Why Carillion may be the final death knell for an entire economic model


January 22, 2018 by Paul Goldsmith

You know someone’s lost the argument by the arguments they use. In this political age it is either when they start censoring your views instead of properly debating, OR it’s when Tories invoke what the last Labour Government did in their own defence. The debate over the collapse of Carillion is the death throes of an economic model for providing public services. The opposition hold all the cards. I know that because all the Tories can do is point at Tony Blair and Gordon Brown. But Blair and Brown believed in the economic model of outsourcing and PFI. Everybody with an ounce of political understanding and knowledge know that Labour are under new management now. A management with a long record of voting against and opposing the economic model. The collapse of Carillion has exposed this model, badly.

That’s because Carillion didn’t fail despite the PFI/outsourcing model, but because of it. The idea was that the Government outsourced the provision of ‘non-core’ services (e.g. catering at a hospital, cleaning at a school) to the private sector. It sent out a tender (here is the job we need doing, now bid for it) and almost without exception awarded the contract to the lowest bidder. This was supposed to outsource the risks of providing the service and increase efficiency as the service provider would be more ‘specialist’ than the public sector and thus efficient so be able to do it cheaper. Hence more could be achieved with less taxpayers’ money spent.

Hopefully you can already see how this can go wrong. The contract was awarded to the lowest bidder because of it wasn’t the lowest bidder would point out that it wasn’t and the government employee who awarded it would be attacked. But the lowest bidder might not be able to actually provide the service quality required at the price they were charging. So they would pay as little as possible to their workers, use zero-hour contracts, cheap materials, whatever they could to try and make even a low profit margin. All very well under normal circumstances, and Carillion took contracts at these low margins and survived.

The problem is what happens if costs rise, as they have done after Brexit for instance with imported raw material prices rising as the pound weakens. What happens if workers can’t be fond to work at those tiny wages, so wages have to rise a bit to attract those workers? The profit margins disappear and the firm starts losing money. It is also worth remembering that there is a different between revenue (money in), profit (income after costs) and cash flow. A firm can be profitable on paper but run out of cashflow. This happens because many firms are paid in arrears (at the end of a contract or a month) but they have to pay their costs earlier. This is why Carillion had only £29m in the Bank despite billions in revenue.

Let’s point out something else. Carillion’s website trumpeted all the right things you need to trumpet to win government contracts. It went on about it’s social responsibility, it had a proper ‘modern slavery’ policy (employees were given compulsory training on this) and had plenty about environmental sustainability. But it still paid its bosses huge bonuses and recently removed from its pay policies the ability to claw back those bonuses in the event of financial failure. Most importantly, Carillion stopped making a profit. This means people providing key public services would be going unpaid and people needing key public services would be going unserved if the government didn’t step in.

The stepping in will hopefully not be a full bailout. That would mean that the profits really were privatised and the risks really worth socialised. Carillion is not too big or important to the economy to fail, unlike banks. Instead, shareholders and, sadly, creditors are going to have to foot the bill. Creditors will include small local firms who supply goods and services to Carillion, who might also go to the wall if they don’t get paid for them, which they may not be, as that again will be socialising the risks.

Which comes back to the point that has been made all their lives by Labour leaders Jeremy Corbyn and John McDonnell. The whole ‘public private partnership’ initiative, which involves contracting out or outsourcing key public services and allowed firms to bit for massive projects under the Private Finance Initiative (PFI) doesn’t in fact raise efficiency, but instead risks public services not being provided. Carillion is possibly going to be the final straw for support for the economic model that brought this in. This economic model sounds good in theory, but as McDonnell especially would point out, the whole point of introducing the profit motive to any service is that those profits would be put before anything else, and in this case they are out before the provision of public services. The Conservatives have lost the argument on this, as have Tony Blair and Gordon Brown, who were passionate advocates of that model. Which is why the desperate attempts by Tories to answer the current Labour leadership by pointing out that Blair/Brown supported it is really rather pathetic. Corbyn voted against the Labour Government hundreds of times. You just can’t pin this on him.

Instead the focus should turn on the concept that Corbyn McDonnell have as a point of faith, which is that the public sector will always do a better job. They are likely to get a chance to put that theory into practice soon.

The questions that should be asked about this are around whether ideological adherence to ‘public sector is always best’ is flawed too. With no profit motive at all, will employees really always be motivated to provide the best service? With no profit motive at all, will there be an incentive to innovate? With an unlimited supply of money for pay, will the unions play ball with wage claims or working practice changes? The experience of the 70s says ‘No’, but this isn’t the 70s and we have tried the alternative model now, and it seems not to have worked.

We are getting closer and closer to the time when Corbyn, McDonnell, Paul Mason, Momentum and all their ideological bedfellows are going to have a chance to put their plan into action. I know this because the arguments against are getting worse and more desperate.

5 thoughts on “Why Carillion may be the final death knell for an entire economic model

  1. Kjell Bengtsson says:

    It should be pointed out carillon’s troubles are entirely within their construction activities. Both commercial and public sector contracts. I don’t think Corbyn et al would suggest the public sector should run construction companies. Pros and cons with outsourcing shouldn’t really be based on Carillon’s demise


  2. Jenny Manson says:

    I so agree as you may guess!

    How are you all?

    And love to you all ..


    Sent from my iPhone


  3. danielgoldsmith says:

    I agree with this blog and am against outsourcing of public services.

    It is very similar to the situation when G4S could not provide the security for the Olympics which I blogged about at https://danielgoldsmith.wordpress.com/

    I summarised “And if things go wrong the Private Sector will always have the government to pick up the pieces. In extremis a Private Sector company can go into receivership, not really an option for a National Government.”


  4. Mr Jon says:

    I’m not sure that the falling pound is entirely to blame here. It was a business model – based on not paying creditors – that finally came home to roost. A friend of mine worked in accounts payable at Carillon ten years ago and he said he was given about a quarter to a third of the necessary funds to pay creditors each month. If one of these unfortunate small traders phoned up to see what was going on, he told them (strictly off the record, of course) that he didn’t have enough money to pay them and the only way they would see they would see their money was if they threatened legal action. A company can only carry on like this for so long before their debts become unsustainable.
    I suppose most of us have examples of outsourced contracts providing appalling service. In my locality, the garden waste bin emptying was given to a private contractor and now we’re lucky if we see the bin emptied at all, and never on the scheduled day.
    When it comes to this absurd outsourcing nonsense, we’re all Corbynites now. Eeeek!


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