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.

The Labour plotters are right: it‘s definitely Jeremy Corbyn who needs to ‘learn lessons’ from the last few months

Mark Steel in The Independent


Well, that was a highly successful three-month campaign to get rid of Jeremy Corbyn. There’s nothing like spending all summer on a project that proves worthwhile and repays the effort.

If Angela Eagle and Owen Smith were generals in a medieval army, they would report back to their commander: “We fired incessantly for three months and have brought such damage to our opponent’s army they now have 100,000 more soldiers than when we started, sir. And I’m not sure how, but although we’re fighting in Belgium, we seem to have given them Wales.”

Corbyn should ask them to do it every year; by 2025 he’d be crowned King of Europe.

Even more impressive was the way the plotters all agreed, after the result, that “this shows the lessons Jeremy needs to learn, and he has to reach out”.

Next they’ll ask Owen Smith to fight Tyson Fury, and as Owen is dragged away by paramedics, Stephen Kinnock will announce: “This shows the lessons Tyson has to learn. From now on he needs to look more skinny and wear glasses and reach out if he knows what’s good for him”.

This is an exciting development in democracy, that the side who won the least number of votes decides what the lessons are that have to be learned. Maybe this is how the anti-Corbyn section of Labour hopes to govern after a general election. They’ll say to the Tories: “As you won a majority of 190, you have to learn to reach out and fill your cabinet with me and my mates”.

Even so, the plotters made an important point: that Corbyn must reach out to those who already tried to unite the party by calling him a moronic pitiful unelectable pile of steaming goat sick for the last year.

Instead of being divisive, as he was last time by offering them jobs in the shadow Cabinet from which they resigned, he should let them pick their own jobs, and if they don’t fancy doing them one day, let them bring in games.

All the plotters agreed on the need for unity, and many of them displayed that straight away by not turning up to Corbyn’s speech. But Corbyn himself ruined the unity by turning up to it himself, rather than uniting with his colleagues by saying he couldn’t be bothered to say anything so he was popping down the pub.

Some MPs will soon resume their commitment to unity by insisting Corbyn is hopeless, on every TV station, one by one through the news channels, the cartoon channels and the GOD channels. Then on a porn channel, John Mann will knock on a door to say: “Hope you’ll be voting Labour in the council by-election”. But a woman in rubber will reply: “I certainly won’t be voting for you”, so he’ll say: “I suppose that’s because we’ve been very, very bad and chosen an unelectable leader”, then lay down and scream: “We’ve been so irresponsible by saying we’ll renationalise the Royal Mail!” while getting thrashed on the arse with an egg whisk.

Others will prove their loyalty as they did before, by texting helpful snippets of information to journalists from meetings, such as: “OMG! Apparently Corbyn wants to abolish the army and replace it with a salad”.

The other demand from the side celebrating its achievement of getting fewer votes than someone they say is unelectable is there can be no threats of deselection. There should be no half measures with this; if Jess Phillips announces: “I’d rather vote for Donald Trump than Corbyn, that’s why I broke into his house and poisoned his fish”, that’s her right as a loyal party member and any talk of deselection would be divisive.

The next issue Corbyn must address now he’s been humbled by winning the election is the problem of all these new members. For example, an investigation into Liverpool Riverside complains there has been “an explosion in membership” which now “meets several times a month”.

That sounds sinister, because when has there ever been any need to do two things in a month?

And what are they all doing, joining like that? No wonder proper Labour members are suspicious. They should have to pass a test, clambering across an assault course, or swimming through piranhas.

As any business leader will confirm, there’s nothing more damaging to an enterprise than an explosion in people demanding your product. This is why Bill Gates always insists, when a new version of Microsoft Windows comes out, that anyone who asks for one is told they can’t have it as they’re almost certainly a member of the Workers Revolutionary Party.

One MP grumbled: “It’s all right these new people joining, but will they go knocking on doors at the election?” We can’t know the answer to that, which is why the best way to ensure they’re enthusiastic enough to knock on doors is to tell them they’re all infiltrating scum and they can sod off somewhere else with their several meetings a month.

If they still join, they should have to prove their loyalty by not only knocking on doors, but when someone answers, say: “Our leader’s unelectable so I don’t know why I’m bothering”.

But most importantly, not one of the plotters has fallen into the trap of accepting they may have made the odd mistake, and perhaps shouldn’t have all resigned to get rid of their elected leader, or whined too many people have joined their party, or gone to court to ban their own voters, or insisted people supported Corbyn because they’d had their arm twisted by Trotskyists, because it’s obviously Corbyn that needs to learn the lessons from the result.