Many Lessons from the Carrillion Collapse

Paul Sweeney23/01/2018

Many Lessons from the Carrillion Collapse.

 

The collapse of the huge construction and outsourcing company, Carrillion, in Britain, has many lessons for policymakers in Europe. Carrillion was a child of the financialisation of the economy, of privatisation, of outsourcing, of too many sub-contractors, of additional costs, of precarious work, of insecurity for entrepreneurs, who had built up sound companies by hard work and hard working craft workers and labourers, all of whom lost their jobs, directly but many more indirectly.

 

Carrillion, the U.K.’s second largest construction company employed 43,000 people directly globally (20,000 were in the UK). It built schools, hospitals, roads, High Speed Rail, military bases and prisons and maintains them as well. Its collapse is delaying the building of two major UK hospitals costing around Stg350m each which were being built under the UK’s financial engineering method called Private Finance Initiative, (PFI), instead of the cheaper and more efficient direct build.

 

Carrillion was building five Irish schools, in Carlow, Kells, Wexford, and 2 in Bray and the Carlow Institute of Further Education under the Irish financial engineering method called Public Private Partnerships or PPPs.

What are PFI /PPPs?

Under PFI or PPP, a private company raises finance to build and operate assets for 25 to 30 years. The risk is supposedly transferred to the private sector. The private company is incentivised to keep construction within budget, to keep running and maintenance costs down too.  The efficiency gains including profits are supposed to be much bigger than what it would cost the state to build and operate. This is in spite of the fact that the state borrowing much cheaper than the private sector.

 

The biggest driver of PPPs and other privatisation / financialisation is the EU’s Stability and Growth Pact (SGP) of the EU which forces some governments to push projects “off its balance sheet.” Borrowing by the state for investment is not allowed no matter how high the return and so the private sector has the asset/liability on its balance sheet. Politicians with short-term view can get the private sector to build now but higher costs are imposed over 25 years.

 

This is now a big industry with thousand of bankers, lawyers accountants and other “value-subtractors” un-gainfully employed in devising ways to force public investment into the private sector. Thus governments which do not meet the SGP rules must go to the private sector for public investment. SGP does not allow governments to borrow for public investment, no matter how big the return is. It forces the state into financialisation schemes like PPPs.

 

Proven Higher Cost of PFIs/PPPs

The UK National Audit office has just written a damning report on the higher costs and unproven benefits of the U.K.’s Private Finance Initiative (PFI). This report was written before the collapse of Carrillion. The big idea driving the UK and Irish governments into PPPs and PFI was “public bad, private good.” My studies over many years showed this was simplistic and too often wrong, but the recent NAO report again shows it is wrong.

 

Direct public provision, managed properly is cheaper and much faster in delivery, without the complication of contested procurement contracts. The huge DIT campus and health centre at Grangegorman would probably have been finished years go if it had been directly funded. It was delayed by litigation over a contract and lack of private funding.

 

Britain’s Audit office found that the PFI has not reduced construction costs nor led to greater day-to-day efficiency. They found some improvement in maintenance standards but only some evidence of the transfer of risk to the private sector. Perhaps most damning of all, best illustrated by the Carrillion collapse, is that when things go wrong, they go badly wrong and any value for money is destroyed.

 

Contracts are usually given to the lowest bidder. This has the obvious advantage but can mean lower quality work and cutting corners. Some contractors are notorious for winning public contracts with low bids and then fighting every inch of every part of the contract with the client. EU procurement rules tend to focus too much on price, neglecting other factors like quality, rampant bogus self-employment and union recognition.

 

With a direct contract to build, without financialisation, the public sector client can more easily insist on better quality and decent contracts for subbies and workers. The main contractors knows the state will pay and it can then pay all sub contractors decently and end bogus self-employment.

Irish PPPs

Eoin Reeves of UL has studied Irish PPPs and warned that the state should be wary of them. In one study, which he quotes, the Auditor General analysed a €282m bundle of school under a PPP. The PPP deal promised that procuring and running the schools through the proposed PPP arrangement would result in a saving of around 6% compared to directly. But its study found that the Dept of Education “should have concluded that adopting the PPP approach to the procurement was likely to be in the region of 13% to 19% more expensive than conventional procurement.” Further, the study found that the “deal involved relatively little transfer of risk to Jarvis” the contractor.

 

A PPP scheme, which was to deliver 1500 homes between 2015 and 2017 did not get off the ground in 2015 and was to have its first 500 homes under way in 2016. None were delivered. There are too many examples of this system for rewarding friends in the private sector. The news on Monday 22nd January that the governmen is addressing the housing crisis by taking on sub-prime debt i and is also  boosting demand is gravely dispappointing, when lack of supply is the issue. 300 families were de-canted from O’Devaney Gardens back in 2008 on a 12 acre site in the heart of Dublin. This was to be a housing PPP which was to start in 2012. The families have been scattered for a decade and the site is still derelict, while the PPP ideologues are still smug in the face of their own failure.

Yet Government Backs more Financialisation.

This week’s response to the housing crisis is that the Irish government is to go into the Sub Prime housing market! Does Minister Murphy not know that this is what led to the US collapse? The taxpayer will give cheap loans to those whom the banks deem unable to repay mortgages after two refusals.

 

In addition the taxpayer will give free or cheap public land to builders (not the home seekers) in the hope of some houses. The one thing this government seems unable to do, because it is frozen rigid with the financialisation ideology, is to build/ the houses itself on its own land! This is an extraordinary commitment to the failed ideology of financialisation. How can a process that has been proven to cost more, takes longer than direct provision and requires an small army of accountants, bankers, lawyers and other “professionals” be efficient?

 

It had appeared that the government was allowing housing Minister Murphy to flounder on his own, but these moves indicate it is part of government policy. This is in contrast to the more nuanced policy on the relationship between the public and private sector as articulated by the Taoiseach late last year. 

 

Nationalisation is back in Favour

The British public prefer the government to run most services with only a majority of support for private ownership of phone and internet providers, (53%) banks (53%) and airlines (68%). With the collapse of our 6 private banks, our awful broadband and the value extraction from Eircom and the privatisation of Aer Lingus on a small island economy, the Irish people may have a different view. Most Brits (65%) want Royal Mail renationalised (after 499 years in public ownership) with Railway companies (60%) and water companies (59%) next in popularity for renationalisation, according a recent Yougov poll. Happily Irish Water and An Post were not privatised here.

 

In the UK Jeremy Corbyn is calling for the end of PFIs. There is a strong political case for the Irish government to abandon it’s reliance on PPPs, particularly as the public finances now allow Government - even under the anti investment rules of  Stability and Growth Pact - to borrow. It can borrow much cheaper than the private moneymen.

 

One of the key reasons for the decline in Social Democracy in Europe, in my view, is that Social Democratic parties all naively signed up to the Stability and Growth Pact even though it is, in essence, a death sentence for progressive economics in Europe.

 

There will always be public projects which are contracted out to the private sector. The problem is that some contracts, especially PPPs are difficult and costly. Direct builds are simple, give certainlty to the main contractor who can pay all the subies and the workers can be employees and not bogus self-employed foreced to cheat tax, losing welfare benefits and union protection.

Conclusion

The collapse of Carrillion in the UK has been a massive crisis hurting so many people, on top of the 43,000 it employed directly in delivering private public services and construction. Combined with the timely report from the NAO, which came out before Carrillion’s collapse, condemning the higher costs and unproven benefits of the U.K.’s PFIs, the UK is having to re-think its ideology, as polls there show.

 

It is time to roll-back the private sector – out of the public sphere. No thinking person can stand over the waste, delays and additional costs of the financialisation of the public services through privatisation, through PPPs, through outsourcing, false “competition” and pseudo-benchmarks of public delivery. Its time for more direct provision but with good management.

 

There is still a major role for the private sector in construction but by directly building for the state as client. There will be some state assets privatised and others nationalised over time and good private management systems and experts can and should have a role in the state’s delivery of services.

 

The minimum reform of the Stability and Growth Pact would be to ensure that capital investment is excluded from its narrow, privatising parameters.

 

In the UK, nationalisation is back in popularity. Here, the strong opposition to water charges, which the government abandoned, was a protest against the future privatisation of Irish Water for many (though others did not want to pay additional charges). But the main reason to revert to the old fashioned good management of public services is to reduce costs and delays.

Posted in: Banking and financeEconomicsEuropeInvestment

Tagged with: publicinvestmentPublic Private Partnerships

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions.  He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


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