Sean O'Grady: Southern Cross won't be the last private 'partner' to hit the rocks

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The Independent Online

As with the banks, so with care homes: some private enterprises are just too important to fail. Gordon Brown had to promise bank depositors their money was safe; now David Cameron has to make a similar promise to the residents of Southern Cross. Profits to shareholders in the good times; losses sent to the taxpayer in bad. The parallels are powerful.

There could be many more Southern Crosses. The firm's troubles are a timely reminder, as the Coalition Government plans to push private finance initiatives and outsourcing deeper and deeper into core public services – schools, housing and heath. Reforms to the NHS will shift the private sector's frontier ever closer to clinical care. Southern Cross highlights what happens if things go wrong.

We've already had one spectacular example of private failure generating huge social costs, apart from the banking mess. The failure of Railtrack in 2001 ought never be forgotten. On track for a loss of £3.8bn, and with an abysmal safety record, it had to be taken back into state ownership by a reluctant Labour government in 2001. The embarrassment of every train in the country grinding to a halt because of bungling by private managers was too awful to contemplate.

So, we should ask ourselves, what might happen if Ferrovial of Spain, which owns BAA, ran into money problems? Should we just leave the planes grounded until a buyer for Heathrow could be found? Or if Capita, Serco, G4S or one of the other titans of outsourcing went down? Would the hospitals be left dirty, the prisoners left stranded in their cells, the courts shut? What about the water utilities? Electricity supply? The power generators? The National Grid? The television transmitters? The list is long. Financial accidents in the private sector can never be ruled out.

Of course many of these firms are highly profitable – which usually means the taxpayer has had a raw deal – and many in activities that are inherently stable and profitable, at least for now.

But some socially vital activities are inherently uneconomic, can only exist with a public subsidy, and then only marginally. Banking is a novel example; social care, rail and bus transport are others. As with the banks, private sector providers of public services need to have "living wills" – special procedures to wind them down in case of failure, and checks on their financial health. And the risk/ reward deal between the taxpayer and the companies needs to be, in the fashionable word of the minute, somewhat "rebalanced".