Carillion collapse: Is there a public alternative in Scotland?

Ben Wray

Ben Wray, Common Weal head of policy, proposes a public-public partnership model in Scotland to replace the private greed and negligence of Carillion and its ilk

THE fallout from the Carillion collapse has only just begun. The immediate necessity is to ensure that wages and pensions are provided for those Carillion workers who don’t make it up the negligent top brass, and that infrastructure projects and privatised services are either taken in-house or new contractors are found quickly.

But the longer term ramifications are unclear. Is Carillion the beginning of the end for public money being spent on private greed and incompetence, where the profits are privatised and the risks are socialised, or is it just another in a long list of fiascos which will be put down to a few bad apples and swept under the carpet, until the next scandal hits?

This piece will argue that, in Scotland at least, not only should it be the beginning of the end for the private finance model in public infrastructure, but that we already have the beginnings of a new model which could replace it. (Skip to the ‘How would the public alternative work?’ section below to see our proposed model).

What is Carillion?

Carillion is (or was) a product of privatisation, created in 1999 by the firm Tarmac with the specific purpose of maximising the bounty that could be made for shareholders from PFI and the outsourcing of services. Its main client has therefore been the public sector, which pays five or six times production costs for infrastructure projects through future debt repayments, a wheeze that keeps infrastructure off the books only for the next government and the one after that to pick up a bigger bill. Its main financier has been the big banks, which, as finance campaigner Joel Benjamin describes, use Carillion and project management firms of its ilk as “shop fronts” for the huge profit margins they reap from public-private partnerships (PPP). Once the big procurement and PPP contracts are inevitably won by the big firms like Carillion set-up to win them, the company pushes much of the actual building work down the supply chain, ruthlessly squeezing (and blacklisting) construction workers and small companies who are reliant on the contractor for work.

The ramifications of Carrillion’s collapse in Scotland is still being analysed, but so far we are aware that it is a key player in the Aberdeen Western Peripheral Route, the Scottish Government’s biggest current infrastructure project, as well as contracts with Registers of Scotland, The Scottish Children’s Reporter Administration, West of Scotland Housing Association, NHS Greater Glasgow and Clyde and Network Rail in Scotland.

Why a public alternative?

The original case for PPP was that it offset risk from the public to the private sector. Evidently, this is not the case – the UK and Scottish governments are going to have to absorb the risk from the failure of a firm that is running services and building infrastructure that cannot be allowed to fail. The profits accrued by Carillion shareholders, and the huge executive payouts over the past 19 years, are not at risk from the companies collapse – it is public money, public services and the pensions and livelihoods of the rank-and-file workers that have been put at risk.

So what remain of the case for a private model for public infrastructure? There is of course the dogma that the private sector does things more efficiently than the public sector, an argument of neoliberal zealots that can never be defeated no matter the weight of evidence against it. But the more important, unspoken, incentive is that it still produces the goods for politicians keen to see projects built now without adding to the government debt balance sheet, and then paid later when it will likely be a new generation of politicians’ responsibility.

The effects of the ‘build now, pay later’ model in Scotland are now beginning to felt as they cut into Scottish Government budgets in a serious way, with annual debt repayments going over £500m in 2015/16 and not projected to drop below that figure until 2034/35. Yet the PPP model continues in the form of NPD and Hub, which negate some of the most detrimental aspects of PFI but retain its essential characteristic of public debt repayments going to private firms like Carillion to build public infrastructure.

Not only is the continuation of this model undesirable, it is increasingly clear that it is no longer possible. Ironically, the very same Aberdeen Western Peripheral Route project was, in a landmark case, registered as on-balance sheet in ONS accounting classifications, meaning the Scottish Government had to pay for the projects with current capital spend rather than future revenue spending, meaning they don’t even get the ‘pay later’ part of the private finance Faustian bargain anymore. Additionally, the Scottish Parliament (sensibly) has a 5% cap on the amount of future revenue budgets which can be tied up in debt repayments – currently that figure is 4.3% and still rising. The only redeeming feature of the private finance model in Scotland is now running up against accountancy limits – there’s nothing left in the ideological armoury of PPP to justify it other than dogma and inertia.

How would the public alternative work?

Common Weal published a paper at the beginning of 2017 proposing how the Scottish Government could replace the private finance model within its current powers. The public-public partnership model we came up with looks like this:

The strength of this approach is that it solves a number of problems all at once:

  1. It gets round strict Treasury capital borrowing rules on the Scottish Government by utilising a new Scottish National Investment Bank to be a principle lender for the infrastructure projects, with the local authorities being the principle borrowers (who do not have the same borrowing restrictions). Common Weal has argued in its consultation response to the implementation plan currently underway for establishing the new Scottish National Investment Bank that public infrastructure should be a key priority of its work. This model would mean no more building up of public debt for private profit, and no commercial banks exploiting the system to extract public money for profit.
  2. The new Scottish National Investment Company (which we envisage replacing Scottish Futures Trust) would mean that the Scottish Government would still have a key role in leading the project management, design and delivery of key national infrastructure projects, working in tandem with local authorities. The Investment Company is the part of this plan which we forsee taking up the actual function of companies like Carillion; to project manage and work with smaller partners in project development. However, rather than the exploitative and reckless way in which Carillion done this, the Investment Company would have a public good mandate with the intention of maximising its team of  skilled architects, planners and engineers to build the best infrastructure possible in a socially just way. Not only do we have in mind here ensuring that we never have another Carillion again, but also that we never have another Edinburgh Schools scandal again, with the collapse of PFI-built Oxgangs Primary school in 2016, or another Grenfell Tower tragedy again with the council contracting firms to erect highly flammable plastic cladding. Quality and safety would be prioritised alongside cost effectiveness and efficient use of public money.
  3. Finally, because this model is based on an increased role for local authorities in public-public partnerships, there should be sufficient scope for a form of procurement that is localised and provides contract tenders small enough and simple enough for small and medium sized firms. Another aspect of the Carillion scandal that I have not analysed is procurement and the cosy, revolving door style relationship between the big contractors that always win procurement contracts and those responsible for government tenders. It’s beyond the scope of this piece to fully analyse the problems in procurement, but essentially it comes back to the same root problem (read more here) – multinationals dominating the system and working in the shadows to get their hands on public money, at the expense of the public purse, service quality and local economies. That too must end with Carillion’s demise.

All of this is doable now – the Scottish Government does not have to wait for Westminster to change its approach to public investment and infrastructure. And with the new National Investment Bank, it looks like we are already half-way there to setting up the sort of institutions we need to make this model work. The Scottish Government can make a bold statement by ending the insidious role of corporate finance in Scotland’s public infrastructure – if ever there was a motivator for change, Carillion should be it.