In a another fine mess
DO YOU remember Prudence? In 1997, when Gordon Brown became Chancellor of the Exchequer, Prudence held sway. A wellintentioned girl, she was unceremoniously dumped as the Iron Chancellor raped the British economy, proving yet again the old adage, “the problem with socialism is that sooner or later you run out of other people’s money”.
Although Brown did stop the UK joining the euro (to spite Tony Blair) he left a trail of economic devastation behind, from flogging off 395 tons of gold at the bargain basement price of $275 per ounce (losing taxpayers $17 billion in the process), to robbing pension funds of £189 billion, printing huge piles of paper to save iffy banks like RBS and Northern Rock, and ending with his Chief Secretary to the Treasury leaving a note for his Tory successor which said: “I’m afraid there is no money.”
But, above all, Brown’s legacy was his cunning plan: the Private Finance Initiative.
PFIs are nothing more than a dodgy accountant’s trick to outsource government plans for a brighter tomorrow to private companies.
Whitehall’s thinking is clear: you want a new NHS hospital? “Minister, that’s going to have to be paid for by either raising taxes or by government borrowing,” say the snivel serpents. “Why not let someone else borrow the moolah, take the risk, and we’ll rent it back from them?”
The government then delivers on its promise of shiny new hospitals and schools, but without extra public borrowing. Someone else pays.
For the Labour government of 1997-2010, PFI was nothing more than a cynical vote-buying scheme pretending to be spending millions on worthy causes, while keeping billions of expensive government spending off the Treasury’s loan books. More than 700 PFI deals were pushed through by New Labour.
However, PFI was always smoke and mirrors to let governments spend more than they could afford. And every politician loves a cheap, vote-buying wheeze — PFI flourished under the Tories, too.
Until this last week, when it all went horribly wrong.
When Wolverhampton-based Carillion collapsed into insolvency, the giant company owed £3 billion with only £29 million in the bank. Its ruin was caused by its PFI contracts.
The corporate monster’s collapse will be felt across Britain. It threatens thousands of workers’ jobs, their families, local shops, and hundreds of cash-starved subcontractors. (Carillion was a notoriously slow payer, as builder Peter Rogers explains: “I refused to do business with them. When they started extending their payment terms up to 120 days? No.”)
Because Carillion was not just a big construction company.
Carillion had diversified. Carillion provided more than new buildings and motorways. The repercussions will be felt in schools, hospitals, prisons, army housing and anywhere that Carillion provided cleaners, porters, and other workers, never mind its pensioners, all worried about their next payslip.
Carillion’s failure is only part of the wider story of recent corporate disasters (remember Tesco, RBS and G4S’s failure at the London Olympics in 2012?).Stagecoach and Virgin even blackmailed the government: unless Whitehall paid £2 billion to keep trains running, they would walk away from their East Coast mainline contract.
Suddenly, the Treasury’s dodgy sleight of hand became a guaranteed way for private companies to get rich. In private companies, the costs are supposed to be borne by the shareholders, who risk their capital to make a profit.
But what happens when badly run state projects go bust? Does the taxpayer bail them out? Now, thanks to PFI and Carillion, Joe Taxpayer is at least £150 billion out of pocket. The key question now is: who pays for this failure?
And therein lies the problem of PFIs. There is a price for capital’s risk taking. Companies regularly go to the wall, for many reasons. Carillion’s board decided that the sole purpose of their company was to make as much money as possible by winning large numbers of lucrative government contracts by making the lowest bid.
A rival firm scorned their business model: “The lowest bid isn’t always the best value . . . Carillion were notorious for bidding low but then asking for more money further down the line.”
Carillion believed wrongly that they could always recover any losses from Whitehall. They thought — as did many taxpayers — that PFI projects were projects underwritten by the government. But they are not. The government has no legal obligation whatsoever to bail out a failed private company — unless it’s politically too big to fail (“After all, there are votes out there. . .”).
And there’s the problem: PFI, a con-job aimed at hiding debt from the government’s balance sheet, became just another messy muddle between government and capitalism.
Carillion’s collapse highlights Whitehall’s club of “preferred bidders” and the disreputable face of capitalism: cosy insider deals cooked up by company directors, to enrich themselves with the connivance of civil servants and ministers.
The various inquiries must demand answers about PFI. The critical question is whether it was incompetence or negligence that led to the company’s crash. More importantly, why Whitehall did nothing, despite the City spotting Carillion was in big trouble.
The collapsed merger with Balfour Beatty in 2014 triggered a profit warning. Quick as a cobra, the City dumped Carillion, selling shares short. Profits were gobbled up by a dwindling cash balance and ballooning debt. Despite a secret loan of £112 million through German Schuldschein bonds, Carillion’s value nose-dived 70 per cent in just three days.
Labour MP Frank Field, respected chairman of Parliament’s Work and Pensions Committee, warns: “Our committee will be looking at the role of the auditors, who say a business is a going concern — then months later it falls apart. Shouldn’t auditors be taking into account when they say it’s a going concern, a pension deficit they cannot meet?”
Economically there are big lessons to be learned. Companies flourish or fail all the time. For Carillion, blame rests with the greedy directors and the shareholders, plus their overcooperative bankers and accountants, whose failure to do their job merits legal investigation. For Whitehall it raises questions about Sir Humphrey’s inefficiency at running public monopolies (eg the NHS) or, as PFI proves, incompetence at buying outsourced services.
Politically, Carillion has been a godsend to the Left and Momentum, proving the “immorality” of capitalism.
To those who believe that “property is theft,” it is evidence of capitalist failure, proof that the private sector is a greed-fuelled racket.
Because many young people fantasise about a genuinely socialist economy. Jealous at not being able to get on the housing ladder, expected to pay for their own education, their sense of grievance is deep.
Labour’s seductive election manifesto committed to nationalising the UK’s water companies, railways and Royal Mail and providing free university education for all.
Union boss Len McCluskey agrees: “Workers suffer as spivs take over public services. . . No longer should government be handing over public money to companies that head to the casino, intent on gambling on the fate of our public services.”
However, despite PFI’s slippery accounting, Carillion’s collapse does not change capitalism’s historic record in creating wealthy, well-run societies.
The fact is that no economy run by government command has ever been able to deliver what its citizens demand.
The USSR, North Korea and socialist Venezuela’s economy stand as warnings of Marx’s failed 19th century economics.
Venezuela’s inflation rate of 4,000 per cent — one US dollar worth a spiralling 178,000 bolivars — and a minus growth rate is proof that statism doesn’t work, and why even China has embraced a form of capitalism.
Remember British Leyland, the old GPO and British Railways? Little government investment, run for the benefit of trade unions and not for customers? To those of us who remember the dark days of the 1970s, there is no magic money tree. But it seems that the snowflake generation will have to rediscover this for itself — the hard way.