Carillion was a necessary failure
Corporate giant’s demise was a gift for Corbyn but is not an argument for nationalisation, writes Bill Jamieson
Few more tasty dishes could have been served up to Jeremy Corbyn than the collapse of Carillion, the construction and services behemoth.
Tens of thousands of jobs at risk, hundreds of small firms facing bankruptcy over unpaid bills and critical public services from hospitals to schools facing uncertainty.
What more damning exposure could there be of public-sector outsourcing and private-sector failure? Carillion’s handling of numerous projects came under criticism and maintenance contracts were withdrawn. Three public profit warnings in five months were issued last year – but ignored by the UK government, which continued to award Carillion huge contracts. Once again, it seems, the capitalist model has failed.
New contracts were taken on in the hope that extra revenues would make good the shortfalls in existing ones – a giant Ponzi scheme in effect. Meanwhile Carillion’s management kept shelling out millions in dividends to shareholders while the group’s pensions deficit ballooned.
Enough, already! The solution is blindingly obvious: bring all those infrastructure projects and long-term public service contracts in-house, to be overseen and managed by the public sector, cutting out the need for profits to finance dividends, fees to banks and costly advisers – and bringing to an end the fat cat pay circus. That’s one way of summing up this corporate debacle. But there’s another. This is not a “failure of capitalism” but an object lesson in how sanction and penalty should work to enforce reform. On this perspective, Carillion is a necessary failure. It sends a clear and salutary signal on the constant dangers of aggressive ambition and over-reach, while reinforcing the cautionary principle that should govern all undertakings: mind that you do not bite off more than you can chew – you may choke to death. A set of searing post-mortems is now under way – as well they should – questioning the award of government contracts, the project accounting system, the oversight of so-called watchdogs and auditors, and above all the Carillion management.
These may take many months. For not least of the questions to be explored is how this company, the UK’S second largest construction concern with a £1.5 billion debt pile, was allowed to grow so big.
The scale of Carillion’s operations almost beggars belief. Contracts embraced institutions from the Royal Opera House, Library of Birmingham and Tate Modern to the controversial HS2 high-speed rail line and the headquarters of GCHQ.
Built up through the acquisition of parts of Tarmac, Mowlem, Wimpey and Alfred Mcalpine, it came to hold some 450 government contracts spanning the departments of education, justice, defence and transport. Its projects included the running of libraries under the fanciful brand name “Cultural Community Solutions”. Amey Housing took on the maintenance of some 50,000 army homes across the UK. Contracts worth between £700 million and £1bn in total. Last year a report by the public accounts committee described the group’s performance for the MOD as “totally unacceptable”.
Carillion maintained approximately half of the UK’S prisons and Young Offender Institutions – again, widely criticised by independent monitoring boards. Two major hospital building contracts have fallen behind schedule, while responsibility for handling the delivery of school meals in Oxfordshire has now been handed to firefighters. Critical issues need to be explored here, three in particular. The first relates to the culture within Carillion – but is by no means confined to it – that encouraged aggressive fixed-price contract bidding to secure business and the booking of profits before contracts (with inevitable cost over-runs) were completed.
Second is who, if anyone, in government had overall oversight of the totality of all the public sector contracts and projects that Carillion was taking on. And who was checking on the competence of Carillion’s finances and its management to handle them? The third relates to the banks, City institutions and investors who for the past 30 years sought to dismantle the corporate behemoth conglomerates and mouthed the mantra of focused business models: no management, the mantra insisted, could possibly have a uniformity of competence across many disparate activities.
Yet multi-contract corporates such as Carillion and Interserve sprang up amid all this, with fund managers and analysts extolling the so-called “defensive” qualities of these all-purpose infrastructure and service models – just so long as they paid the dividends. Ever-rising order intake seemed to be the only metric that mattered, blinding them to issues of managerial competence – and of course, ever-rising debt. As for the £600m pension fund deficit, who seemed much concerned about that, such was the flawed culture within Carillion?
While the post-mortems get under way, it is tempting to urge that public service contracts are now brought in-house and managed by central and local government: tempting, but blind to past experience. The land is littered with examples of public sector failure – projects that overran massively such as Edinburgh’s trams, rail line extensions that billowed in cost, buildings that fell years behind schedule, poor workmanship, inefficiency and wasted resources.
No public sector approach can ever be total, for which local authority can afford a fully staffed, full-time, multi-skilled and multi-specialist workforce to meet all contingencies? Heavy assurances would be given that small-scale outsourcing would be allowed to enable contracts to be undertaken and completed with confidence. But for years, small and medium-sized enterprises have railed against the exclusive nature of public sector procurement.
Nowhere has this complaint been louder than in Scotland, where the business community has constantly lobbied government ministers for a more equitable slice of the pie. Qualification hurdles working against small firms can range from lack of historic track record to size of balance sheet and gender and diversity requirements. All these can effectively bar all but the biggest private sector firms from bidding for contracts. The system favours the biggies. But, hey, isn’t this where we came in? The path out of this trap inevitably involves pain: sanction, behaviour change and cultural shake-up. In this respect “capitalism” must be allowed to work: managers and government agencies brought to account, and business models obliged to reform and adapt.
Seventeen years ago, the US – that epitome of unbridled capitalism – threw the book at the gross corporate mismanagement at the corporate giants Enron and Worldcom. Government did not step into “rescue” them but instead ensured that market sanction had its chastening effect. That is why Carillion is indeed a necessary failure and why the sanction of bankruptcy and searching inquest must apply. Just as an enterprise system should reward success, it needs also to penalise failure – the endgame business seeks to avoid.
There is every reason to despair at what has happened, but every reason, too, for hope that Carillion will stand as a lesson that will bring about a chastened but more responsible business culture.