ANGELA JAMESON on the danger that real lessons from the collapse of Carillion are being missed.
‘Whoever forms the next Government can’t afford to ignore private finance. But PFI has to evolve, it has to become more responsive and flexible.’
That was what a businessman called John McDonough told me in 2010, when I wrote about the dangers of the Private Finance Initiative for a national newspaper.
McDonough was the chief executive of Carillion from 2001 to 2012. His successor was Richard Howson, the chief executive from 2012 to 2017, who is largely being blamed for the collapse of the outsourcing company with a £5.2 billion turnover.
The purveyors of PFI, or Public Private Partnerships as they became, were wise to its limitations even back then. They could also see that public opinion was sceptical about buying new buildings, new homes for soldiers and even air traffic control systems on extremely long ‘never-never contracts’.
I covered this sector for more than a decade. There was always the suspicion that PFI was a way of cooking the books, or a financial sleight of hand.
There were two big problems with PFI: to qualify for PFI status there had to be a so-called ‘genuine transfer of risk’ to the private sector. This was supposed to mean that contracts could be priced more effectively and that the Government or client would only pay for the outcomes, without the headache of making those happen.
In effect, contracting out and risk transfer was taking place to make buying shiny new buildings cheaper – sometimes up to 50% cheaper. As taxpayers we were buying now and paying later, something the National Audit Office confirmed last week generated no financial benefit for the taxpayer.
We know now – and really have always known – that responsible governments cannot palm risks for vital public services off entirely.
Deals become unworkable. For example, while not strictly a PFI, Network Rail took all its maintenance work back in-house in 2003. When National Express walked away from operating the East Coast main line, the Department for Transport had to pull together an operating company under civil service management.
Which brings us to the other problem. All of this fervent transfer of risk meant that the government and local authorities were awarding contracts, increasingly, on cost only. Lowest bid won. Those may not have been the rules as they were written down. But they were the rules as they were carried out because that was the main way civil servants could justify their choice of contractor – and presumably the reason why Carillion was still winning contracts when its competitors knew it was in deep trouble.
Last week the Government decided not to step in and bail out Carillion when the construction firm ran out of cash. This was the right thing to do. Private contractors must be allowed to fail. Other construction and outsourcing companies are, right now, retendering and bidding for the work. Some of them, partners of Carillion, have been obliged to pick up the pieces.
But in the construction sector the lowest bids will continue to win and margins will be sliced even further, unless the government culture of seeking the lowest bid is halted. If ministers want infrastructure built, they must pay a fair price for it.
Now Jeremy Corbyn and John McDonnell can use the Carillion collapse to throw the whole idea of procuring public services from the private sector out entirely. It will probably be a popular move, although pretty much impossible to pull off in practice. (I’ve never met a brickie with a civil service pension).
There must be a new model for public procurement. But even under Corbyn there has to be a role for the private sector in providing infrastructure.
Also the government and those councils who buy services must share some responsibility for what has happened. They could have bought, managed and monitored deals better.
Brexit is also putting pressure on the sector. Foreign earnings are depressed and 8% of the UK’s existing construction workforce could disappear if the UK does not stay in the single market.
The withdrawal of the European Investment Bank will also create a funding gap, potentially pushing a cash-strapped government back to PFI-style deals.
Mistakes, big ones, were made at Carillion. But there needs to be more thought on how we sustain a viable construction industry that serves our future needs and less focus on the current whipping boy.