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’.

 

Reference

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

Ageing badly

There is plenty of public discussion of the complex issues involved in being a parent, but far less about having parents. What I mean is the issues arising for people in middle-age having to care for and cope with their ageing parents. Those issues are made more complex by the way that families tend now to be dispersed geographically and the much longer live spans that are now common. The consequence is the necessity of engaging with the organization of care for the elderly. In the UK, at least, that organization is woefully inadequate and in crisis.

Longer live expectancy is both a consequence of medical care and a cause of the need for medical care. This in turn requires increased health expenditure, but in 2015 the UK health expenditure as a percentage of GDP was 8.5%: lower than Greece, lower than most west European countries, and far lower than the US. Against this, it has to be recognized that the UK system is far more efficient than others in translating expenditure into health outcomes. Maybe more important, though, is that increases in UK health expenditure don’t match increased costs (healthcare cost inflation is much higher than general price inflation) and increased demand (driven primarily by ageing).

But healthcare is only one part, and not necessarily the most important part, of the organization of ageing. Most health expenditure arises in the last two years of life; whether that life ends at 70 or 90. No, the real issue is the organization of care, and this is in complete crisis. Whereas it used to be provided mainly by local authorities, now there is a hybrid system of private care homes part-funded by local authorities. Budget cutbacks mean that the part-funding is increasingly inadequate; whilst the crazy financial engineering of some private home owners like the collapsed Southern Cross (discussed on p.115 of the book) exacerbates the problem.

The two aspects of health care and care homes are closely related. Both emergency and routine care departments of hospitals can’t discharge elderly patients because there is nowhere for them to go, especially if they are ‘unprofitable’ from a care home perspective. On the other hand, as a report this week highlights, in other cases the elderly are being discharged back to their own homes when they are incapable of coping, with horrific consequences.

All of this is absolutely to do with failures in the way that we organize. The privatized, often private equity firm-owned care home system is simply absurd, and passes on its inefficiencies to the public sector NHS. But beyond that is the obvious absurdity of dividing health and social care at all. There has been much talk of overcoming it, and some areas in England have made progress in doing so but overall the separation remains stubbornly in place.

As is often – perhaps always – the case, the issues relate to both organizations in the institutional sense (the structures of, in this case, health and social care) and to ideational organization (the construction of ‘health’ and ‘care’ as categories). Underlying the latter is perhaps also the more profound division of the public and private realms, so that health care is something that happens in the public domain of the hospital ward and social care something that happens in the private domain of the home (even if the home is an institutional ‘care home’). This in turn means that much suffering remains hidden (‘at home’) and experienced by both the elderly and their families as a ‘private’ problem, and possibly a stigma.

The psychology of this is undoubtedly very complex, since the relations between (adult, ageing) children and (aged) parents has the capacity to engender guilt, frustration, anger, fear and much else besides. Psychology has been much concerned with the relationships of children and parents in infancy, but perhaps much less so (at least, that’s my impression) with those in adulthood. The dynamics of the latter are surely taking new forms as extended old age and associated dependency become the norm rather than the exception.

In 1911 in the UK life expectancy was 51 years; by 2013 it was 81 years. In 1911 there were 107 people in Britain aged 100 or over; in 2013 there were 13,780. A similar pattern can be found across the developed world. Organizationally, and emotionally, we have not really caught up with these profound demographic changes.

Unsurprisingly shocking

I have not posted for a few weeks now, partly because I took some holiday at the beginning of April, partly because of pressure of work, and partly because I have been writing several blog posts for various sites working with the EU Remain campaign. The most recent of these can be found here for anyone interested and there are several more in the pipeline. And in the even more unlikely event of anyone being interested in my holiday, my new profile picture shows me emerging from a Norfolk pub (quite sober, I should say) whilst I was away.

So there’s plenty I could write about but I’ll focus on the news this week that the retailer British Home Stores (BHS) has gone into administration, with debts of over £1.3Bn and a pension deficit of £571M, leaving the 11,000 employees across its 164 UK stores in limbo, and creating much insecurity for former employees with deferred pension rights. Like all statistics, this depersonalises the reality but I visited my mother this week and, by coincidence, her care assistant used to work for BHS and told me how worried she was about her deferred pension. I tried to reassure her that the Pension Protection Scheme meant that 90% of her rights were assured, but for someone on (I guess) the minimum wage and with limited pension expectations that 10% matters, even if she trusts that the 90% will be forthcoming.

BHS is one of those high street stalwarts that seems to have been there forever – I can remember one of my sisters having a Saturday job there in the 1960s. In fact it goes back to 1928 and joins the long list of British companies, some of which I mention in my book (pp. 105-106), that have fallen by the wayside. There are all sorts of reasons for that, of course, from the rise of the internet to the growth of Pound shops. I actually go to BHS quite regularly to – look away now, kids – buy cigarettes and that branch, at least, seems faded, dilapidated and dated, and the staff demoralised.

That is because underneath the general trends in retailing there is another story to be told about BHS. Bought by the fabulously wealthy tycoon Sir Philip Green for £200M in 2000 he sold it for just £1 in 2015. In the interim, rather than investing in modernising the business it had been used as an enormous cash cow and systematically pillaged for massive dividend payments. Far from ‘adding value’ in the manner self-righteously claimed as the hallmark of dynamic entrepreneurship, value was ripped out of BHS and pocketed. There are now calls for a public inquiry into what happened but, whatever the details specific to BHS, it is just another case of the consequence of rapacious financial engineering of the new capitalism (discussed in chapter 5 of my book). Hardly less noteworthy is that its post-2015 owner was a company run by a twice bankrupt former racing driver with no retailing experience, and the demise of BHS comes as no surprise. Interweaved into this sorry saga are the usual array of offshore tax avoidance schemes and global investment bank advice.

Such stories have become so commonplace that they lose the power to shock. Even so, there is still a jolt of surprise in recollecting that as recently as 2010 Green was commissioned by the British government to make recommendations on improving its efficiency. Reading his report today, my immediate reaction was to think how thin it seemed – I have seen undergraduate student workplace projects with more depth. My second reaction was to recall how similar it was to the 2004 review of public sector efficiency by Sir Peter Gershon. In fact, on government procurement especially, the Gershon recommendations were nearly identical. It makes you wonder what the point is of these endless reviews – perhaps they have the same ritualism as public inquiries, about which I have written before.

Anyway, Green’s review concluded – surprise, surprise – that the way forward was for government to adopt the methods of the private sector, apparently unaware that this has been exactly the approach since the early 1980s, so what he was observing was the consequence of precisely the course of action he was advocating. And his headline finding was that the government was “failing to leverage both its credit rating and its scale”. In other words, the government should get on the wagon of the same financial engineering techniques that he was at the time so assiduously applying to bring BHS to disaster.

With the controversy now surrounding him, it’s unlikely that Green will in the future be asked to give advice on how the government should organize itself. But there will always be someone else – whether a faceless but fresh faced MBA from a big league consultancy, or whoever the currently lauded tycoon may be – to apply the same failed logic. Because however often it fails it is never discredited; worse, each failure provides the impetus for its re-application. That, too, has lost the power to shock.