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.

Prisoners of austerity

A couple of years ago I had some spare money and decided to donate it to a charity. There are so many charities that command out attention – all of them worthy, but some more fashionable than others. So I thought that I would try to seek out as unpopular a cause as possible and did an internet search on just that. The result (and I wonder if you can guess it?) was a charity that supports ex-prisoners into work, for example by paying for training, or travel fares to job interviews. Whether this is truly the most unpopular charity I don’t know – it might come up on a search engine just by having those words somewhere on its website – but it seemed plausible and I donated accordingly.

I was thinking about this because of the news this week of a murder in Pentonville prison. Violence in prisons is getting worse and the connection with my charity search is that, I suppose, most of us don’t really care. Of all of the problems and injustices in the world somehow those that befall criminals bother us least. After all, they are the dregs of society so at best why should we care and at worst they probably deserve it, right?

Wrong, I think. We sentence criminals, quite properly, to the punishment decreed by the courts. That may include incarceration, but it doesn’t include being subject to violence up to an including murder. And as so often, the dictates of morality and those of practicality are linked: if our prisons are brutally violent not only is that morally repugnant it also makes the chances of rehabilitation remote.

Prison violence – including violence against staff - is rising for a simple reason: funding cuts and consequent understaffing. Austerity economics has a cheery make-do-and-mend, belt-tightening sound to it, but the reality after several years of cuts is stark and is happening right across the piece. Sometimes the consequences are direct: roads fall into disrepair, libraries close, the court system clogs up or the armed forces can’t fulfil the basic requirement of protecting the nation. Other times the consequences are indirect: social care provision disappears creating ‘bed-blocking’ in hospitals. In fact, the problems of prison violence are in part due to the inadequacy of (in particular mental) health services.

For years it has been a truism that you can’t solve public service problems by ‘throwing money at them’ – the alternative always being reorganization, subcontracting and privatization – which easily mutates into the absurdity that money doesn’t matter at all. The consequence is that, for a while, things hold together. Savings can be made, a bit; people working in services can work harder, a bit; cuts can be made, a bit. But, gradually, the public sphere breaks down. I think that that is where we are getting to now in the UK – a spreading paralysis and crisis in every area of public life.

At the root of all this is a dishonesty. The small-state political Right could say that the government should get out of huge swathes of public provision and cut public spending accordingly. Or the social democratic Left could say that government must deliver public provision and raise taxes accordingly. Instead, we have lived for decades with the pretence that we can both have extensive public provision and have spending and/or tax cuts. That pretence has now run out of steam, and the choice will have to be faced up to, unless slow decline and periodic scandal are to continue.

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.

Fat cats?

The British government have today announced plans to further restrict redundancy pay-offs made to public sector employees. Proposing an £80,000 cap, this will only affect senior staff, and it is in part a response to a populist media campaign, enraged about public sector ‘fat cats’ not just because of redundancy pay-offs but, more generally, high salaries and ‘gold-plated’ pensions.

Fair enough, perhaps – although where is the comparable outrage about private sector rewards? – but it is worth considering how it has come about that public sector managers enjoy the high rewards that they do. For it was not always so. Traditionally, senior managers (then more often called administrators or officials) had substantially lower salaries than in the private sector, and were expected to be motivated primarily by their commitment to public service.

That all changed from the 1980s, when under the general ideology of the market and the particular influence of the ‘New Public Management’ that derived from it, it was argued that the public sector was inefficient because it did not have the dynamic management of the private sector and that, therefore, it had to offer rewards commensurate with those in the private sector so as to attract that talent. This new breed of managers could hardly be expected to work for so fluffy an ideal as public service – no, in line with the motivational theories of what was then called the New Right, they had to be paid top dollar. And they were – bringing with them many of the reforms that have laid waste to the public sector. But that is another story, about which I have written elsewhere in the blog.

One way of understanding this story is to see it as one of a huge number of examples where the consequences of decisions by now long-retired or dead politicians who were in power in the 1980s neo-liberal heyday have now come to fruition. Examples range from the decision to relax planning regulations on flood plain building because the market should decide where to build, leading to the floods of recent years, through to the deregulation that led to the global financial crisis.

It’s the same with the 1980s approach to those parts of the public sector that were not privatised (those that were, by the way, have mostly now died). Wind forward 30 years and we see that the very same ideologues who blasted the public sector for not paying the going rate for top managers now blast the public sector for … paying the going rate for top managers. It is a hypocrisy unleavened by any acknowledgement that the going rate for top managers is ludicrously high. Because of course their quarrel is not with top management pay rates at all, but with the very existence of the public sector.

Indeed, the attack on public sector fatcat pay is really only a way of finding a soft point to attack public sector pay in general. It is part and parcel of two claims. One is that public sector workers are paid more than private sector workers. The other is that public sector workers get 'gold-plated pensions’. Often, the two claims are linked together.

The problem with the first claim is that – again because of the impact of market ideology and neo-liberal reforms – the lowest skilled (and therefore lowest paid) jobs in the public sector have been outsourced to private sector contractors. Thus, of course, average public sector pay is higher. As regards pensions, in 2012 (the latest year for which I have been able to find comparative figures) the median-average public sector pension was £5,600 pa (mean-average £7,800 pa) and the median-average private sector pension was £5,860 pa (mean-average £7,467). It’s true that most final salary pension schemes in the private sector have closed; it’s also true that those in the public sector are closing (one reason being the pressure put on them by high paid managers).

So let’s by all means challenge the high pay and pensions of senior managers in the public sector. But doing so only makes sense if we do so across the board, perhaps by considering a maximum wage. In 1998 FTSE-100 CEOs were paid a huge 47 times the pay of their average employee. Shocked? Well, by 2014 they were paid 130 times as much as their average employee. We might think about Fred Goodwin, who brought down Royal Bank of Scotland and cost the taxpayer billions of pounds, scraping by on a reported pension of £342,500 pa, poor fellow. We might think about Paul Dacre, Editor-in-Chief of the Daily Mail which has so vociferously campaigned against public sector largesse. In 2014 his pay and bonus package was £2.4M. The average UK pay in 2014 was £26,500 or 1.1% of what anti-elitist Dacre earned that year. The highest paid public official, and this by a long chalk, in 2015 was the Attorney-General at £205,000 or 8.5% of what public sector scourge Dacre earned the previous year. We might think about Jonathan Isaby, the Chief Executive of the Taxpayers’ Alliance that campaigns against public sector pay in the interests of transparency – but, alas, so profound is his commitment to transparency that his pay isn’t on the public record, nor are the identities of the donors that fund the Taxpayers’ Alliance. Strange, perhaps, to learn that the Taxpayers’ Alliance are enthusiastic advocates of freedom of information, but we surely can’t doubt that everyone associated with them is an assiduous taxpayer, can we?

So let’s think about all that, let’s understand the hypocrisy of those who decry the consequences of what they advocate, and the underlying agenda they champion, and the kind of world they really want to see.