Carillion lays systemic flaws bare

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The level of extortion made obvious to millions last month is a sharp illustration of the logic of capital.

Carillion was a creature of government cronyism and capitalist dysfunction. It was born in 1999 when parent company Tarmac sought to refocus on its core business of building supplies and span off Carillion, which inherited the facilities management and construction business.

The secret of Carillion’s early success was the manner in which the recently elected government of Tony Blair and Gordon Brown expanded the previous Conservative administration’s privatisation programme.

This meant continuing to allow public service providers to contract out services — and revitalising the Private Finance Initiative (PFI). Tory ministers had proposed PFI as a means of unlocking the supposed dynamism of the market by enabling companies to build and maintain hospitals and other public facilities. But it was under New Labour that PFI was rolled out on a huge scale, allowing investment in the public sector without breaching Brown’s strict spending targets.

There were two main problems with PFI. First, governments can borrow far more cheaply than the private sector. The National Audit Office estimate that the resulting extra costs to the public of PFI schemes will amount to £200 million. Second, PFI means private firms leaching money out of the public sector in order to make a profit.

The sums involved in contracting out are huge — something like half of government spending on goods and services. Carillion, along with rivals such as Serco, Capita and G4S, was one of the beneficiaries of outsourcing and PFI. By the time of its collapse it had 450 public sector contracts with 208 different organisations, including 14 NHS Trust facilities management contracts.

Initially, Carillion grew explosively. As one analyst told the Financial Times, “It seemed that every couple of years or so it would buy another troubled contractor with a support services component. It would forecast earnings growth from savings — mainly on staff costs — and the costs of implementing the savings would be dismissed as exceptionals.”

Rapid growth boosted the share price — and bonuses for its executives. Richard Howson, chief executive until July last year, received a £1.5 million pay package in the 12 months before his departure. The company report was even changed in 2016 to remove the provision that bonuses could be clawed back in the event of “corporate failure”. Dividends paid to shareholders rose every single year from 1999 to 2016 — even as Carillion unravelled.

Carillion employed 45,000 people globally at the time of its collapse, 19,000 of them in the UK. But far more important to its business model was its network of contracting arrangements — something like 90 percent of its work was outsourced to around 30,000 smaller firms. Carillion’s real focus was to aggressively bid for public contracts. Competition was so fierce that Carillion, and other firms in the sector were operating with relatively small profit margins.

The impact of the 2008-9 recession, which hit the construction sector particularly hard, cuts to government spending and the uncertainty caused by Brexit seem to have pushed Carillion over the edge.

As early as 2013 the firm told contractors and suppliers that its terms of payment would now be 120 days. To get paid more quickly, they had to go to Carillion’s “partner banks” and use a process known as “reverse factoring”. Banks would pay out on behalf of Carillion and then add that to the firm’s growing debts. These were then moved off the balance sheet and buried in footnotes to company reports.

Meanwhile, ever more government contracts were required just to keep the firm afloat. According to one FT journalist, “It had, in effect, become a lawful sort of Ponzi scheme — using new or expected revenues to cover more pressing demands for payment.”

The beginning of the end came last summer when Carillion had to accept huge losses on troubled construction projects. Despite this, Carillion was awarded £1.4 billion in government contracts for the HS2 rail link, as well as other defence and transport contracts. The evidence suggests that the government was desperately trying to prop up a zombie firm with public money.

But by now the game was up. After a last-ditch attempt to borrow £150 million from the government, along with guarantees of future contracts, the firm went into liquidation. Theresa May faced the political price of continuing the government’s largesse. It was deemed too great.

At the time of its collapse Carillion owed lenders £1.35 billion, on top of a £587 million pension fund deficit and unknown millions owed to contractors. It had just £35 million in the bank.

What are the lessons of Carillion’s collapse? Jeremy Corbyn is right to say he will end PFI and outsourcing. However, there has been an effort from “soft left” commentators such as Will Hutton to limit any break with the past. He argues, “The task now is to repurpose capitalism. The first step is to make declaring a purpose beyond profit-making mandatory.”

Yet Carillion represents the essence of capitalism. Whatever a firm’s declared purpose, the competitive battle for profit ultimately wins out. That means zombie firms papering over the gaps in their balance sheets with credit. It is the logic of capital that must be challenged.