gone wrong. Britain’s nationalised industries suffered from inefficiency and persistent underinvestment. Taking activity back in-house is a strong soundbite, but no panacea.
While some public sector delivery is outstanding, notably in parts of the NHS, the general pattern is more patchy. It is for this reason that governments for decades have been contracting the private sector to deliver goods and services. Trying to extend that principle is not unreasonable if high-quality private sector partners step up to the mark: the problem is they are in such short supply. Equally, a better-designed private finance initiative could have transferred risk and debt to the private sector more equitably. Why did British companies drive such an impossibly expensive and unfair bargain?
Carillion’s failure is part of a wider story of corporate mishaps and debacles. The financial crisis, starting with the run on Northern Rock and culminating with Royal Bank of Scotland teetering on the point of closure, was a tipping point: banks and building societies could no longer be trusted.
Since then, a succession of illustrious British names have become embroiled in varying crises. BT, Tesco and, most recently, GKN have all suffered from multimillion-pound accounting irregularities, with the resulting fall in GKN’s share price exposing it to an opportunistic £7bn hostile takeover last week.
The public service delivery industry, of which Carillion is part, is not exempt. Serco and G4S have had to repay £180m for the overcharging of tagged prison offenders.
Learndirect – privatised and sold to the private equity arm of Lloyds Bank in 2011 and, until recently, Britain’s biggest training provider – proved to be systematically failing up to a third of its apprentices; it is being investigated by the National Audit Office.
Stagecoach and Virgin say they will walk away from their East Coast mainline contract unless the government waives up to £2bn of contract payments.
PFI, aimed at getting debt off the government’s books, turns out to be organised hugely in the private sector’s interest. The taxpayer is up to £150bn out of pocket. And now Carillion.
But is it capitalism, or capitalism British-style, that is at fault? The Conservative party, as the promoter of capitalism and the private sector, sees no differentiation – and neither does the current leadership of the Labour party, who are in receipt of a political gift.
There must be an end to privatisation’s dogma and rip-offs, runs the attack by Jeremy Corbyn and John McDonnell: the answer is plainly nationalisation and bringing contracts back “in-house”, which, if Labour were elected, would become a statutory requirement. There will be no more indulging of the private sector with the taxpayer picking up the bill. How could Carillion continue to be awarded contracts last year, including for HS2, after issuing a series of profit warnings? Above all, says Labour, it seems to be one law for workers and another for overpaid directors.
These are telling criticisms, but they do not get under the skin of why so much has gone wrong. Britain’s nationalised industries suffered from inefficiency and persistent underinvestment. Taking activity back in-house is a strong soundbite, but no panacea.
While some public sector delivery is outstanding, notably in parts of the NHS, the general pattern is more patchy. It is for this reason that governments for decades have been contracting the private sector to deliver goods and services. Trying to extend that principle is not unreasonable if high-quality private sector partners step up to the mark: the problem is they are in such short supply. Equally, a better-designed private finance initiative could have transferred risk and debt to the private sector more equitably. Why did British companies drive such an impossibly expensive and unfair bargain?
Some of the answers lie in the Carillion scandal. Its top directors were exceptionally well rewarded if they could keep the share price up, which meant running the company to minimise short-term costs and cap investment, with no margin for error. Carillion might have survived one mishap, but a succession inevitably bowled it over.
When the terms of directors’ pay was changed in the very small print of a remuneration report, so that extravagant short-term bonuses could still be paid even if Carillion collapsed, no shareholder noticed the change. Nor did any of the proxy voting agencies to whom many shareholders delegated their votes and decision-making rights. Indeed, when Carillion was begging the government for a short-term £150m loan at the very last, no investors were alongside them, mounting or supporting a rescue package. The main shareholder activity was to sell the shares short.
This was an ownerless company denuded of any purpose except seemingly to enrich its directors and keep its rootless multiple shareholders happy from one profit-reporting period to another. There was no mission to deliver, no drive for excellence, no pride in service. Workers were disposable notations on spreadsheets. Yet it could be different.
This malaise is at the heart of too many British companies and is what lies behind the litany of disasters and economic under-performance. One leading international investment manager, who wishes to remain anonymous, says that British companies suffer from a disproportionate number of irregularities, fines, missed profit forecasts and malpractice compared with the companies in which he invests in other countries. It is part of a wider picture in which British companies tend to under-invest and under-innovate – even while executive pay has grown at a startling rate to become, per pound of turnover, the highest in the world.
So what to do? One of the striking distinctions of the British system, as the Big Innovation Centre’s Purposeful Company Taskforce revealed in its 2016 Evidence Report (full declaration: I am the co-chair), is that British quoted companies do not have “anchor” shareholders owning a critical mass of their shares (blockholders in the jargon) – engaged owners who will support them through thick and thin. Instead, British companies have the most diffuse, disengaged and transactional shareholder base of any corporate sector in the advanced industrial world.
With so many shareholders, the voice of any single one is easy to ignore. The yardstick becomes immediate financial performance. A preoccupation with the short-term share price becomes inevitable, with shareholders linking executive pay to achieving just that.
On top of this, there is a culture, imported from the US and legitimised by the dominant free market theories of the 1970s and 80s, that the sole purpose of a company is to make as much money as possible as quickly as possible.
In Professor Milton Friedman’s conception, a company can only make a lot of money if it is delivering economic and social good. But maximising shareholder value has become corporate Britain’s intellectual god.
British company law does not require companies to declare any purpose when they incorporate: indeed, the whole British ecosystem is organised to put short-term financial priorities first, and all the other things that make a company great – its people, its relationship with its customers, its capacity to innovate, its declared reason for being – in second place. Bad economics married with Britain’s unique institutions delivered what we now have: a rogue form of capitalism.Q&A
What went wrong for Carillion?Show
The task now is to repurpose that capitalism – a task with no single solution, but rather a range of initiatives that cumulatively will move the dial.
The first step is to make declaring a purpose beyond profit-making mandatory, and incorporating it in the constitution of the company – its articles of association. Another is to harden up the requirements to incorporate wider stakeholder interests into corporate decision-making. Companies should be required to put their reason for existing to a regular shareholder vote, a “say on purpose” beyond merely maximising profits.
Every effort should be made to widen company types beyond the public limited company. There should be more co-operatives and employee-owned companies – companies consecrated to delivering a public benefit first and foremost. The £7 trillion asset management industry should take its obligations as owners much more seriously: every inhibition to forming “anchor” shareholding groups should be dropped, every incentive to become more active long-term stewards encouraged.
Directors’ bonuses should be paid only after a period of between five and seven years, so that boards think long-term. Trade unions should be encouraged, their voices heard and built into company decision-making. Pension funds should be encouraged to invest in purposeful companies; up to £100bn could be earmarked. The 40,000 pension funds should also be consolidated into many fewer entities, so they have genuine clout. The under-resourced and under-powered Financial Reporting Council should become a proper business regulator.
There is a movement for change, but it is on the margins. In Britain, along with the Purposeful Company Taskforce, there is Tomorrow’s Company and Blueprint for Better Business all arguing for systemic change. Internationally, the thinktank Focusing Capital on the Long Term makes a similar argument, as does the “inclusive capitalism” movement. The TUC, under Frances O’Grady, is pushing a parallel agenda.
The best and most reflective people in the business lobby are alarmed by the growing “trust gap” and want to close it. There is intellectual support: the new economics is attempting to integrate the best of free-market, Keynesian and even Marxist traditions. Companies cannot be seen as solely profit machines, but as complex problem-solving organisations, bound together by the social glue of shared purpose, in which tensions and power battles between management and stakeholders will be inevitable. How companies are owned, purpose expressed, directors paid and stakeholder interests traded off will be of fundamental importance.
More Carillion-style disasters lie ahead as the economy slows down. The government cannot continue to ignore these failings, nor can the Labour party simply promise to nationalise everything. The debate about our capitalism can only deepen. For the ordinary Briton, the sooner it is resolved the better.
When the terms of directors’ pay was changed in the very small print of a remuneration report, so that extravagant short-term bonuses could still be paid even if Carillion collapsed, no shareholder noticed the change. Nor did any of the proxy voting agencies to whom many shareholders delegated their votes and decision-making rights. Indeed, when Carillion was begging the government for a short-term £150m loan at the very last, no investors were alongside them, mounting or supporting a rescue package. The main shareholder activity was to sell the shares short.
This was an ownerless company denuded of any purpose except seemingly to enrich its directors and keep its rootless multiple shareholders happy from one profit-reporting period to another. There was no mission to deliver, no drive for excellence, no pride in service. Workers were disposable notations on spreadsheets. Yet it could be different.
This malaise is at the heart of too many British companies and is what lies behind the litany of disasters and economic under-performance. One leading international investment manager, who wishes to remain anonymous, says that British companies suffer from a disproportionate number of irregularities, fines, missed profit forecasts and malpractice compared with the companies in which he invests in other countries. It is part of a wider picture in which British companies tend to under-invest and under-innovate – even while executive pay has grown at a startling rate to become, per pound of turnover, the highest in the world.
So what to do? One of the striking distinctions of the British system, as the Big Innovation Centre’s Purposeful Company Taskforce revealed in its 2016 Evidence Report (full declaration: I am the co-chair), is that British quoted companies do not have “anchor” shareholders owning a critical mass of their shares (blockholders in the jargon) – engaged owners who will support them through thick and thin. Instead, British companies have the most diffuse, disengaged and transactional shareholder base of any corporate sector in the advanced industrial world.
With so many shareholders, the voice of any single one is easy to ignore. The yardstick becomes immediate financial performance. A preoccupation with the short-term share price becomes inevitable, with shareholders linking executive pay to achieving just that.
On top of this, there is a culture, imported from the US and legitimised by the dominant free market theories of the 1970s and 80s, that the sole purpose of a company is to make as much money as possible as quickly as possible.
In Professor Milton Friedman’s conception, a company can only make a lot of money if it is delivering economic and social good. But maximising shareholder value has become corporate Britain’s intellectual god.
British company law does not require companies to declare any purpose when they incorporate: indeed, the whole British ecosystem is organised to put short-term financial priorities first, and all the other things that make a company great – its people, its relationship with its customers, its capacity to innovate, its declared reason for being – in second place. Bad economics married with Britain’s unique institutions delivered what we now have: a rogue form of capitalism.Q&A
What went wrong for Carillion?Show
The task now is to repurpose that capitalism – a task with no single solution, but rather a range of initiatives that cumulatively will move the dial.
The first step is to make declaring a purpose beyond profit-making mandatory, and incorporating it in the constitution of the company – its articles of association. Another is to harden up the requirements to incorporate wider stakeholder interests into corporate decision-making. Companies should be required to put their reason for existing to a regular shareholder vote, a “say on purpose” beyond merely maximising profits.
Every effort should be made to widen company types beyond the public limited company. There should be more co-operatives and employee-owned companies – companies consecrated to delivering a public benefit first and foremost. The £7 trillion asset management industry should take its obligations as owners much more seriously: every inhibition to forming “anchor” shareholding groups should be dropped, every incentive to become more active long-term stewards encouraged.
Directors’ bonuses should be paid only after a period of between five and seven years, so that boards think long-term. Trade unions should be encouraged, their voices heard and built into company decision-making. Pension funds should be encouraged to invest in purposeful companies; up to £100bn could be earmarked. The 40,000 pension funds should also be consolidated into many fewer entities, so they have genuine clout. The under-resourced and under-powered Financial Reporting Council should become a proper business regulator.
There is a movement for change, but it is on the margins. In Britain, along with the Purposeful Company Taskforce, there is Tomorrow’s Company and Blueprint for Better Business all arguing for systemic change. Internationally, the thinktank Focusing Capital on the Long Term makes a similar argument, as does the “inclusive capitalism” movement. The TUC, under Frances O’Grady, is pushing a parallel agenda.
The best and most reflective people in the business lobby are alarmed by the growing “trust gap” and want to close it. There is intellectual support: the new economics is attempting to integrate the best of free-market, Keynesian and even Marxist traditions. Companies cannot be seen as solely profit machines, but as complex problem-solving organisations, bound together by the social glue of shared purpose, in which tensions and power battles between management and stakeholders will be inevitable. How companies are owned, purpose expressed, directors paid and stakeholder interests traded off will be of fundamental importance.
More Carillion-style disasters lie ahead as the economy slows down. The government cannot continue to ignore these failings, nor can the Labour party simply promise to nationalise everything. The debate about our capitalism can only deepen. For the ordinary Briton, the sooner it is resolved the better.
Friday, 19 January 2018
This is not a Corbynite coup, it’s a mandate for his radical agenda
Gary Younge in The Guardian
Kings were put to death long before 21 January 1793,” wrote Albert Camus, referring to Louis XVI’s execution after the French revolution. “But regicides of earlier times and their followers were interested in attacking the person, not the principle, of the king. They wanted another king, and that was all.”
One of the biggest mistakes the critics of Jeremy Corbyn, the Labour leader, made from the outset – and there are many to choose from – was that his victory was about him. They refer to “Corbynites” and “Corbynistas” as though there were some undying and uncritical devotion to a man and his singular philosophy, rather than broad support for an agenda and a trajectory. If they could get rid of the king, went the logic, they would reinherit the kingdom. With a new leader normal service could resume. Labour could resuscitate its programme of milquetoast managerialism, whereby it was indifferent to its members, ambivalent about austerity at home, and hawkish about wars abroad.
This week’s resounding victory of a slate of leftwing candidates to Labour’s national executive committee, the party’s ruling body, has put that assumption to rest for the moment. There is now a reliable majority on the NEC who back both democratising the party, to give members more control, and pursuing policies against austerity and war and for wealth redistribution.
Corbyn has been accused of tightening his grip on the party so that he may purge critics and promote cronies. The logic is perverse
That this should have happened in the week of Carillion’s collapse has a certain symmetry. Carillion took billions in public funds for public projects, paid its executives and shareholders handsomely, and has now left taxpayers to pick up the pieces in a system of private finance initiatives introduced by Conservatives but championed and vastly expanded by New Labour.
It was anger at this kind of rank unfairness, the inequalities it both illustrated and imposed after the economic crash, that explains not just Corbyn’s victory but the rise of the hard left across Europe and in the US.
The contradictions inherent in Corbyn’s rise are finally ironing themselves out. In 2015 he won not the leadership but the title of leader. Unlike Podemos in Spain or Syriza in Greece, his ascent was not the product of a movement that could sustain his challenge from the margins; instead he emerged from a wider, inchoate sense of frustration and alienation that propelled him to the top within the mainstream. Without the consent of MPs he lacked the authority that would endow that title with power and meaning in parliament. Outside parliament he lacked the kind of organised support that could buttress his position against this hostility. This left him embattled, isolated and, to some extent, ineffective, since his primary task was not to exercise leadership but to cling on to it.
'I'm JC': Jeremy Corbyn on ageing, infighting and his Tory 'friends'
Last year’s general election changed all that. Labour’s gains, with its highest vote-share since 2001 leaving the Tories without a majority, proved that there was a broad electoral constituency for his redistributive, anti-austerity agenda. In so doing it showed that the membership was far more in touch with the needs and aspirations of the electorate than the parliamentarians.
Now, with the shadow cabinet no longer in open revolt, the parliamentary party quiescent, if not onside, and the party machine no longer obstructive, at almost every tier the party has either come around or made its peace with him. Meanwhile, outside parliament, Momentum – the leftwing caucus within the party that supports Corbyn’s agenda – has become more organised and less fractious, providing a more coherent plank of support beyond Westminster. Finally, Corbyn can do what he was elected to do – lead on the agenda he has laid out.
Leftwing control of the NEC was one of the last pieces to fall into place. Since the three candidates who won this week were backed by Momentum, and one – Jon Lansman – is its founder, this latest shift will inevitably provoke some bedwetting.
Those who have got everything wrong about Labour over the past two years will, of course, get this wrong too. We must once again brace ourselves for rhetorical hyperbole. Corbyn has been accused of tightening his grip on the party so that he may purge critics and promote cronies. The logic is perverse. The Stalinists, in the minds of his most feverish critics, are the ones who keep winning internal elections hands down; the democrats are those who launched a coup against the popular choice.
Jeremy Corbyn speaks to NHS staff at Park South community centre in Swindon. Photograph: Andrew Matthews/PA
The obsession, among parliamentarians and their courtiers, is that this latest development will lead to a wave of deselections (or purges) in which MPs hostile to this new orientation will be forced out. There is some irony in the notion that those who tried to depose an elected leader with a huge mandate might bristle at the prospect of being removed by an election.
For now, that fear seems unfounded. While Momentum certainly believes MPs should be more accountable to their local parties, there is little evidence that this is a strategic priority (which doesn’t mean some local chapters might not pursue it). Corbyn’s team is not keen either, believing the pain rarely justifies the gain.
This is a relief. Another election could be upon us at any moment. The party does not need more trauma. Moreover, the gains are likely to be minimal. Corbyn is not king; his word is not law. The moment has tipped in his favour, not swung to him completely. And while the party may have made its peace with him, Momentum still sits outside its comfort zone. According to the website Labourlist, of the 24 key marginals to be contested so far, Momentum candidates have won in just five, while a further six have gone to candidates from the “wider Labour left”. The rest have been taken by “trade unionists, longstanding local campaigners and former [candidates]”.
Momentum’s focus is instead on funding organisers to transform the party into a social movement by connecting it with local campaigns – be they over caretakers’ pay, or cuts to schools and hospitals. For those whose understanding of politics and power is limited to elections and parliament, this will seem at best a waste of time. But anything that engages members, be they new or longstanding, in activities that make Labour more dynamic and receptive to the outside world should be welcomed.
This would fulfil one of three central challenges for Momentum in the foreseeable future. The second is to deploy all its resources – digital, human, organisational – to help Labour win at the next election. The third is to establish some independence from the Labour leadership, so that it can continue to advocate for a left agenda, should the party come to power. However confused the left might be about where power resides, the right understands that a range of vested interests, from big business to hot money, can force parliament’s hand and thwart the popular will.
Like most radical governments, Labour will have to negotiate between the powers that be and the forces that made them possible. Corbyn is not king. It was pressure from below that made him possible. It will be pressure from below that keeps him viable.
Kings were put to death long before 21 January 1793,” wrote Albert Camus, referring to Louis XVI’s execution after the French revolution. “But regicides of earlier times and their followers were interested in attacking the person, not the principle, of the king. They wanted another king, and that was all.”
One of the biggest mistakes the critics of Jeremy Corbyn, the Labour leader, made from the outset – and there are many to choose from – was that his victory was about him. They refer to “Corbynites” and “Corbynistas” as though there were some undying and uncritical devotion to a man and his singular philosophy, rather than broad support for an agenda and a trajectory. If they could get rid of the king, went the logic, they would reinherit the kingdom. With a new leader normal service could resume. Labour could resuscitate its programme of milquetoast managerialism, whereby it was indifferent to its members, ambivalent about austerity at home, and hawkish about wars abroad.
This week’s resounding victory of a slate of leftwing candidates to Labour’s national executive committee, the party’s ruling body, has put that assumption to rest for the moment. There is now a reliable majority on the NEC who back both democratising the party, to give members more control, and pursuing policies against austerity and war and for wealth redistribution.
Corbyn has been accused of tightening his grip on the party so that he may purge critics and promote cronies. The logic is perverse
That this should have happened in the week of Carillion’s collapse has a certain symmetry. Carillion took billions in public funds for public projects, paid its executives and shareholders handsomely, and has now left taxpayers to pick up the pieces in a system of private finance initiatives introduced by Conservatives but championed and vastly expanded by New Labour.
It was anger at this kind of rank unfairness, the inequalities it both illustrated and imposed after the economic crash, that explains not just Corbyn’s victory but the rise of the hard left across Europe and in the US.
The contradictions inherent in Corbyn’s rise are finally ironing themselves out. In 2015 he won not the leadership but the title of leader. Unlike Podemos in Spain or Syriza in Greece, his ascent was not the product of a movement that could sustain his challenge from the margins; instead he emerged from a wider, inchoate sense of frustration and alienation that propelled him to the top within the mainstream. Without the consent of MPs he lacked the authority that would endow that title with power and meaning in parliament. Outside parliament he lacked the kind of organised support that could buttress his position against this hostility. This left him embattled, isolated and, to some extent, ineffective, since his primary task was not to exercise leadership but to cling on to it.
'I'm JC': Jeremy Corbyn on ageing, infighting and his Tory 'friends'
Last year’s general election changed all that. Labour’s gains, with its highest vote-share since 2001 leaving the Tories without a majority, proved that there was a broad electoral constituency for his redistributive, anti-austerity agenda. In so doing it showed that the membership was far more in touch with the needs and aspirations of the electorate than the parliamentarians.
Now, with the shadow cabinet no longer in open revolt, the parliamentary party quiescent, if not onside, and the party machine no longer obstructive, at almost every tier the party has either come around or made its peace with him. Meanwhile, outside parliament, Momentum – the leftwing caucus within the party that supports Corbyn’s agenda – has become more organised and less fractious, providing a more coherent plank of support beyond Westminster. Finally, Corbyn can do what he was elected to do – lead on the agenda he has laid out.
Leftwing control of the NEC was one of the last pieces to fall into place. Since the three candidates who won this week were backed by Momentum, and one – Jon Lansman – is its founder, this latest shift will inevitably provoke some bedwetting.
Those who have got everything wrong about Labour over the past two years will, of course, get this wrong too. We must once again brace ourselves for rhetorical hyperbole. Corbyn has been accused of tightening his grip on the party so that he may purge critics and promote cronies. The logic is perverse. The Stalinists, in the minds of his most feverish critics, are the ones who keep winning internal elections hands down; the democrats are those who launched a coup against the popular choice.
Jeremy Corbyn speaks to NHS staff at Park South community centre in Swindon. Photograph: Andrew Matthews/PA
The obsession, among parliamentarians and their courtiers, is that this latest development will lead to a wave of deselections (or purges) in which MPs hostile to this new orientation will be forced out. There is some irony in the notion that those who tried to depose an elected leader with a huge mandate might bristle at the prospect of being removed by an election.
For now, that fear seems unfounded. While Momentum certainly believes MPs should be more accountable to their local parties, there is little evidence that this is a strategic priority (which doesn’t mean some local chapters might not pursue it). Corbyn’s team is not keen either, believing the pain rarely justifies the gain.
This is a relief. Another election could be upon us at any moment. The party does not need more trauma. Moreover, the gains are likely to be minimal. Corbyn is not king; his word is not law. The moment has tipped in his favour, not swung to him completely. And while the party may have made its peace with him, Momentum still sits outside its comfort zone. According to the website Labourlist, of the 24 key marginals to be contested so far, Momentum candidates have won in just five, while a further six have gone to candidates from the “wider Labour left”. The rest have been taken by “trade unionists, longstanding local campaigners and former [candidates]”.
Momentum’s focus is instead on funding organisers to transform the party into a social movement by connecting it with local campaigns – be they over caretakers’ pay, or cuts to schools and hospitals. For those whose understanding of politics and power is limited to elections and parliament, this will seem at best a waste of time. But anything that engages members, be they new or longstanding, in activities that make Labour more dynamic and receptive to the outside world should be welcomed.
This would fulfil one of three central challenges for Momentum in the foreseeable future. The second is to deploy all its resources – digital, human, organisational – to help Labour win at the next election. The third is to establish some independence from the Labour leadership, so that it can continue to advocate for a left agenda, should the party come to power. However confused the left might be about where power resides, the right understands that a range of vested interests, from big business to hot money, can force parliament’s hand and thwart the popular will.
Like most radical governments, Labour will have to negotiate between the powers that be and the forces that made them possible. Corbyn is not king. It was pressure from below that made him possible. It will be pressure from below that keeps him viable.
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.
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.
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'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?
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?
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 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.
Tuesday, 16 January 2018
Both the left and the right can learn from Carillion's demise
Ben Chu in The Independent
Psychologists have identified a phenomenon they call “confirmation bias”. This is the tendency for people to interpret new information in a way that simply confirms their pre-existing beliefs. We’ve seen quite a lot of confirmation bias in the wake of Carillion’s belly flop into liquidation this week.
For some on the left this is all confirmation that privatisation of the provision of public services has been a disaster. It shows that corporate fat cats can walk away with profits while ordinary workers and small firms suffer, public services are put in jeopardy and taxpayers foot the bill.
For some on the right, on the other hand, it confirms that privatisation is working broadly as it should. A badly-run private company failed. Its contracts will now be re-distributed to other, more competent, private firms. As for profiteering at public expense, they see the precise opposite. If anything, civil servants have got too good at putting the squeeze on private contractors, forcing them into bidding wars which screw down their margins to almost nothing. Tough for the private companies, certainly, but it means better value for money for taxpayers.
Both sides should take a step back and remove the blinkers. It’s certainly welcome that Carillion’s shareholders and its lenders have not, despite intense corporate lobbying, been bailed out by the Government in the way banks were rescued in 2008. The shareholders will lose their shirts. And the banks must write-down their loans. That is how it ought to be. Leftist nationalisers ought to recognise that this represents progress.
But champions of privatisation should also face up to some unpalatable realities laid bare by this scandal. The profit margins of some contractors may be small but Carillion still managed to pay regular and substantial dividends to its shareholders, even when it was clear the company was financially overstretched.
And there have been high personal rewards for failed management. If these services had been managed “in-house”, no civil servant would have been paid the £1.5m a year that Richard Howson, the former chief executive of Carillion, commanded. The head of the NHS, Simon Stevens, by comparison, earns £190,000 a year. Are we really to believe that more modestly paid civil servants would have been vastly less competent than Howson and his team at Carillion?
As for the idea that civil servants have morphed into hard-nosed contracting experts, that rather stretches credulity given the miserable history of Private Finance Initiative deals. Moreover, this adversarial image isn’t a particularly useful way to conceptualise the relationship between private contractors and the state when it comes to the delivery of public services.
This relationship is inherently different from a normal commercial transaction between two parties. It has to be a much closer (and ongoing) relationship because society cannot cope with even a brief interruption of supply of the services. Ministers can’t allow a prison to be unguarded, a hospital to go uncleaned, a school to be without catering, a care home to be shut down.
Commissioning a contractor to deliver a public service extremely cheaply is a false economy if that contractor runs the risk of financial collapse and the state will have to fork out to keep the show on the road, as it is now with Carillion’s contracts.
This reality was also demonstrated last year when the Transport Secretary allowed Virgin and Stagecoach to exit their East Coast rail franchise early, costing the state £2bn in foregone payments, after the operators discovered they were running at a loss. It was not wise for the Transport Department to have accepted such a high bid from the consortium in 2015, however good it looked at the time.
One clear lesson from Carillion’s demise is that much more public transparency over contractors’ books is needed, something the National Audit Office urged back in 2013. The Carillion fiasco demonstrates that it’s impossible to rely on the expertise, or perhaps integrity, of auditing firms to flag looming problems.
In the end, the broader privatisation versus nationalisation debate might be an unhelpful framing of the issue. Even if many more services are managed in-house, as Labour wants, there will still be contracting out. Even Jeremy Corbyn is not demanding the nationalisation of construction firms.
When it comes to the delivery of vital public services, there is an unavoidable symbiosis between the state sector and the private sector. There is no purity to be found. The key question, which is too little addressed, is the appropriate balance of authority in that relationship and the institutional checks on that authority to ensure the broad public interest is always paramount.
Psychologists have identified a phenomenon they call “confirmation bias”. This is the tendency for people to interpret new information in a way that simply confirms their pre-existing beliefs. We’ve seen quite a lot of confirmation bias in the wake of Carillion’s belly flop into liquidation this week.
For some on the left this is all confirmation that privatisation of the provision of public services has been a disaster. It shows that corporate fat cats can walk away with profits while ordinary workers and small firms suffer, public services are put in jeopardy and taxpayers foot the bill.
For some on the right, on the other hand, it confirms that privatisation is working broadly as it should. A badly-run private company failed. Its contracts will now be re-distributed to other, more competent, private firms. As for profiteering at public expense, they see the precise opposite. If anything, civil servants have got too good at putting the squeeze on private contractors, forcing them into bidding wars which screw down their margins to almost nothing. Tough for the private companies, certainly, but it means better value for money for taxpayers.
Both sides should take a step back and remove the blinkers. It’s certainly welcome that Carillion’s shareholders and its lenders have not, despite intense corporate lobbying, been bailed out by the Government in the way banks were rescued in 2008. The shareholders will lose their shirts. And the banks must write-down their loans. That is how it ought to be. Leftist nationalisers ought to recognise that this represents progress.
But champions of privatisation should also face up to some unpalatable realities laid bare by this scandal. The profit margins of some contractors may be small but Carillion still managed to pay regular and substantial dividends to its shareholders, even when it was clear the company was financially overstretched.
And there have been high personal rewards for failed management. If these services had been managed “in-house”, no civil servant would have been paid the £1.5m a year that Richard Howson, the former chief executive of Carillion, commanded. The head of the NHS, Simon Stevens, by comparison, earns £190,000 a year. Are we really to believe that more modestly paid civil servants would have been vastly less competent than Howson and his team at Carillion?
As for the idea that civil servants have morphed into hard-nosed contracting experts, that rather stretches credulity given the miserable history of Private Finance Initiative deals. Moreover, this adversarial image isn’t a particularly useful way to conceptualise the relationship between private contractors and the state when it comes to the delivery of public services.
This relationship is inherently different from a normal commercial transaction between two parties. It has to be a much closer (and ongoing) relationship because society cannot cope with even a brief interruption of supply of the services. Ministers can’t allow a prison to be unguarded, a hospital to go uncleaned, a school to be without catering, a care home to be shut down.
Commissioning a contractor to deliver a public service extremely cheaply is a false economy if that contractor runs the risk of financial collapse and the state will have to fork out to keep the show on the road, as it is now with Carillion’s contracts.
This reality was also demonstrated last year when the Transport Secretary allowed Virgin and Stagecoach to exit their East Coast rail franchise early, costing the state £2bn in foregone payments, after the operators discovered they were running at a loss. It was not wise for the Transport Department to have accepted such a high bid from the consortium in 2015, however good it looked at the time.
One clear lesson from Carillion’s demise is that much more public transparency over contractors’ books is needed, something the National Audit Office urged back in 2013. The Carillion fiasco demonstrates that it’s impossible to rely on the expertise, or perhaps integrity, of auditing firms to flag looming problems.
In the end, the broader privatisation versus nationalisation debate might be an unhelpful framing of the issue. Even if many more services are managed in-house, as Labour wants, there will still be contracting out. Even Jeremy Corbyn is not demanding the nationalisation of construction firms.
When it comes to the delivery of vital public services, there is an unavoidable symbiosis between the state sector and the private sector. There is no purity to be found. The key question, which is too little addressed, is the appropriate balance of authority in that relationship and the institutional checks on that authority to ensure the broad public interest is always paramount.
Saturday, 13 January 2018
Whither free market? Carillion the Government's preferred private contractor maybe bailed out.
Aditya Chakrabortty in The Guardian
You may never have heard of Carillion. There’s no reason you should have. Its lack of glamour is neatly summed up by the name it sported in the 90s: Tarmac. But since then it has grown and grown to become the UK’s second-largest building firm – and one of the biggest contractors to the British government. Name an infrastructure pie in the UK and the chances are Carillion has its fingers in it: the HS2 rail link, broadband rollout, the Royal Liverpool University Hospital, the Library of Birmingham. It maintains army barracks, builds PFI schools, lays down roads in Aberdeen. The lot.
There’s just one snag. For over a year now, Carillion has been in meltdown. Its shares have dropped 90%, it’s issued profit warnings, and it’s on to its third chief executive within six months. And this week, the government moved into emergency mode. A group of ministers held a crisis meeting on Thursday to discuss the firm. Around the table, reports the FT, were business secretary Greg Clark, as well as ministers from the Cabinet Office, health, transport, justice, education and local government. Even the Foreign Office sent a representative.
Why did Chris Grayling give the HS2 contract to a company that was already in existential difficulties?
That roll call says all you need to know about the public significance of what happens next at Carillion. This is a firm that employs just under 20,000 workers in Britain – and the same again abroad. It has a huge chain of suppliers – and its habit of going in for joint ventures with other construction businesses means that a collapse at Carillion would send shockwaves through the industry and through the government’s public works programme.
To see what this means, take the HS2 rail link, where Carillion this summer was part of a consortium that won a £1.4bn contract to knock tunnels through the Chilterns. If Carillion goes under, what happens to the largest infrastructure project in Europe? What happens to its partners on the deal, British firm Kier, and France’s Eiffage? The project will need to be put back and the taxpayer will almost certainly have to step in.
Imagine that same catastrophe befalling dozens of other projects across the UK and you get a sense of what’s at stake. Jobs will be cut, schools will go unbuilt (just a couple of months ago, Oxfordshire county council pulled the plug on a 10-year schools project) – and the government’s entire private finance initiative (PFI) model for building this country’s essential services will be shaken to the core. The dirty secret of PFI and all government attempts to pass public services into the private realm is that the shareholders make profits while the taxpayers remain on the hook for any losses.
After all, this isn’t the only case where the public sector’s reliance on one giant private-sector player endangers the provision of basic services. As my colleague Rob Davies reports in today’s paper, crisis-hit Four Seasons Health Care has run into yet another roadblock in its rescue talks. If those negotiations fail, then the big question will be who will look after the 17,000 elderly and vulnerable people in its care.
Carillion crisis: fears major government contractor is on the verge of collapse
Or look at rail, where as I wrote this week, transport secretary Chris Grayling has come to a disastrous deal (sorry, “pragmatic solution”) to allow Virgin Trains to get out of their contract to run the East Coast mainline three years early. The public will have to step into the breach with some makeshift arrangements and will forego hundreds of millions in lost franchise payments. The train operators will be able to go about their business and even take on new franchises.
Should Carillion go down, there will be another truckload of questions for Grayling. He awarded the firm its £1.4bn HS2 contract last July – by which time the writing was already on the wall. That job from the Department of Transport may have helped tide Carillion over for a bit – but why did the transport secretary give the work to a company that was already in existential difficulties? A firm known to have grown too quickly by borrowing hundreds of millions. A firm that just a few months later came under investigation of the Financial Conduct Authority. I have long thought that Grayling is less serious minister and more an unexploded landmine. I just wonder what the trigger will be.
But what happens to that minister is just one debacle of many as far as Carillion is concerned. Today you may never have heard of Carillion. Soon you may wish it had remained that way.
You may never have heard of Carillion. There’s no reason you should have. Its lack of glamour is neatly summed up by the name it sported in the 90s: Tarmac. But since then it has grown and grown to become the UK’s second-largest building firm – and one of the biggest contractors to the British government. Name an infrastructure pie in the UK and the chances are Carillion has its fingers in it: the HS2 rail link, broadband rollout, the Royal Liverpool University Hospital, the Library of Birmingham. It maintains army barracks, builds PFI schools, lays down roads in Aberdeen. The lot.
There’s just one snag. For over a year now, Carillion has been in meltdown. Its shares have dropped 90%, it’s issued profit warnings, and it’s on to its third chief executive within six months. And this week, the government moved into emergency mode. A group of ministers held a crisis meeting on Thursday to discuss the firm. Around the table, reports the FT, were business secretary Greg Clark, as well as ministers from the Cabinet Office, health, transport, justice, education and local government. Even the Foreign Office sent a representative.
Why did Chris Grayling give the HS2 contract to a company that was already in existential difficulties?
That roll call says all you need to know about the public significance of what happens next at Carillion. This is a firm that employs just under 20,000 workers in Britain – and the same again abroad. It has a huge chain of suppliers – and its habit of going in for joint ventures with other construction businesses means that a collapse at Carillion would send shockwaves through the industry and through the government’s public works programme.
To see what this means, take the HS2 rail link, where Carillion this summer was part of a consortium that won a £1.4bn contract to knock tunnels through the Chilterns. If Carillion goes under, what happens to the largest infrastructure project in Europe? What happens to its partners on the deal, British firm Kier, and France’s Eiffage? The project will need to be put back and the taxpayer will almost certainly have to step in.
Imagine that same catastrophe befalling dozens of other projects across the UK and you get a sense of what’s at stake. Jobs will be cut, schools will go unbuilt (just a couple of months ago, Oxfordshire county council pulled the plug on a 10-year schools project) – and the government’s entire private finance initiative (PFI) model for building this country’s essential services will be shaken to the core. The dirty secret of PFI and all government attempts to pass public services into the private realm is that the shareholders make profits while the taxpayers remain on the hook for any losses.
After all, this isn’t the only case where the public sector’s reliance on one giant private-sector player endangers the provision of basic services. As my colleague Rob Davies reports in today’s paper, crisis-hit Four Seasons Health Care has run into yet another roadblock in its rescue talks. If those negotiations fail, then the big question will be who will look after the 17,000 elderly and vulnerable people in its care.
Carillion crisis: fears major government contractor is on the verge of collapse
Or look at rail, where as I wrote this week, transport secretary Chris Grayling has come to a disastrous deal (sorry, “pragmatic solution”) to allow Virgin Trains to get out of their contract to run the East Coast mainline three years early. The public will have to step into the breach with some makeshift arrangements and will forego hundreds of millions in lost franchise payments. The train operators will be able to go about their business and even take on new franchises.
Should Carillion go down, there will be another truckload of questions for Grayling. He awarded the firm its £1.4bn HS2 contract last July – by which time the writing was already on the wall. That job from the Department of Transport may have helped tide Carillion over for a bit – but why did the transport secretary give the work to a company that was already in existential difficulties? A firm known to have grown too quickly by borrowing hundreds of millions. A firm that just a few months later came under investigation of the Financial Conduct Authority. I have long thought that Grayling is less serious minister and more an unexploded landmine. I just wonder what the trigger will be.
But what happens to that minister is just one debacle of many as far as Carillion is concerned. Today you may never have heard of Carillion. Soon you may wish it had remained that way.
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