Carillion crash and capitalist fairy tales

As Carillion, Capita, Virgin Trains and others hit the buffers Bryn Jones makes the case for ‘re-sourcing’ public sector outsourcing

The collapse of the PFI-peddling and public service contractor Carillion is a major embarrassment for Mrs May’s government and a financial nightmare for its employees and multitude of sub-contractors. Together with similar problems at Capita, another mega-contractor, and the fiasco of East Coast rail franchises, it also represents a wider crisis for the whole outsourcing model and a golden opportunity for Labour and left policymakers to overthrow a pillar of neoliberal economic governance. Instinctive calls for returning all out-sourced contracts to public ownership and control are understandable. But there should also be some credible and workable alternatives to both marketised outsourcing and the traditional public sector management bureaucracies. This would chime in with the more efficient, accountable and democratic alternatives outlined at the recent Labour conference on Alternative Models of Ownership.

Before describing such alternatives, it’s worth considering the ideology and practices leading to the Carillion crisis. Outsourcing and its related PFI model are direct consequences of late twentieth century neoliberalism. Policies flowing from this mind-set, whether by Thatcherite or New Labour governments aimed at minimising public debt and spending by camouflaging it as private sector activity. In keeping with the neoliberal orthodoxy, it was also assumed that prices paid for public contracts could, nay should, be held down by getting corporations to tender competitively against each other.

Fallaciously, however, such policies presume robust market competition amongst contractors. Yet the capital needed to build a high-speed rail link or run labour-intensive operations like prisons is too high for all but a handful of big businesses. Contractors had, therefore, not only to muster significant financial clout, they also needed a business model that could shuffle finance amongst different types. This was a capitalist fairy-tale in which success begat success: winning one large contract generated funds to bid for another. Like the similar saga of railway franchises, it wasn’t long before there were only a handful of big firms with the financial muscle to outbid others and meet the ever-increasing government demands for lower bids. These contracts are now estimated to make up half the total government spending on goods and services: up to £100bn a year.

Unfortunately this mish-mash of text-book economics, political manipulation and corporate power produced a Frankenstein’s monster of business practice. Firms such as Carillion grew by chasing contracts for work ever further from their original speciality: buildings materials, maintenance and construction, in Carillion’s case. The variety of public sector contracts undertaken – I.T., waste management, building maintenance, social care and defence, plus construction – has led to the main firm acting more like an old-fashioned holding company. That is one which coordinates the finances of a large range of businesses and an even greater spread of dependent sub-contractors. The massive irony here, from the point of view of business efficiency, is that consultants and pundits who promoted the virtues of market disciplines from the 1990s onwards, urged firms to abandon this ‘conglomerate’ model and ‘focus’ only on the most profitable and well-practised activities in order to maximise shareholders’ returns.

The problem for Carillion and its ilk is that they must violate this specialisation principle even as they seek to satisfy its ‘shareholder value’ counterpart. Share dividends were generous. Between 2015 and 2017 Carillion payouts totalled £163 million; while its employees’ pension fund accumulated a £580 deficit. To survive and placate their ever-hungry investors, outsourcing firm like Carillion must continuously land new public service and construction contracts. Recognising that these firms are only one failed contract bid away from financial disaster governments have continued to award them, just to keep the show on the road. Meanwhile these constraints pressured Carillion to use its bargaining power to seek breathing space by delaying payments to their sub-contractors. Carillion was making its 30,000 dependent ‘subs’ wait four months for payment for their invoices.

Outsourcer firms are similarly hard-nosed about paying their own direct workforce. Public procurement agencies striving to come up with ever cheaper deals for maintenance, catering and care services, pushes outsourced operations to ‘externalise’ costs on to poorly paid and under-resourced workers. The tightening of these screws reduces state tax revenues and throws many workers on state support and services to make ends meet and patch up their fraying health. Why should any rational government persist with this bogus market charade: putting dependent sub-contractors and exploited workers under such pressure, while virtually guaranteeing fat profits for remote investors? As speeches from Labour’s top brass and local authorities’ return to in-house sourcing show, the outsourcing model has to be replaced. But wholesale and rapid de-privatisation will entail significant costs and time scales. So what bigger alternative to neoliberal pseudo-market models could be developed to relinquish long-term contracts and PFI deals and invest in the necessary in-house skills and capacity?

The Smith Institute has suggested in-house provision should be the default option for public services, relegating outsourcing to a supplementary option. It also recommends having a central clearinghouse’ to monitor company performance across multiple contracts, with a new government agency to regulate, share best practice and evaluate outsourcing across Whitehall and the NHS’.

This recipe envisages ‘parallel arrangements for local government and the devolved administrations’. But there could be more radical delegation. From Thatcher onwards, more and more responsibilities have been transferred from local authorities to government agencies and quangos. Instead councils could form consortia and pool their own resources where necessary for projects like regional infrastructure, replacing recently created metropolitan mayoralities which hold substantial purse strings for clusters of local councils’ infrastructure investment.

As the Smith Institute also argue, democratic oversight and control has been diminished because, ‘accountability is lacking’ and the identity of service providers is opaque to taxpayers and users. So reforms have to make democratic accountability a priority. A Labour government should therefore explore the subsidiarity principle for a wholesale devolution of contracting from Whitehall departments to regions and local councils. The latter could, in turn, put proposals out to local voters’ agreement as part of the participatory budgeting exercises which have been established in other countries: ‘should service X be undertaken by the council or its agencies, or put out to tender?’ A modest, but considerably more democratic measure than present practices, where services are outsourced with only box-ticking consultations.

Social justice objectives could also be pursued by strengthening the scope of the existing state rules on social and environmental considerations in the award of public sector contracts. Under the Social Value Act (2012) contracting authorities must prioritise social considerations and wellbeing above simple cost advantages, which is one of the conditions for the widely praised Preston model of economic development. If social value were made a condition rather than merely ‘a consideration’ in awarding contracts, it could be elaborated to cover a range of priorities: preferences for social enterprises, such as coops, requirements for ‘living wage’ rates of pay; or even proof that bidders do not practice tax avoidance. Wider scope could cover many more contracts if the EU threshold for social value was reduced below its current £600,000 for services tendered by the central government. Again, properly accountable local government bodies would be a more democratically effective medium if big public contracts were disaggregated down to local levels wherever practicable.

The Carillion collapse has discredited the entire neoliberal rationale for systemic outsourcing based on flaky assumptions of market disciplines. The mega corporations which actually monopolise these contracts often deliver poor value, while extracting huge sums for remote investors, penalising workers and sub-contractors and adding to the state’s fiscal burden, through lost tax revenues and extra demands on the welfare system. Some form of nationalisation could be a relatively simple solution in the case of train operating companies on the railways.

Elsewhere, however, it would be a fairly blunt and costly instrument to cover the myriad services and projects scooped up by the contracting corporations. Applying the principles of devolution, subsidiarity and accountability would bring these operations much closer to the workers and citizens who undertake and use them. Democratic accountability could range from involvement of worker-citizen communities in deciding between in-house and outsourcing, through local council setting of the social value criteria for new contracts, to regional consortia of local authorities commissioning, preferably local, firms and social enterprises to undertake larger projects. Of course all of this would require national legislation. So let’s see such a commitment in Labour’s next general election manifesto.

Bryn Jones co-edited Alternatives to NeoLiberalism: Towards Equality and Democracy (2017)

Bryn Jones
Bryn Jones is the author of Corporate Power and Responsible Capitalism? Towards Social Accountability and co-editor of Alternatives to Neoliberalism: Towards Equality and Democracy., He is a member of Chartist EB.

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