The explosive collapse of Carillion, the UK’s largest construction firm, has proved to be one of the biggest media stories of the year, opening up a wide-ranging discussion on how the financial policies of national governments could be improved. The vast majority of Carillion’s mammoth portfolio prior to liquidation came in the form of government contracts for public services such as hospitals, public transport networks and residential buildings, and the swift collapse of the company has meant that those lucrative contracts have had to be passed on quickly. While some of these contracts have simply been handed straight back to the British government, other, more solvent contractors have stepped in to fill the gaps in mega-projects such as Angel Gardens in Manchester and the High Speed 2 railway system.
The demise of Carillion was the result of a longstanding approach by the government to outsource public services to private companies, emphasising cost-effectiveness as the key priority, with the result being that those contractors then take on the significant financial risks inherent in projects of this nature. Let’s take a look at how the British government’s policies affected the fortunes of Carillion, and how such mistakes can be avoided in the future.
Cost Over Quality?
Since the global financial crisis of 2008, governments in Europe and beyond have taken drastic measures to reduce the costs of delivering public services and therefore lift some of the strain from government coffers. The UK has long led the way with this strategy, having outsourced public services for decades in an attempt to keep things as cost-effective as possible. This isn’t necessarily a bad thing, as the positive effects of cost are well proven, however, the fundamental risk of this fiscal strategy lies in the fact the private companies, who are greatly exposed to the effects of the market, carry a great degree of responsibility over the administration of vital public services.
Furthermore, the director of a private company will naturally be concerned more with profits and success than about the quality of the service, meaning that such a policy requires a huge degree of trust of private contractors on behalf of the government that the services delivered will be of sufficient quality. Offsetting the cost of expensive public services is an understandable priority, but the overwhelming emphasis on driving down costs means that vital considerations like quality and viability were all-too-often overlooked by those in charge.
Lack of Insider Knowledge
A common line of argument for Public-Private-Partnerships (PPPs) such as that which existed between the British government and Carillon is that the directors of a private construction company will have a greater deal of knowledge on how best to implement big projects, as they are the true insiders. While this may indeed be true, when delivering costly public services the vital knowledge of how best to do so for the public’s benefit is missing. In addition, the government officials who are ultimately responsible for public services often completely lack the nuances of the construction industry and how it may be affected by wider market trends, meaning that they may often be tone deaf to the concerns of the company.
In many countries, financial regulatory authorities work on behalf of the government to gather detailed knowledge on current financial markets and trends in order to better inform the government’s fiscal decision making. For example, Poland’s KNF (Financial Supervision Authority) keeps the government on top of all the latest financial shifts, from banking to developments in forex trading, and advises them on how to alter policy accordingly. Similarly, France’s Council of Economic Advisors play a key role in keeping the government informed on how publicly-funded projects can retain maximum profitability and sustainability, with recent Paris Metro upgrades being a significant example. The demise of Carillion suggests that similar practices were simply not as prevalent in the UK, as the fallout in the days and weeks after highlighted a startling lack of market knowledge from high-level government officials.
A Blueprint for the Future
Ultimately, the collapse of Carillion was undoubtedly handled pretty well given the magnitude of the crisis, and major public projects which were once in jeopardy have been taken up by more solvent and stable contractors, with most projects still on track to be completed on schedule. However, the risk of a similar crisis happening again in the UK remains high, and the government should take a page out of other country’s books to re-think their approach to PPPs.
For a start, the government should take a more active role in risk assessment and management, to ensure that private contractors aren’t taking up jobs with massive amounts of risks attached. They should also take steps to ensure the directors of private companies are more financially and legally liable in the event of collapses stemming from negligence of incompetence, and introduce stronger incentives for good performance. Most importantly, the UK government should take a more active and attentive role in the progression of massive projects which affect millions of people, focusing on public outcomes and benefits as much as they do on cost-effectiven