Graffiti at the site of the new £355 million Royal Liverpool Hospital, which was being built by Carillion.
As if neoliberalism wasn’t in deep enough trouble across the West, now one of its foundational concepts is sinking into the mire in the UK. Outsourcing of government functions is at the heart of neoliberalism — from making services contestable to contracting out to outright privatisation, the idea that the private sector can get things done more efficiently and effectively is sacred writ.
And in infrastructure building, that has often proven to be the case: private infrastructure companies really are better and quicker at building roads and tunnels than governments used to be — partly because such work used to be Featherbedding Central for public sector unions.
But the UK’s biggest builder and outsourcing recipient, Carillion, is destroying that idea in the UK. Carillion failed on Monday, with a probable cost well north of AU$5 billion, leaving contracts uncompleted and thousands of workers facing unemployment. Now, its major competitor Interserve has also been placed under government health watch by Theresa May’s government.
May declined to bail out Carillion, which had been reduced to using current government contracts to pay its debts to subcontractors from previous projects. She couldn’t have done otherwise given the abiding rage in the UK electorate about bank bailouts back during the financial crisis.
According to the Financial Times:
Carillion was left with just £29 million in cash when it collapsed… the insolvent construction company owed more than £1.3 billion to its banks, including a £790 million revolving credit facility and £349 million in private placement notes. It also had £630 million of “bonding facilities” and £350 million of invoice finance, taking the total exposure of its 13 banks above £2 billion. Keith Cochrane, the company’s interim chief executive, has stated in a document for the company’s insolvency process that there was so little funding available that the consultants PwC and EY both rejected requests that they be taken on as administrators amid concerns they would not be paid.”
It also owes hundreds of millions of pounds in pensions payments and debts to subcontractors, many of whom faced being wiped out given the lack of assets for liquidators to sell.
Contracting giant Interserve provides cleaning, security, probation, healthcare and construction services and employs 80,000 people worldwide but issued a profit warning in September, and in the wake of Carillion’s woes, is now being closely monitored by civil servants, with a special team of officials created to assess the group’s financial strength. Interserve recently reported that it had come under pressure from the increase in the national minimum wage and losses on a waste-to-energy project in Glasgow. Its shares plunged 14% overnight Wednesday.
Carillion became Britain’s biggest builder by combining parts of rivals such as Tarmac, Wimpey, Mowlem and Alfred McAlpine but struggled to integrate the acquisitions. Market analysts also think Carillion overpaid for its acquisitions, and there are reports of poor management and aggressive accounting in the company.
On this front, Australia has been something of a precursor: the weak performance of outsourcing companies has seen a number taken over by better placed rivals, especially from offshore. For example, around 87% of Spotless — which specialised in low-margin services such as laundry, catering and associated activities — was bought last year by manufacturer and contractor, Downer. UGL, an engineering, contractor and outsourcer, was knocked off by Spain’s ACS (which controls CIMIC in Australia, the old Leighton Holdings) in 2016. Most famously, the former refugee centre contractor, Transfield Services (which renamed itself Broadspectrum to escape the odium) was taken out by Spanish giant, Ferrovial in 2016. Last year, Programmed Maintenance Services (which had bought labour hire pioneer, Skilled in 2015), was mopped up by Japan’s Persol.
A common feature seems to be weak management at the top of the companies by senior executives and boards, and weak oversight of contracts by governments and private clients. Transfield, in particular, was a beneficiary of what can be charitably described as extraordinary bungling on offshore processing contracts by the Department of Immigration that gifted it billion-dollar contracts and poor oversight.
Perhaps poor outsourcing management by governments doesn’t just hurt taxpayers — it turns managements and boards soft and lazy as well. Maybe they could be outsourced as well?
The problem with a lot of these providers is the way the contract is designed. They encourage underbidding to be then offset with recovery of damages with ridiculously high mark ups. Then the desire for litigation starts. If the government doesn’t sack the Vendor quickly, then bad behaviour becomes accepted with no way to sack them without losing in the courts. Despite this, public servants are rarely taught how to manage contracts, only making acquisition convuluded and “fair” by making it difficult for SMEs to compete due to complex contracting requirements. Bring back good public service managers empowered to act swiftly to protect their political masters, rather than expecting their masters to make the decision for them.
Round here the public service managers are on contracts and if they do not suit the incoming government or new CEO then they are gone. The friends of the new government take the senior management positions but it turns out that they do not know much about the business they run. They can hardly be expected to ride shotgun on contractors that are also friends of the government.
I don’t know whether it worked better in the olden days when there was a Department for Housing and Construction which tendered out specific work to the private sector, to be completed on behalf of the Government, and therefore maintained control over what was build and the costs and the Government owned it at the end. It seemed to have been more transparent and more cost-effective.
Outsourcing is not competitive if you are running a monopoly and if the Government is going to keep shelling out for it, whatever happens.
I was caught with a failure of company management to properly monitor what was going on in another franchise, and had to take the company to court in order to get compensation. There have been many failures of company managements in Australia and elsewhere, and on the evidence the private sector does not automatically have better managers than the public sector. Public sector managers are more risk averse, however, and are rewarded by their political masters for not having things go wrong rather than for imaginative achievements. I suspect upper level management typically operates too far from the coal face.
Straight from the horse’s arse – “Outsourcing of government functions is at the heart of neoliberalism ” – and people (claim to) wonder why it’s a stinking corpse.
The private sector works best at manufacturing products in a competitive environment, however operate at their worst when providing monopolised services via outsourcing by governments.