On 15th January 2018, Carillion plc – one of Britain’s largest multinational facilities management and construction services companies – informed its 43,000 staff, 30,000 suppliers as well as its 28,500 pensioners that it was bankrupt and closing for business. After weeks of attempting to borrow more cash from Santander UK, HSBC and Barclays, all of them refused to lend to Carillion as it was already drowning with debts of £2bn.
Former British Prime Minister Margaret Thatcher must be turning in her grave, as the latest victim of her wholesale privatisation ended with over £2bn in debts. Private owners would necessarily perform better than any public owners because they were private, she asserted back in the 1980s.
Carillion specialised in construction, as well as facilities management and maintenance. It worked on big private sector projects such as the Battersea Power station redevelopment and the Anfield stadium expansion. But it was best known for being one of the largest suppliers of services to the public sector. It was part of a consortium that held the contract to build part of the forthcoming HS2 high speed railway line. It had over 450 contracts with the government, maintaining 50,000 homes for the Ministry of Defence and managed nearly 900 schools as well as managing highways and prisons.
Carillion was long held as a successful case study of privatisation. A company that could do what the public sector could not – provide efficient services to the public and make a profit from it.
So what went wrong at Carillion?
With so many contracts one would have thought that even an average leader could turn them into a profit.
Trouble began for the company in June 2017 when it issued a profit warning. Its construction services division was making a loss on none other than its three UK Private Finance Initiative (PFI) projects. In dialogue with investors in September 2017, Keith Cochrane, Carillion’s CEO, stated his view that the business had accepted too many projects which had become unprofitable and for which the amount paid was insufficient in relation to the cost of work done, and that as a result, the company had burned through cash in trying to deliver to a high standard without assessing the possible implications. In January 2018, the Times newspaper commented that Carillion’s problems were not a secret and had been known for about four years. During this period, the government gave Carillion more contracts in order for it to meet the costs of other struggling projects. Carillion turned into a Ponzi scheme and ran up a huge debt pile of £900m. This did not stop the Carillion board lying about their financial state, continuing to pay themselves large salaries, bonuses and fat dividends to their shareholders.
The Thatcher era saw the wholesale privatisation of British industries. Under the Tony Blair Labour government, PFIs were introduced to give private companies even more of a leg up with the costs of projects. Under the PFI, hedge funds and banks fund the projects in return for interest and income paid by the operators of the projects, with payments spread over 25 years. The idea was to keep down ‘public debt’ levels. Of course, this was at the expense of future generations of taxpayers.
According to the UK’s National Audit Office report, taxpayers will be forced to hand over nearly £200bn. to contractors under PFI deals for at least the next 25 years. After years of PFI, there is still little evidence that it delivers enough benefit to offset the additional costs of borrowing money privately. Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change.
This is the case across the board with privatisation: British Railway has been a nightmarish private franchise experiment that rail travellers have experienced. The disastrous collapse of Railtrack, the private company that took over the maintenance of the track in 2007 is just one example of many. With that, economists at UBS found British fares are now the most expensive in the world.
The universal experience of water privatisation in the UK was a sharp increase in the cost of water. On average, prices rose by over 50% in the first four years and privatised water companies are planning to increase prices by 40% by 2020. A parliamentary committee in 2000 disagreed with Ofwat and made the claim that since privatisation, the water supply and sewage system had got worse through inadequate investment.
Detailed studies of the UK privatisations of electricity, gas, telecoms, water and rail have found no evidence that privatisation has caused a significant improvement in productivity. A comprehensive analysis in 2004 of all the UK privatisations concluded: “these results confirm the overall conclusion of previous studies that …privatisation per se has no visible impact …. I have been unable to find sufficient statistical macro or micro evidence that output, labour, capital and TFP productivity in the UK increased substantially as a consequence of ownership change at privatisation compared to the long-term trend.”
A 2014 report by the Public Services International Research Unit found:
“there is now extensive experience of all forms of privatisation and researchers have published many studies of the empirical evidence on comparative technical efficiency. The results are remarkably consistent across all sectors and all forms of privatisation and outsourcing: there is no empirical evidence that the private sector is intrinsically more efficient. The same results emerge consistently from sectors and services which are subject to outsourcing, such as waste management, and in sectors privatised by sale, such as telecoms”.
This is not just a UK experience – privatisation across the world has failed to deliver the utopia liberals promised. A global review of water, electricity, rail and telecoms by the World Bank in 2005 concluded: “the econometric evidence on the relevance of ownership suggests that in general, there is no statistically significant difference between the efficiency performance of public and private operators”.
The largest study of the efficiency of privatised companies was undertaken by the UNDP Global Centre for Public Service Excellence in 2015. It looked at all European companies privatised during 1980-2009 and compared their performance with companies that remained public as well as with their own past performance as public companies. The result? The privatised companies performed worse than those that remained public and continued to do so for up to ten years after privatisation.
The fundamental problem with privatising public services in origin, in matters such as education, healthcare and security, is that they are services and not commodities that can be sold for profit. When they are commodified they cease to be effective; serving as profit rather than a service, becomes the aim.
Private ownership of the public sector, rather than efficiency, has merely become a cash cow for the profits of shareholders.