Both the left and the right have their ideological blinkers on when it comes to the lessons of Carillion's demise

Whatever your political hue, one clear lesson from Carillion’s demise is that much more public transparency over contractors’ books is needed

Ben Chu
Tuesday 16 January 2018 15:15
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Carillion announced its liquidation on Monday after failing to secure financial rescue from the Government
Carillion announced its liquidation on Monday after failing to secure financial rescue from the Government

Psychologists have identified a phenomenon they call “confirmation bias”. This is the tendency for people to interpret new information in a way that simply confirms their pre-existing beliefs. We’ve seen quite a lot of confirmation bias in the wake of Carillion’s belly flop into liquidation this week.

For some on the left this is all confirmation that privatisation of the provision of public services has been a disaster. It shows that corporate fat cats can walk away with profits while ordinary workers and small firms suffer, public services are put in jeopardy and taxpayers foot the bill.

For some on the right, on the other hand, it confirms that privatisation is working broadly as it should. A badly-run private company failed. Its contracts will now be re-distributed to other, more competent, private firms. As for profiteering at public expense, they see the precise opposite. If anything, civil servants have got too good at putting the squeeze on private contractors, forcing them into bidding wars which screw down their margins to almost nothing. Tough for the private companies, certainly, but it means better value for money for taxpayers.

What is the Carillion fiasco? Economics Editor Ben Chu explains

Both sides should take a step back and remove the blinkers. It’s certainly welcome that Carillion’s shareholders and its lenders have not, despite intense corporate lobbying, been bailed out by the Government in the way banks were rescued in 2008. The shareholders will lose their shirts. And the banks must write-down their loans. That is how it ought to be. Leftist nationalisers ought to recognise that this represents progress.

But champions of privatisation should also face up to some unpalatable realities laid bare by this scandal. The profit margins of some contractors may be small but Carillion still managed to pay regular and substantial dividends to its shareholders, even when it was clear the company was financially overstretched.

And there have been high personal rewards for failed management. If these services had been managed “in-house”, no civil servant would have been paid the £1.5m a year that Richard Howson, the former chief executive of Carillion, commanded. The head of the NHS, Simon Stevens, by comparison, earns £190,000 a year. Are we really to believe that more modestly paid civil servants would have been vastly less competent than Howson and his team at Carillion?

As for the idea that civil servants have morphed into hard-nosed contracting experts, that rather stretches credulity given the miserable history of Private Finance Initiative deals. Moreover, this adversarial image isn’t a particularly useful way to conceptualise the relationship between private contractors and the state when it comes to the delivery of public services.

This relationship is inherently different from a normal commercial transaction between two parties. It has to be a much closer (and ongoing) relationship because society cannot cope with even a brief interruption of supply of the services. Ministers can’t allow a prison to be unguarded, a hospital to go uncleaned, a school to be without catering, a care home to be shut down.

Commissioning a contractor to deliver a public service extremely cheaply is a false economy if that contractor runs the risk of financial collapse and the state will have to fork out to keep the show on the road, as it is now with Carillion’s contracts.

This reality was also demonstrated last year when the Transport Secretary allowed Virgin and Stagecoach to exit their East Coast rail franchise early, costing the state £2bn in foregone payments, after the operators discovered they were running at a loss. It was not wise for the Transport Department to have accepted such a high bid from the consortium in 2015, however good it looked at the time.

One clear lesson from Carillion’s demise is that much more public transparency over contractors’ books is needed, something the National Audit Office urged back in 2013. The Carillion fiasco demonstrates that it’s impossible to rely on the expertise, or perhaps integrity, of auditing firms to flag looming problems.

In the end, the broader privatisation versus nationalisation debate might be an unhelpful framing of the issue. Even if many more services are managed in-house, as Labour wants, there will still be contracting out. Even Jeremy Corbyn is not demanding the nationalisation of construction firms.

When it comes to the delivery of vital public services, there is an unavoidable symbiosis between the state sector and the private sector. There is no purity to be found. The key question, which is too little addressed, is the appropriate balance of authority in that relationship and the institutional checks on that authority to ensure the broad public interest is always paramount.

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