Friday, 19 January 2018

Carillion: the Enron moment for public sector outsourcing?

Since the very early days of this blog, I have written several posts about the danger and damage done by public sector outsourcing and it’s also discussed in my book (pp. 88-90 and elsewhere). It is a practice which developed extensively from the 1980s onwards, and was given a particular boost during the New Labour period of ‘high managerialism’, but has by no means diminished since then. Indeed, one might say that it became normalised as the standard way of delivering public services so that what started out as a controversial ideological principle became a routine administrative technique, with its ideological roots concealed from view.

Those ideological roots are worth reflecting on. At one level, they derived from what might be called first phase neo-liberalism, in which it was assumed that markets and private companies were by definition more efficient ways of delivering goods and services of any kind. Such a view was most manifest in outright privatizations, but also informed the outsourcing of services which were either politically impossible to privatize, or which because of their cost structure would not attract any buyers.

This then morphed into a rather more curious second phase of neo-liberalism, whereby it was not markets as such which were lionized but a kind of state sponsored “market managerialism”, to use Martin Parker’s (2002) term. Here, the idea was less about ownership and more about the idea that private sector management methods were a guarantor of ‘efficient’ delivery: the entire distinction of public and private began to be erased. Typically, if not invariably, what that meant in practice was reducing the employment security and pension rights of erstwhile public sector workers re-employed by the new contractors. What was curious about it was that it created a kind of corporate welfare state – not simply in the sense of state services being delivered by corporations but in the sense of corporations being entirely dependent upon payments from the state – the real welfare scroungers, as I put it in a previous post on this blog.

It is highly doubtful whether any of this actually reduced the costs of service delivery in the round. Even if headline delivery costs were reduced, the extra cost of paying shareholders needed to be factored in and, more than that, the changing employment terms of workers created both a bill for tax credits to supplement earnings and contributed greatly to the emergence of a far more precarious and insecure workforce, with multiple economic and political consequences. In fact, a National Audit Office (NAO) report published this week shows Private Finance Initiative (PFI) construction projects are far more expensive than using the public sector.

Moreover, outsourcing was dogged by one failure after another as documented in the posts I have linked to. At the core of the myth of public sector outsourcing is the idea that it transfers risk to the private sector (with this, in turn, justifying the return to shareholders). The reason this is a myth is that, politically, the state always ends up having to deal with the consequences of a failure to deliver public services. This was well-demonstrated by the way that during the 2012 London Olympics the government had to use troops to deliver security when the outsourced contract failed to do so. In the end, the government can’t walk away and is stuck with the risk.

These failures revealed another myth: that is the firms to which services were outsourced did a poor job they would not get any more contracts. But they did, partly because there are only a few firms who can bid for the contracts (which in turn actually exacerbates risk to the government, since if one fails, it has huge consequences) and partly because the over-riding belief that this was the way to administer services had become so normalised. But in any case, each failure could easily be dismissed as a particular episode rather than revealing anything systematic about the entire approach.

Arguably, what has been created is a situation which, perversely, combines the worst stereotypes of both public and private sectors. On the one hand, there is no real competition to provide market discipline; and no public service ethic to provide normative discipline.

And so we come to this week’s news that Carillion has gone into administration. This construction firm holds massive numbers of contracts right across the public sector, including in education, schools, prisons, the military and transport and thus reaching far into the most basic functions of the State. These are precisely the kinds of PFI projects criticised by the NAO report, although that was prepared (albeit not published) before the news of Carillion’s insolvency. But Carillion did far more than build public facilities, it also had contracts to run and maintain them, right down to cleaning.

The Carillion crisis goes far beyond the failure of this or that outsourced service and reveals for perhaps the first time the massive transfer, and therefore vulnerability, of public services and the state as a whole into private hands. And whilst the government have not underwritten the company (if they had, it would presumably have stayed solvent but at great potential public liability) it is already clear that they will have to undertake to provide the services it has been providing or – more likely, at least in the long term – to transfer the outsourced contracts to new providers.

But the story does not end there. Because alongside the central issue of public service outsourcing another part of the business model – typical of the “new capitalism” described in chapter 5 of my book - is the creation of lengthy chains of sub-contractors, and sub-contractors to the sub-contractors. These, much smaller, organizations are likely to suffer considerably from Carillion’s collapse not least because this financialized model partly relies on very slow payments to sub-contractors who will now be on a long list of creditors. Even if they get paid eventually, it may be too late for businesses which are likely to have very tight cash flows to survive. At the other end of the chain, the massive salaries and bonuses of Carillion executives exemplify the huge inequalities which are associated with the new capitalism (pp. 117-118 of my book).

I apologise again to those who have read this blog regularly over the last few years for my recent neglect of it, which is due to the work I have been doing on my Brexit blog. But it is worth nothing that there is a Brexit connection to the Carillion collapse. Back in December 2016, shortly after the Referendum result, Carillion and other outsource giants identified the Brexit vote as impacting adversely upon them. There are many reasons for Carillion’s demise, and the deep flaws in the model of public outsourcing are nothing to do with Brexit. But nothing that happens in Britain now is entirely separable from Brexit, including the Carillion debacle.

At all events, the collapse of Carillion has now brought to the centre of political debate all of the issues that I (and of course many other people, both in academia and politics) have been raising for years now, especially the incoherence of the idea of risk transfer. It may be too early to say that Carillion is a ‘Lehman moment’ for public sector outsourcing, but perhaps it is its ‘Enron moment’.

Parker, M. (2002) Against Management. Cambridge, UK: Polity Press.