Carillion, PFI, finance capital and Brexit
by Scott McDonald
Will the collapse of Carillion bring to an end the notorious Private Finance Initiatives (PFI), which have cost the public purse millions.
Carillion was the second biggest construction firm in the UK until it went bust, resulting in massive job losses, a huge hole in its pension scheme of some £1billion, and suspension of building contracts. The ineffectiveness of regulators and auditors and the greediness of the directors was exposed. The Tory government’s complicity in the debacle is also clear as they continued to award contracts to Carillion despite profit warnings and clear signs of financial instability.
Carillion had 43,000 staff globally with 20,000 in the UK. Included in Carillion’s contracts were the HS2 high-speed rail line and huge hospital developments in Liverpool and Birmingham. The company also looked after 50,000 homes for the Ministry of Defence as well as hundreds of schools and prisons. It was one of the main suppliers of maintenance services to Network Rail.
Private Finance Initiative (PFI) contracts are a form of outsourcing in which the private sector raises the capital for a project. Outsourcing was originally introduced supposedly as a way of transferring risk from the public to the private sector. It was based on the idea that competition and the profit motive would drive down costs, delivering savings for the taxpayer.
It hasn’t worked. PFI contracts have proved particularly expensive. The National Audit Office recently revealed that some PFI contracts are costing the public 40% more than would have been the case had public money been used directly. Over the next several decades more than £200 billion of taxpayers’ money will be channelled into the pockets of private companies.
Currently, the state invites companies to bid for contracts and awards them to whichever company contractor is able to deliver the project most cheaply. The bidding companies have become specialists in simply in winning public contracts. These large conglomerates then sub-contract the delivery of the contracts and have moved for some time now into delivering front-line public services.
Over the last two years, five companies have won over 80% of all the public sector’s outsourcing contracts. The company, Capita, has been awarded half of these contracts. In the last two years Capita has been awarded ten times as many public sector contracts as Carillion.
In the wake of the collapse of Carillion, Capita’s share price fell by 45%.
The situation in which private companies are delivering front-line public services on behalf of local government and the NHS has proven to be disastrous. The private sector often delivers these services at a lower quality and higher cost than the public sector. Public sector contracts should not be awarded solely on the basis of “value for money”, in other words, cheapness. And, then when privatisation fails the public sector is called upon to bail-out the companies.
Private financing of public sector projects should be ended. If the government wants to build a major infrastructure project it should do so through historically cheap public borrowing. Taking public service delivery back into the public sector and ending PFI is what is needed.
Carillion’s pension scheme trustees wrote to The Pensions Regulator (TPR) in 2010 and again in 2013 requesting “formal intervention” to require the company to pay more to reduce its deficit. The company said it could afford no more than £23m per year to reduce the pension deficit. This was £12m less than the minimum the trustees said was needed. During this time the company was paying a bumper dividend of 12% to shareholders and huge bonuses to directors.
The trustees told TPR that the December 2011 valuations could not be signed off by the statutory deadline of March 2013. The trustees proposed a rescue plan to the company which required it to pay £65m per year in a bid to close a yawning £770m pension deficit.
In response Carillion proposed a final “take it or leave it” offer of just £33.4m per year. As a result, the trustees told TPR an “impasse” had been reached and called for formal intervention by the regulator. The regulator did not take formal action until Carillion collapsed, by which time there was no money left.
The regulator could have rolled out its section 231 powers to impose a schedule of pension contributions on the company. However, the regulator took a “softly-softly” approach as it has done in scores of cases. Indeed, the regulator has used its section 231 powers only once – an extraordinary statistic.
Labour MP Frank Field, chair of Parliament’s Work and Pensions Select Committee, said, “Their (Carillion) private pleading that the company could not afford more was in stark contrast to the rosy picture – and bumper dividends – being presented to the outside world.”
Carillion was one of those companies which used “The Consulting Association” to create a blacklist of workers, especially in the construction industry. This secret database of workers - who complained about asbestos, unsafe electrical installations or were active trade unionists – was used as a blacklist to stop certain workers getting jobs.
In 2009 one worker took Carillion to an Employment Tribunal. The company admitted blacklisting because he was a union member who had raised concerns about safety on a building site. Although the holding of a blacklist is unlawful the worker lost the case. The reason for the decision was that he was not employed directly by Carillion but via an employment agency and as such was not protected by employment law. The written judgement stated that:
“We have reached our conclusions with considerable reluctance. It seems to us that he has suffered a genuine injustice and we greatly regret that the law provides him with no remedy”
The worker appealed and ended up in the European Court of Human Rights but still lost. Carillion then pursued the worker for £3,500 worth of legal costs.
In 2016 at the High Court, Carillion admitted that they had blacklisted workers and paid out millions in an out of court settlement. Technicalities in the legal system meant that Carillion and the rest of the blacklisting companies were able to buy their way out of a trial. None of the company directors who orchestrated the blacklisting has had to account for their actions.
Unite the union is taking further action in the High Court for breach of privacy, defamation and Data Protection offences against a host of major contractors.
PFI milked the public purse as did the banks when they were bailed-out following the 2008 crash. This parasitic economy, that is now Britain, was the topic of Labour Party leader, Jeremy Corbyn, speech to the Engineering Employers Federation (EEF) Conference when he claimed that the finance sector’s “destructive” dominance over “the real economy” and “undemocratic” control over politics needed to be tackled so that the economy could be rebalanced. He said, “We will take decisive action to make finance the servant of industry not the masters of us all. For a generation, instead of finance serving industry, politicians have served finance. We’ve seen where that ends.”
He added, “When private debt is twice the size of the real economy, when traders no longer understand the products they are trading, and banks are funding their own speculation rather than productive investment, something has gone grossly and badly wrong.” [I]
This criticism of the City of London stands in stark contrast to the position of the Tory Party, which regards the City as the flagship of British capitalism. Although there are deep divisions within the Tory Party over Brexit they are united in their defence of the City and Finance Capital.
One major concern among all Tories, both hard and soft Brexiteers as well as Remainers, is that a British withdrawal from the EU could have a negative impact on the City of London and its key role in the global financial world.
German and French finance capital see an opportunity for them to gain ground in terms of financial services if Britain were to exit from the EU. The negotiations over this issue are crucial for the rival capitalisms and seen as much more important than the Irish border, EU citizens or even trade, although that is not how it is presented.
The dominant position within British ruling-class circles for decades has been to ride two horses: remain within the EU and have a special relationship (ie junior partnership) with the USA. The Brexit vote was unexpected, even by many of those in Tory pro-Brexit circles.
The Tories are in a difficult position. Their slender majority in the House of Commons depends on the Democratic Unionist Party (DUP), they don’t want another election any time soon, and they are deeply divided over the EU including within the Cabinet. In addition, Remainers across all parties may be able to command a majority in the House of Commons.
The House of Lords is likely to play an important role in the next stage of the European Union (Withdrawal) Bill. There are 248 Tories in the Lords, less than a third of the total membership of 794. Thus, Remainers with a huge majority in the Lords, will make life very difficult for the divided government.
Mrs Thatcher’s former Chancellor, Lord Nigel Lawson, has written recently about the negotiations with the EU, “So we find ourselves today quite unnecessarily as a supplicant, in a humiliating state of cringe, begging for what is both unnecessary and unattainable – a posture which would have been anathema to Margaret Thatcher. The time has come to call an end to this demeaning process. We must get up off our knees. Enough is enough. The government should instead devote its energies, as is long overdue, to making the necessary arrangements for leaving without a bilateral trade agreement..” [ii]
Lawson’s statement suggests that he understands that the longer the negotiating process goes on the less likely it is that the UK will leave the EU and that the Remainers will get their way.
Organisations campaigning to stop Brexit include “Best for Britain”, funded by the billionaire, George Soros, and chaired by his friend, Labour peer, Lord Malloch Brown; and the European Movement, whose CEO is former Tory Cabinet Minister, Stephen Dorrell, Lord Ashdown is President and Ken Clarke MP, Vice-President. Among its patrons are the Lords Heseltine, Kinnock, Hurd and Baroness Williams.
Given the dominant historical position within British ruling-class circles and the balance of forces at the Palace of Westminster it is conceivable that the referendum result may still be overturned. That is what the hard Remainers are aiming for.
However, they do concede [iii] that they have a lot of work to do in changing the minds of those who voted to leave the EU, as the majority of the people still see it as an undemocratic and bureaucratic monstrosity, which acts for the few not the many.
[i] The Daily Telegraph, 21 February 2018
[ii] Nigel Lawson, “Margaret Thatcher would have said ‘No!’ to a bad deal”, Standpoint, February 2018.
[iii] See Lord Malloch Brown, https://bestforbritain.org
"Carillion was one of those companies which used the "Consulting Association" to create a blacklist of workers, especially in the construction industry.
This secret database of workers who complained about asbestos, unsafe electrical installation or were active Trade Unionists were denied work on construction projects."