Yves here. While this article focuses on the Carillion and the broader failure of privatization and other Thatcherite fads, it is germane to American readers too. It describes how the demonization of the public sector and the insistence that private operators would do better was evidence free…and no one has been keeping tabs to see if the claims of improved performance came to fruition. There are plenty of anecdotes I can supply that would suggest not.
By Trevor Smith, co-founder of Democratic Audit and a Liberal Democrat life peer. Originally published at openDemocracy
Carillion’s collapse – and other failures such as privatised forensics firm Randox – show the limits of the managerial revolution. But who’ll take on the robber barons?
The Carillion bankruptcy is but the most spectacular illustration to date of the malfunctioning of the UK economy. Coming hard on the heels of the equally high profile failure of BHS, it has raised a fundamental questioning as to whether it is yet another one-off incident or symptomatic of a much deeper malaise. The public debate that has ensued has brought the ideas of Karl Marx back into fashion: does late stage monopoly capitalism contain within itself the seeds of its own destruction? Answers to that age-old conundrum are best left to the rhetoricians, but the latest corporate collapse reveals that more immediate and widespread practical reforms are now called for.
To state the obvious, Carillion occurred against an already very bad economic background. The gap between rich and poor continues to widen. Top executive remuneration packages now show that the difference between them and average pay packets amounts to a ratio of 120:1 *High Pay Centre, Feb 2018), while the gender pay divide remains at 20% according to ACAS. Other glaring inequalities include both ethnic minority life chances, widespread regional disparities and especially the North/South divide, and the stasis caused by social immobility. In addition, home ownership has been plunging and more people are compelled to rent, usually with short tenure and often in sub-standard accommodation.
A Short History of the ‘End of History’
Mid-twentieth century Britain appeared to point to a very different future. During the first half of the 1950s the Keynesian consensus, that went by the term “Butskellism”, seemed set fair to become a long-lasting paradigmatic formula for operating the economy. Looking back, it could have been seen as portending the coming of Fukeyama’s “the end of history”, though the “mixed economy” turned out to be a short-lived trailer for a story that wouldn’t last. It was replaced by Gaullist-style “indicative planning” under the Britain of the two Harolds (Macmillan and Wilson). These sequential consensuses gave way to the wholesale privatisation of the nationalised public utilities. Privatisation characterised Margaret Thatcher’s government but the actuality did not live up to the free market slogans she flauntingly employed in promoting it. Privatisation did not usher in extensive price competition – it merely created a new series of cartels that necessitated the recruitment of a vast number of allegedly “independent” agencies in an attempt to regulate their activities. Thatcherism’s main accomplishment was to firmly embed the notion that “private” was good and “public” was bad – this was to become the new consensus.
A major off-shoot of privatisation was the subsequent invention of the Public/Private Partnership (PFI). It was John Major’s innovation when he was prime minister and was first employed to enable the construction of the Heathrow Express from Paddington mainline station to London airport. The device was seized upon by the incoming government of Tony Blair and aggressively pursued by Gordon Brown as chancellor and John Prescott as deputy prime minister. PFIs became an extensive new industry providing the wherewithal for building rafts of schools, hospitals, prisons and other such infrastructural developments.
PFIs turned out to be too good to be true. Whereas the Heathrow Express generated its own cash flow that would both help repay its initial capital costs and cover running expenditures, the extensive New Labour programme would have to be repaid by the taxpayer, usually over a long period. Customarily, these PFIs were bid for by consortia of builders, financiers and others, secretly drawn up with little or no public scrutiny. The big legal and accountancy firms acted either for these consortia or for the government on each PFI which created a swirling “revolving door” rodeo with little or no regard for the conflicts of interest implicit and endemic in such commercial carnivals. Meanwhile, it quickly transpired that the senior civil servants were not at all well-equipped to oversee these PFIs or represent the public interest.
It came as no surprise (and, in fact, many commentators like Professor Alyson Pollack pointed it out at the time) that PFIs turned out to be grossly over-expensive and would become an immediate charge on the public purse when they failed- as, inevitably, some did. It also meant that the participants in the PFI consortia could not easily be held contractually responsible over the lengthy time spans of twenty-five to thirty years. Furthermore, PFIs were frequently sold on to others and a whole new secondary market developed to facilitate such deals. These schemes became a veritable financial quagmire, making evaluation and assessment extremely difficult.
Privatising the Night-Watchman
One very spectacular failure is to be seen in the private provision of forensic science services. The government-run Forensic Science Service examined most of the evidence submitted by the police and others until it was abolished in 2012. This activity, crucial to pursuing criminal prosecutions and inquests, was in future to be contracted out solely to private enterprises. This has resulted in long delays, extensive losses, the mixing- up of vital evidence and wrongful prosecutions. One firm, Randox Testing Services, was found to be extensively at fault while another, KFS, has had to be bailed out, at a cost of millions of pounds, by the police to prevent its liquidation and jeopardise “thousands of cases including rape and murder” according to The Times (31.1.18). Shortcomings such as these pose a major threat to the workings of the criminal justice system which, itself, is racked with other problems.
Worse still was to come with more extensive recourses to outsourcing both on the part of PFIs and more generally by central and local government. One difficulty was that outsourcing itself spawned a small group of cartel-like firms to cater for the new demand. It was all part-and-parcel of the “private-good/public-bad” consensus that dominated the practice of recent governments of all parties – Tory, Labour and Coalition. G4S, Serco, Capita and Carillion together held a firm, oligopolistic grip over the outsourcing of erstwhile government activities. Even at the height of the Victorian “Night-Watchman State”, it was always recognised that the defence of the Realm, the conduct of diplomacy and foreign affairs and the maintenance of internal home security would remain the monopoly of Government. Now, in all these three broad policy areas privatisation has made major inroads with a corresponding loss of direct responsibility by the Cabinet overall and ministers individually – the very conventions that were taken axiomatically as the very hallmarks of our parliamentary democracy. This widespread ministerial abnegation has in turn contributed indirectly to the rise of the populist politics that is now prevalent.
The present legal framework of commerce owes its origins to the Victorian age which codified the law in a way more comprehensive than anything tried since. It has been tinkered with as necessary in the intervening century and a half but no overall transformation has been undertaken.
So Much for the Managerial Revolution – The Return of the Robber Barons
Under the company law that has prevailed for so long, the shareholders in principle own an incorporated enterprise and nominally control its board of directors. This somewhat tenuous system of governance was given a longer lease of life by being mitigated later by the rise of the “Managerial Revolution” which brought about the divorce of ownership from control. This, in turn, it was argued had given way to the mutation of a more benign type of business executive. The modern businessman was now regarded as having wider concerns beyond that of mere profit maximisation, including the needs of the consumer, staff, suppliers and the wider society, including the environment. This assertion, propagated by Berle & Means in 1932, was later taken up and eagerly embraced by the leading Labour revisionist theorist, Anthony Crosland. In his influential book The Future of Socialism (1964) he asserted there was no further need for the nationalisation of major industries as the public good and the general consumer was now better served by the new cadre of company executive. However attractive this may have appeared at the time of his book, it, too, did not endure with the passage of time – the “Robber Barons” are now back with a vengeance.
The world-wide 2008 financial crisis specifically engulfed the banks and the financial sector more generally. For the most part, governments bailed them out with vows of “never again”. Numerous enquiries followed proposals for reform implemented to a greater or lesser extent aimed at securing this desired outcome. While many have questioned their practical efficacy, the problems shifted but did not go away. This is because they are clearly systemic and call for much wider and more far-reaching approaches.
Despite some increase in shareholder activity since 2008, particularly over the remuneration packages senior corporation executives award themselves, these are now showing evidence of diminishing. The position of shareholders has also been further weakened by the recourse to Electronically Traded Funds (ETFs) whereby large tranches of shares are traded in nanoseconds having been triggered algorithmically. ETF shareholders can have no role to play in corporate governance. This new situation has not been adequately addressed by any of the numerous corporate reviews of the past two decades.
Of Accountants, Regulators and Mandarins…
Three inter-related problems have emerged. The first arose from the conduct of the accountancy profession. The FTSE 100 companies- and many others employ the services of the “Big Four” firms – PWC, Deloitte, KPMG and E&Y. These comprise yet another cartel with all the attendant problems thrown up by such restricted market conditions which have led to unacceptable practices. For example, no FTSE 100 company has ever had its annual accounts qualified, a fact which at long last seems about to be investigated. There has been a steady growth, particularly overseas in the USA and recently in South Africa, of massive fines being levied on the Big Four for various acts of malfeasance. These dominant world-wide accountancy firms are not as pure as they pretend and their poor performance both sullies their reputations and, much more importantly, severely damages the operations of the capitalist system.
Exacerbating and compounding these deficiencies has been the emergence of the second problem – the very poor workings of the so-called regulatory agencies. Almost none of them has escaped criticism. The operations of the various “Ofs” – Ofsted, OfCom, OfWat, OfGem, etc, as well as the Quality Care and Police Complaints Commissions – and all the rest – have been seen to fall short, often very far short, of acceptable standards.
And thirdly, there’s the senior civil service, comprising the non-political arm of the Executive, which no longer attracts the prestige it once enjoyed. Partly this is because it has been down-sized, or “hollowed out”, since the Thatcher era. Consequently, “departmental memories, once an indispensable resource assisting the mandarins of Whitehall in their duties, have all but disappeared. Endeavouring to compensate for this memory loss, leads to further reliance on outsourcing the task of contriving remedies to management consultants; but their solutions, by the very nature of their authorship, are invariably short-term and non-contextual in character and thereby usually much inferior.
Accountants, regulators and mandarins now perform a very sub-optimal auditing function in the scrutiny of public policies and their implementation. And that all-important function, especially for a regime that purports to be a democracy, is yet further damaged by the practice of relying on recruitment by the “revolving door” process. Accountants, regulators, management consultants, civil servants, ex-MPs and the legions of insouciant, well-paid, technocratic hired-hands, have ceased to be the quite distinct entities some of them once were. They have all but dissolved into what aptly may be termed a new nomenklatura that would feel at home in the former USSR. The seal of omerta – of not shopping one another – is as firmly observed by this grouping of fixers as it is among the Neapolitan mafia.
The major problem with privatisation, outsourcing and their various consequences is that there is no inventory of successes and, more importantly, of failures. There were relatively few state-owned industries, covering discrete areas, so their performance was relatively easy to gauge. Indeed, William A Robson was able to encompass them definitively within the covers of one book, Nationalised Industry & Public Ownership (1960). By contrast, the extensiveness of privatisation and, even more, the recourse to outsourcing, makes these twin manifestations even much more difficult to evaluate. This is the reason why the near-uncritical acceptance of the “private=good/public=bad” consensus has held sway for so long and is only now being questioned following Carillion and similar large-scale disasters. The Economic & Social Research Council (ESRC) really should have recognised before now this gaping lacuna and commissioned extensive sample studies of the phenomenon; instead, it allowed itself to become a mere adjunct to the ever-burgeoning nomenklatura. Doubtless, recent calamities will furnish material for future academic research but the findings will come too late to inform what now needs to be swiftly undertaken.
Another grievous issue concerns the occupational pensions industry. Firms’ pension schemes have been raided to produce easily accessible cash flows. While others, very noticeably in the case of BHS and Carillion, have been denied the finances needed to remain viable. Added to which, excessive over-charging by asset managers who run the investing of funds, has greatly reduced their overall worth and correspondingly lowered the amounts paid out to pensioners. This story has much further to run and the deficits being revealed are of such magnitude that they will undoubtedly force government, the regulatory agencies and parliament to take specific action to deal with these gross failings.
Can Capitalism Clean Up Its Act?
But there is a growing awareness that something much more radical needs to be done. While the re-nationalisation of rail transport may be seen as acceptable, widespread public ownership to include other sectors cannot provide the answer. Theresa May proclaimed that many current business practices are beyond the pale when she assumed the office of prime minister and has since re-iterated her worries. But, so far, all she has come up with are warnings of taking remedial steps at some distant date. But the enormity and ever-increasing frequency of the faults being revealed in the operations of industry and commerce in Britain and beyond demands immediate and urgent action. It is quite amazing that virtually no criminal prosecutions have been mounted against the perpetrators of major malpractice, which is in distinct contrast to what has been happening in the US. Like Britain, the American authorities levy big fines on the bad guys, or come to agreed compensation payments with them, but they also imprison many – why the difference, it has to be asked?
What will trigger radical reform? It may be that the wave of disasters will have to climb even higher yet to create the necessary political will before government(s) feel forced to take action. Similarly, will the main representative bodies of business and the professions, both individually and severally, feel obliged to take action to improve standards of members’ behaviour? At the recent Davos conference, it was reported that there was a general feeling among corporate participants that ethical behaviour needed much improvement; though don’t bet on anything happening very quickly. Another, slightly more tangible cause for a measure of optimism is that a handful of large enterprises are beginning to announce measures aimed at improving their behaviour. We can but hope but time is not on anyone’s side and by default Karl Marx may be allowed to have the last word.