Robber Barons: The Public Always Pays

by Michael Patrick O'Leary

This article appeared in Ceylon Today on March 8 2018

http://www.ceylontoday.lk/news-search/padraig%20colman/print-more/145

 

The Wolverhampton-based firm Carillion was a big player in providing services that had once been provided by the public sector. In 2016, £1.7bn, a third of Carillion’s total revenue, came from public sector contracts. In the health service it was responsible for maintaining buildings, cleaning, providing meals for patients as well as the construction of new hospitals. It maintained 50,000 homes for military personnel and 50 prisons, provided meals for 218 schools, and was in charge of the £400 million Battersea power station development.

Liquidation

Carillion went into compulsory liquidation on 15 January 2018. It had been the second largest construction company in the UK and had 43,000 employees. Temporary CEO, Keith Cochrane made some lame excuses about the company’s collapse and saw Carillion, rather than the taxpayer, as the victim. He said that they had accepted too many projects which had turned out unprofitable and for which the amount paid was insufficient for the cost of work done “we were building a Rolls Royce but only getting paid to build a Mini”. The House of Commons business and work and pensions committees found the Carillion personnel that came before them, evasive and delusional and described Cochrane as having only a ‘vague’ knowledge of finance. In January 2018, The Times commented that the company’s problems had been known for around four years, with too many poorly managed contracts, delays to works, and monies withheld by clients.

Dominos

The liquidation announcement had an immediate impact on 30,000 subcontractors and suppliers, Carillion employees and pensioners, plus shareholders, lenders, joint venture partners and customers in the UK and other countries. Five UK banks incurred heavy losses on loans to Carillion. What Private Eye refers to as the ‘bean counters’ have once again disgraced themselves. Chairman of the House of Commons pensions select committee, Frank Field, described them as “feasting on what was soon to become a carcass” after collecting fees of £72m for Carillion work during the years leading up to its collapse. Carillion’s auditor KPMG will have its role examined by the Financial Reporting Council. Transport Secretary Chris Grayling faced calls to resign, having awarded a major HS2 (high speed project) rail contract to Carillion in July 2017, when many people (Grayling should have been one of them) knew the company was in deep do-do. Their profit warning should have given him a clue. What kind of cretin gives of £1.4 billion to a company days AFTER it has issued a profit warning? Carillion shares slumped by 70% in a month as it was forced into the profit warning following an £845m write-down.

Ponzi Overreach

Cochrane may have had a point but it did not excuse the company. It would have been more accurate to describe Carillion’s modus operandi as a Ponzi scheme. All firms involved in public-private partnerships put in low tenders to get the contract. They are able to work on thin margins because they get big money up front from the state and failure is rewarded by the taxpayer. They begin work on construction without paying sub-contractors for another 120 days. They use the upfront money to pay debts within the business, which means they have to win new contracts just to keep going. Overreaching itself to take on lucrative contracts, Carillion failed to deliver and ran up debts of nearly £1.5bn and a pension fund shortfall of almost £600m.

Conclusion

A National Audit Office (NAO) report into wider PFIs shows that the taxpayer will be handing over £199bn to private firms well into the 2040s.The NAO concluded that that there was little published evidence of the benefits of private finance deals. The NAO found that a group of schools could cost the taxpayer 40% more when funded through PFI rather than government borrowing, with further research suggesting hospitals could cost as much as 70% more.

The PFI deals struck with companies like Carillion mean that private companies whose main obligation is to shareholders actually own the assets which were once public and rent them back to the taxpayer. Carillion’ mismanagement means that huge areas of the public sector are threatened with cuts or complete closure.