The failure of the UK infrastructure firm Carillion demonstrates that “public/private partnership” means private gains and socialized losses. Carillion is being put into liquidation, with “very little of value left within the business,” despite it having had over 43,000 employees, with over 20,000 in the UK, as well as hundreds of subcontractors.
Due to the sprawl of Carillion’s activities, information about the implications of its collapse will come out over the coming days and weeks. However, some things are evident now. We’ll provide a starter list:
Many contractors to Carillion will go bust. As the Guardian explained:
Thousands of staff who worked for the collapsed construction firm Carillion inside private sector companies will have their wages stopped on Wednesday unless their jobs are rescued by other firms, the government has said.
Experts also said up to 30,000 small firms were owed money by Carillion, which crashed into liquidation on Monday morning, with insolvency practitioners reporting an immediate rush of calls from worried business owners.
Clive flagged an article from the Building Services Engineering Association yesterday:
The liquidation of construction giant Carillion could lead to potentially catastrophic losses for thousands of SMEs, according to the Building Engineering Services Association (BESA) and the electrotechnical and engineering services trade body ECA.
According to its latest set of accounts, Carillion was holding over £800m in retentions payments owed to sub-contractors. There is growing alarm that much of this money will be lost leaving many more firms at risk of financial collapse.
As Clive explained:
Likely to never be repaid to their suppliers. Retentions are basically extortion — you (the supplier or subcontractor) agree to letting us withhold payment, we agree to cutting you in on new work. Maybe. If you don’t rock the boat on other things (like turning a blind eye to site safety, engaging on-demand in phoney bidding scams and cover pricing, petty embezzlement by our managers…)
Mind you, the retentions are no doubt the biggest chunk of funds that contractors will see go poof, but they likely had additional late payments on their current gigs.
Due to the importance of many of Carillion’s roles, government will step in to take up many of the projects and bear the costs. Due to the fact that the handoff to new workers and contractors is likely to result in cost increases, plus Carillion likely underbid some of its later projects out of a need to keep cash coming in no matter what, the various authorities are almost certain to face bigger bills than they had originally budgeted for this work. That translates into tax increases, higher user charges, and/or service cuts. As the Financial Times noted:
The collapse will have implications throughout the UK, where Carillion is the biggest manager of military bases for the Ministry of Defence as well as providing facilities management for hospitals, courts and schools, and work on key infrastructure projects.
Carillion continued to be awarded government contracts as it entered a financial crisis. Carillion put out a profit warning in July 2017, and reserved £845 million to cancel contracts and cover losses. Despite obvious and increasing desperation, in the form of two more profit warnings, it won three more government contracts worth almost £2 billion in the most recent six months. Oh, and Carillion was still paying dividends as its financial condition worsened, up until it suspended them over the summer: £370 million in the last five years and £72 million in June 2017.
Taxpayers will eat most of the pension underfunding costs. Carillion’s beneficiaries will take some relatively small hits as the public pays the pension bill. From the Financial Times:
About 28,000 members of Carillion’s 13 UK pension schemes will now be transferred to the Pension Protection Fund, the lifeboat for collapsed companies. Pension scheme members who are transferred to the PPF and not yet retired will receive 90 per cent of the pension they were expecting, up to a cap.
Members already receiving their pensions will continue to receive 100 per cent of their benefits but may receive lower annual increases. The pension that a surviving spouse could inherit may also be smaller.
The Carillion pension scheme will be one of the largest the PPF has had to take over. In 2017, the company estimated its pension deficit at £587m but on Monday, Carillion’s pension trustees estimated the scheme’s “PPF deficit” at up to £900m.
The Carillion liquidation will play into Brexit. Remember how the UK is going to need a lot of new facilities near ports to handle all of the customs checks? This is hardly a good time to lose capacity in the construction industry.
Last but not least, Carillion’s massive failure is an indictment of the UK’s so-called “public finance initiative,” which in the US, we call “public/private partnerships”. It is an excuse for looting. The claim was that private businesses could build and run public infrastructure more cheaply than government bodies could. Never mind that in the US, the government has been the only body able to design and execute major projects like the electrification of Tennessee Valley or Hoover Dam. Even for smaller initiatives, the premise has never made sense. Why borrow privately when the government has the lowest funding costs? Why should one assume the private sector is cheaper when it brings in numerous operators, which means additional contracting and coordination costs? And even if there are cost advantages, why should one assume the public will capture them, rather than the financiers, the executives, and the shareholders?
PFI deals were invented in 1992 by the Conservative government and then enthusiastically rolled out by the subsequent Labour government. The schemes usually involved large scale public buildings such as new schools and hospitals which were previously funded by the UK Treasury. Under PFI they were put out to tender with bids invited from developers who put up the investment to build new schools, hospitals or other schemes and then leased them back.
The schemes allowed ministers to harness big sums of private capital to invest in public projects, such as new schools and hospitals, without paying any money up front — and thus keeping the level of current public debt relatively low. Repayments are made over a long time scale, usually between 25 and 30 years but occasionally as long as 60 years, but often at an exorbitant rate of interest.
For the developers involved, the returns are generous and relatively safe, backed as they are by the UK taxpayer. But if the developer doesn’t want to hold on to the asset, there’s always the option of “flipping,” or selling on to some other investor, invariably one based in a tax haven, so not even UK corporation tax is paid on the profits. As the UK Independent reports, Carillion was one of four companies (the other three being Balfour Beatty, Interserve and Kier) that recently pocketed over £300 million flipping PFI schools and hospitals to the highest bidder.
In other words, many of Carillion’s PFI assets are already in the hands of foreign-domiciled investors, meaning that while the government will have to take over many of the services Carillion can no longer provide, it may still have to pay leasing costs to the foreign-owned firms that Carillion sold out to. Otherwise, those firms may sue the government for lost profits.
This is all happening as the true cost of PFI is becoming apparent. In April 2017, a bombshell report by the National Audit Office warned that the price tag for paying PFI firms would reach £8.6 billion in 2018 alone. In total, taxpayers owe a mind-watering £121.4 billion on public projects that are worth just £52.9 billion. And the compound interest continues to grow.
The Government’s dealings with Carillion is the perfect illustration of how the Conservatives are playing fast and loose with taxpayers money in pursuit of their ideological ambitions. This cavalier attitude was epitomised by Transport Secretary Chris Grayling, who blithely insisted that Carillion’s financial problems “were not an issue” following its successful tender for HS2 contracts last July, despite the company issuing a profit warning just a few days earlier and even though hedge funds were betting on Carillion’s failure as early as 2015.
How he is being proved wrong. Of course, it will not be Grayling, one of Theresa May’s closest allies, that suffers the consequences. Nor, I wager, will it be those involved at a senior level in Carillion, who will probably move on to pastures new, well-rewarded for their failure. Indeed, a few months before its difficulties became public, Carillion changed the wording of its pay policy to make it more difficult for investors to claw back bonuses paid to its executives in the event of financial difficulty.
Once again, it will likely be the public that pays the price, be it through the cost of bringing all the services back in-house, necessary though this is, or through a repeat of the expensive tendering processes that gave Carillion its government contracts in the first place. This is to say nothing of potential job and pension losses.
For what we know for sure about outsourcing is that when times are good and profits are to be had it’s shareholders that benefit, but when crisis hits and losses mount it’s the public that picks up the bill one way or another.
Like the bailout of the banking sector, it’s a model that privatises profits and socialises risk. It’s economics for the few, not the many, and it’s time to end it. We can start by bringing the affected public services back in-house on a permanent basis, and we can take it further by electing a Labour Government that will put a stop to the continued corporate sabotage of society.
Actually, Labour could go even further. While PFI has been a two-party affair, Corbyn has never had any truck with the Blairites who embraced it. Any financier with an operating brain cell should know that the 70 to 99 year leases that are common in PFI and public/private partnerships a very dodgy proposition. How many bonds have more than a 30 year maturity? There’s no sound reason to think that contracts that extend so long beyond other norms are either immutable or enforceable. Corbyn would be in a political position to demand that PFI deals be renegotiated and stare down the creditors. It would take some clever lawyering but one could likely come up with misrepresentations made by the deal organizers and other legal arguments for reopening the terms. And the beauty is that it would have the side effect of chilling, perhaps fatally, the market for these transactions, an outcome Labour would not mind either.
Mind you, I am not saying the odds of this happening are high. But if the shockwaves of the Carillion implosion become large enough, the seemingly impossible may start to look viable.