The Carillion Catastrophe and the limits of privatized government

Carillion's sudden failure shows just how big a problem the outsourcing of government services in western economies has become over the past few decades.

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Image Credit: From The Dudley News

To say that British Prime Minister Theresa May has been having a rough time since rolling the dice on an early election and losing her party’s parliamentary majority in June, is probably a bit of an understatement. Headaches abound and multiply, from a widely covered speech being interrupted by a prankster, a falling back drop and a coughing fit, to Brexit ‘negotiations’ that seem to go nowhere, to buffoons in her own party, most comically the British version of Donald Trump, Boris Johnson, who recently suggested building a bridge over the English Channel to connect France and the U.K., a feat of engineering that could only be matched by the U.S. President’s proposed border wall.

More seriously, the latest blow came on Monday, January 15th, when the country’s second largest construction company, Carillion, suddenly collapsed after a frantic weekend in which the government decided there would be no bailout for the firm. Up to 20,000 jobs could be lost in the U.K. and thousands more in other countries.

Carillion, operating under a name that doesn’t appear to exist in any language, was really good at one thing: winning bids for billions in government contracts in many countries but most especially in the U.K. It kept receiving such contracts up until its collapse, even after earnings warnings for more than a year saw the stock lose 90% of its value.

The company’s sudden failure shows just how big a problem the outsourcing of government services in western economies has become over the past few decades. More and more, and not just in the U.K., what British politicians call Private Finance Initiatives (PFIs) are used to contract services traditionally undertaken by the public sector to for profit companies. This has become commonplace at all levels of government, especially in cash strapped municipalities.

In the U.K., it’s been ongoing at the national level since 1992. Whether the leader was a committed neo-liberal like Tony Blair or a conservative like Theresa May, PFIs have been remarkably resistant to any presumed ideological differences between the so-called left and the right.

Carillion was shifty in so many ways that they almost can’t be counted. A little more than a year ago, the company promised an almost 8% dividend to investors just before its stock plummeted, bringing in many who probably couldn’t understand or afford the risks of investing. Rather than receiving income from their stock as promised, the dividend soon went down to 0 and now, to add insult to injury, their shares are worthless.

It wasn’t as if Carillion was an ordinary construction company, it worked to provide a variety of public services contracted to it by successive British governments from the local to the national, including catering and janitorial services at hundreds of schools, managing public libraries, maintaining some of the country’s prisons, building railways, roads and power stations, even managing infrastructure and housing for British military families.

How Carillion managed all these things was simple, it was something of an empty shell and didn’t do much of the work itself, relying on 30,000 subcontractors to complete its British contracts.These subcontractors were often treated shabbily, their money withheld for up to 120 days by the apparently cash starved company, which in the end had less than 30 million pounds in cash but did manage to pay out almost half a billion pounds to shareholders between 2011-2016. According to the same Daily Mail report, subcontractors may in the end receive the equivalent of a penny for each pound owed, placing many at risk of going out of business (the pound is currently at $1.41 US).

While banks like Lloyd’s, HSBC and RBS, which received billions during the 2008 bailout have grudgingly offered 225 million pounds of emergency funding for many of the subcontractors, often in terms of reduced or waived fees, it could be too little, too late.

Failing upward for fun and profit

Many of those on Carillion’s board, past and present, are considered Britain’s “best and brightest’. However, when one looks at many of their individual pasts, they appear to be well-connected people who continually land prestigious posts, regardless of their own personal records of failure.

To take just one example, Baroness Morgan (yes, she actually uses this ridiculous title) was a political secretary for former Prime Minister Tony Blair.. The Baroness was also on the board of another company that made plenty of money for the right people and then failed spectacularly. The company, Southern Cross, was the largest British provider of home care facilities for the elderly. It unraveled in 2011, endangering some 31,000 people under its care when it couldn’t make rent on its 750 facilities.

With the help of some corporate and political heavy hitters on their board, Carillion managed to grow by making lowball bids with very small profit margins and no room for the problems that inevitably arise from things like building hospitals or managing operating rooms, two of the almost too many areas the company was bidding for and, all too often, winning.

As Russ Mould investment director of the British investment firm AJ Bell told The Independent newspaper, “Carillion was juggling complex, long-term contracts across a range of disciplines and geographies, a feat which ultimately proved beyond it, especially once a small number of big projects went wrong.”

In the end, as reported by The Guardian, it was just four large contracts that hobbled and ultimately brought down the company: two English hospitals, a road in Scotland and a large development in Qatar.

It isn’t as if Carillion was the only such firm involved in the lucrative contracting business in the U.K. Even the UK Ministry of Justice (MoJ) was sent scrambling recently as it had 300 million pounds in contracts to collect fines and make arrests coming in February, fearing that a replay of the Carillion fiasco could conceivably play out if only one company is awarded all the contracts. At the same time, it is a little worrying that the power to make arrests could shared by multiple companies throughout the U.K.

In order to save 3 million pounds, the MoJ is giving arrest powers to non police bailiffs who will be supervised, not by law enforcement or government but by a private company. The blame for this madness does need to be placed on the current government’s lap, they have demanded the MOJ slash its administrative budget by 50% during the current parliament.

Perhaps the worst part of the Carillion disaster is the amount of money that was invested in a variety of pension “schemes” the company pushed to employees and as a side business.

A man whose first name is given as Martin, in the northern city of Manchester, told the BBC he had placed his life savings of 43,000 pounds into the Carillion pension fund, money he may now have lost, “This pension was all I had to fall back on, now it’s in doubt. I haven’t a clue what I’ll do if it doesn’t come.”

Most likely it will eventually come from British taxpayers, who will foot the 587 million pounds lost by the company’s various pension “schemes.” Meanwhile, executives and board members received millions of pounds in bonuses over the years. In one small bit of good news, the insolvency service in charge of the aftermath of Carillion’s collapse has said that promised bonuses and continuing payments to current and former executives will be stopped after a large public outcry.

The pro-business crowd are not so different from the religious fundamentalists they often seem to channel when they talk about “free markets” and “unseen hands.” They are always at ready to wag their fingers at those who believe that collective action and consensus are better ways to solve problems than relying on some self proclaimed genius to come along and hire someone else to do the work.

It may be heretical, but, if nothing else, Carillion proves that certain things are too important to be left to the vagaries of the market.

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