The collapse of Carillion is a sorrowful calamity for the countless innocent people and families caught up in it – the subcontracting firms who will never get paid, the former employees who won’t be able to pay their mortgages, and the users of public service contracts that will not be fulfilled such as the patients at the delayed, yet again, £335m new Royal Liverpool Hospital. The Government will, as usual, seek to blame greedy company bosses but governments of all colours have contributed to this disaster.
The flaw of the Public Finance Initiative (PFI)
This is an expensive route to achieving public facilities as they are financed by interest costs charged at higher rates than that at which the government can borrow. The ‘buy now pay later’ model may win short-term political votes but the proverbial ‘no such thing as a free lunch’ comes back to bite the taxpayer in future years.
The flawed approach to risk
Risk is a fact of life. London is a much respected centre of the international insurance market and we in the UK understand risk very well. Risk has to be managed by being properly avoided, transferred or mitigated. It cannot simply be ignored or managed improperly. When governments talk of risk being transferred to the private sector, it has responsibility to ensure the risks are understood and the person taking on the risk can withstand it. If I take out insurance with a ‘tin pot’ insurer, I have only myself to blame if they can’t pay up.
The company misread risk and entered into contracts unwisely as they built a huge organisation but the regulatory authorities did not oversee Carillion with sufficient care. After the banking crisis, one might wonder if basic and fundamental lessons of oversight have still not been learnt.
The flaw of too many eggs in one basket
Common sense dictates that we do not put all our work with one person if we can help it. Yet, successive governments put huge swathes of work with a few enormous companies. When they fail the fallout is spectacular.
The flawed approach to subcontractor payments
Much public sector work given to Carillion was then outsourced to subcontractors who in turn further outsourced it to sub-subcontractors etc. In essence, Carillion operated like a bank in taking money from the taxpayer and others for projects which it was meant to give out to subcontractors for work done – except it did not hand the money out when it should! It held on to it for its own benefit. The payment terms given subcontractors by Carillion (and other huge contractors) on public sector work could, in practice, be very poor (even though it is not meant to be under the contact). For non-public sector work, payment terms of 120 days are commonplace. Bullying to force such awful payment terms on subcontractors is not in the public interest, yet governments have been weak at addressing the problem. (Michael Fallon as Business minister in 2012 did threaten to name and shame the big contractors who refused to sign up to a voluntary code of practice to pay subcontractors on time http://www.theconstructionindex.co.uk/news/view/late-payers-to-be-named-and-shamed.) This means that when ‘a Carillion’ goes bust, the subcontractor not just loses his money for his current invoice but for three further months of work. Few firms will survive such a catastrophic loss.
The flawed approach to pensions
The requirement for pension funds to hold so many of their investments in gilts provides a poor return to the pension funds at the benefit of the taxpayer who is given a cheap source of financing. The irony is that in the name of de-risking pension funds, commercial returns are denied to pension funds and so risk to them of not meeting their obligations increases.
Our governments must share responsibility
The former bosses of Carillion are being grilled by MPs this week – and rightly so, but the buck does not just stop in the board room – the buck also stops at the cabinet table (of many administrations) where current heads should also be rolling. It is disingenuous for the editor of the London Evening News (George Osborne, former Chancellor) to blame the failure of Carillion on the civil servants. In opposition he criticised PFIs yet in office he was an advocate of them.
Who is brave enough to speak truth unto power?
The large federations (CBI, IoD etc) do not seem to be holding governments to account for the PFI shambles adequately. Perhaps that is because many of their members are the big boys who have benefited from them. The one federation which is an exception to this is the Federation of Small Businesses (FSB) whose members are the countless small businesses that take the real hit when the big boys fall over. Mike Cherry, their national chairman understands the issues well.
Mr Cherrry says “When the dust settles on this sorry saga, there is also a wider lesson to learn about the concentration of public contracts in the hands of a small number of very big businesses. Public procurement must be much more small-business friendly, in which it is easier for small firms to navigate the system and the Government should prioritise meeting its target of at least one third of taxpayer-funded contracts going to smaller firms.” See http://www.fsb.org.uk/media-centre/press-releases/carillion-s-small-suppliers-must-be-paid.
If governments spent more time listening to the FSB, I suspect they would hear a lot more common sense. It is sadly laziness on the part of governments that they mainly talk to the few big players in any subject area and ignore the vast numbers of smaller businesses who account for about half of the economy!
Carillion may may have gone bust but the Carillion problem sadly lives on.
This is a very important subject and comments (either agreeing or disagreeing) on this blog are very welcome!
David Eaton