Carillion is This Week’s Watershed: But When Will Anything Change?

The collapse of Carillion, the construction and services company, is a true catastrophe. The company directly employed around 20,000 workers, all of whose jobs are now under threat, while even more jobs are at risk at the estimated 30,000 small firms that are owed money.

But this is not the only disaster to befall the country in recent months. Last year, 71 people died when Grenfell Tower, a public housing block in west London, went up in flames. Earlier this year a consortium of Virgin Group and Stagecoach was able to walk away from the Virgin Trains East Coast rail franchise leaving the Treasury with a potential shortfall of up to £3.1 billion. Going a bit further back in time, G4S famously failed to deliver the security detail it promised for the 2012 Olympics.

The common theme should not be hard to spot: the government has outsourced key public sector activities (building or running schools, hospitals, prisons, train services, and social housing) to the private sector.

And in one of those almost-too-true-to-believe coincidences, the National Audit Office published a major study into the Public Finance Initiative (PFI) tool to deliver public-private partnerships of the type that Carillion has heavily engaged in. The government’s financial watchdog said that Britain had incurred billions of pounds in extra costs for no clear benefit by using PFI to build much of its infrastructure. Total charges until the 2040s amount to £199 billion.

Unsurprisingly Labour leader Jeremy Corbyn, a longstanding critics of PFI and its variants, seized on the disaster calling it a “watershed moment”. But will it? The weaknesses of the government outsourcing model have been made plain over the last three decades, although most of the failures are not as tragic as the four listed above.

government has to outsource more of the risk

When it was a Labour government piggybacking on the Tories’ PFI concept then the right-wing media were happy to highlight the insanity of the Ministry of Defence paying £22 for light bulbs valued at just 65p, or hospitals being forced to shell out £242 just to change a padlock.

What's good for the goose is good for the gander and it is no surprise that the liberal media are keen to pin the failures of Carillion as Grenfell and VTEC on Theresa May’s weakened Conservative government.

But away from the political argy-bargy is anything likely to change? The obstacle to change is that outsourcing is beneficial to governments. It allows them to move major infrastructure projects such as the now-troubled Royal Liverpool University Hospital off the public sector balance sheet. Outsourcing services enables public services to run without the need for government employees and probably for less cost (at least initially).

Voters have also acquiesced, as the lower upfront costs have enabled governments to offer tax cuts that would be hard to deliver if the full costs had been accounted for. But if people really do want high-quality public services and infrastrucrure, they will have to pay for it.

In the meantime, private sector provision of public services is not going to go away even if JC waves his magic wand.

Advocates of outsourcing and PFI (and its David Cameron PF2 offspring) make valid points. Some nationalised public services were badly run before privatisation: when the Post Office ran the phone lines there were long waiting lists and a shortage of lines forced many people to accept party lines. The Government itself does not have a great record of running major projects: the abandoned NHS IT system has cost £10bn.

But if the private sector is to remain involved, one basic thing has to change: the government has to outsource more of the risk as well as rewards to private sector. They can — and need to make a profit — but there must be no rewards for failure as almost happened with Carillion.

Theresa May has revealed how far the government is from understanding the problem

But stopping future bonuses is not enough; there must be some facility to claw back past bonuses in the case of mismanagement as is planned to happen for bailed-out banks.

There should be a right for ministers to recall contracted out services without compensation in the case of poor quality or performance that is not in the public interest. Outsourcing firms should not be able to cut the wages and conditions of staff without paying a higher fee to the government for the contract. The fact that the Government will always have to step in is a huge benefit to the private sector and should be costed.

Those are just a few ideas. Later this week the Smith Institute will publish a report calling for a review of the whole outsourcing programme. While this review takes place, there must be a moratorium on any new outsourcing deals.

The recent string of failures offers an ideal opportunity to the government to call a halt to the outsourcing gravy train.

Sadly, it is unlikely that they will. Theresa May has revealed how far the government is from understanding the problem with outsourcing. She has told MPs that the government was merely “a customer” of Carillion and has set out a statement that does little more than repeat her pledges of 2017 when she became prime minister. Until the government remembers that it alone has the power and responsibility to act as a steward for our public services, the next failure is surely not far down the track.

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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