Carillion and the ‘dead end’ of privatisation

A few weeks ago, Martin Wolf, Keynesian economics journalist for the UK’s Financial Times, wrote a piece arguing that the renationalisation of privatised state companies was a ‘dead end’ and would not solve the failures of privately owned and run public services in the UK and elsewhere.

And yet within a week or so, it was announced that one of the leading construction and service companies in the UK that has got much of the ‘outsourced’ previously publicly owned projects had gone bust.  Carillion, as it likes to call itself, employs about 20,000 people in the UK and has more staff abroad. It specialised in the construction of public roads, rail and bridges and ‘facilities management’ and ongoing maintenance for state schools, the armed forces, the rail network and the UK’s national health service.

But it seems that it had taken on too many projects from the UK public sector at prices that delivered very narrow margins.  So, as debt issuance rose and profitability disappeared, cash began to haemorrhage.  Carillion ran up a huge debt pile of £900m.  But this did not stop the Carillion board lying about their financial state, continuing to pay themselves large salaries and bonuses and fat dividends to their shareholders.  In contrast, the company did little to reduce a mounting deficit on the pensions fund of their 40,000 global staff, putting their pensions in jeopardy. Indeed, Carillion raised its dividends every year for 16 years while running up a pensions deficit of £587m.  It paid out nearly £200m in dividends in the last two years alone.  The recently sacked CEO took home £660,000 a year plus bonuses.

But eventually, the bank creditors had enough and pulled the plug on further loans and Carillion has closed.  With the liquidation of the company, thousands of jobs are likely to go, while pension benefits could be cut and the British taxpayer will have to pick up the bill of maintaining necessary services previously provided by Carillion.

Amazingly, as I write, the Official Receiver for the bankrupt company says that all the top executives are “still on the payroll” and receiving their salaries, including the recently sacked chief executive.  The government has announced it will guarantee the salaries of employees in 450 public sector contracts run by Carillion.  So the taxpayer will be covering these.  But over 60,000 employees working on private sector jobs are likely to receive no more wages from now, while up to 30,000 sub-contractors have invoices of £1bn that are unlikely ever to be met.

Carillion is a very graphic confirmation that outsourcing public services and sectors to private companies to ‘save money’ on ‘inefficient’ public sector operations is a nonsense.  The reason for privatisation and outsourcing has really been to cut the costs of labour, reduce conditions and pension rights for employees and to make a quick buck for companies and hedge funds.  But such is competition for these contracts that, increasingly, private companies cannot sustain services or projects even when they have cut costs to the bone.  So they just pull out or go bust, leaving the taxpayer with the mess. It’s a microcosm of capitalist economic collapse.

Carillion is not the first example in the UK.  The 2007 failure of Metronet, which had been contracted to maintain and upgrade the London Underground cost the taxpayer at least £170m.  In the UK, outsourcing of public sector operations has reached 15% of public spending or about £100bn.  So more may be under threat.  Indeed, half a million UK businesses have started 2018 in significant financial distress, according to insolvency specialist Begbies Traynor, as the UK economy felt the effects of higher inflation, rising interest rates, growing business uncertainty and weaker consumer spending.

A total of 493,296 businesses were experiencing significant financial distress in the final quarter of 2017 according to Begbies’ latest “red flag alert”, which monitors the health of UK companies. That was 36% higher than at the same point in 2016 and 10% higher than in the third quarter of 2017.  And the worst situation was to be found in the services sector. A total of 121,095 businesses in the sector were showing signs of financial difficulty, up 43% on a year earlier.

Martin Wolf’s claim that privatisation has been a success because it is more efficient is just nonsense.  For the last 25 years, the UK government, starting with Thatcher and continued by right-wing Blair and Brown Labour governments, has resorted to ‘private finance initiatives’ to fund public sector building of schools, hospitals, rail and roads.  Under the PFI, banks and hedge funds 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.  But of course, this was at the expense of future generations of taxpayers.

According to the UK’s National Audit Office in a new report, taxpayers will be forced to hand over nearly £200bn to contractors under PFI deals for at least the next 25 years.  And there was little evidence that there were any financial savings in doing PFI – indeed the cost of privately financing public projects can be 40% higher than relying solely upon government bonds, auditors found.  Annual charges for these deals amounted to £10.3bn in 2016-17. Even if no new deals are entered into, future charges that continue until the 2040s amount to £199bn, it.  “After 25 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.”

And yet Martin Wolf reckons that it does not make sense to renationalise privatised state operations.  He makes the usual claim that state companies were huge inefficient behemoths that were not accountable to the public, “chronically overmanned and heavily politicised. They either underinvested or made poor investment decisions”.  Oh, unlike the private profit monopolies that now run Britain’s utilities, rail and energy and broadband.

Wolf digs up some research from the 1980s and 1990s by William Megginson of the University of Oklahoma who argues that public companies were more inefficient than the private counterparts.  Wolf also cites research from 2002 that British railways have been more efficient under the nightmarish private franchise experiment that rail travellers have experienced since 1997 along with the disastrous collapse of RailTrack, the private company that took over the maintenance of the track.  Tell this to rail travellers and staff.

There is, however, a pile of research that reaches opposite conclusions from Wolf’s sources.  I quote from the recent PSIRU report: “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.”

Detailed studies of the UK privatisations of electricity, gas, telecoms, water and rail have also 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.”

Evidence from developing countries points to the same conclusion. 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” (Estache et al 2005).

The largest study of the efficiency of privatized companies looked at all European companies privatized during 1980-2009. It compared their performance with companies that remained public and with their own past performance as public companies. The result? The privatized companies performed worse than those that remained public and continued to do so for up to 10 years after privatization.

Wolf’s answer to the failures of privatisation and outsourcing is to “reform the structure and purposes of regulation”.  As if regulation ever worked; indeed, current thought among government elites and big business is that economies need to loosen up regulation again in order to get things going.  To quote Wolf himself from his book on the lessons of the banking crash: “notwithstanding all the regulatory reforms, the system is bound to fail again,”

Public ownership is not of “totemic significance” to the left, as Wolf harps.  It is based on clear evidence that delivering services that people need is best done within a plan and not based on the level of profitability for the likes of Carillion. Yes, public ownership and state companies that become just milk cows for the profits of the private sector without any democratic control are not what we require.  But democratically run public companies as part of a plan for production for need are not “a dead end”, but the future.


18 thoughts on “Carillion and the ‘dead end’ of privatisation

  1. Efficiency was never the real reason for privatisation.
    Reducing workers on the payroll and making those remaining to take on an added workload; to reduce wages; to undercut trade union membership and to discipline the workforce were four principal reasons. You can also add reductions in holidays, pensions, health and safety and working conditions. Privatisation was wholly political; an attack on the working class.
    And will labour under Corbyn reverse privitisation. Of course not.
    State run services and privitisation are two sides of the same coin. The alternative to both is socialism.

    1. ”A few weeks ago, Martin Wolf, Keynesian economics journalist for the UK’s Financial Times, wrote a piece arguing that the renationalisation of privatised state companies was a ‘dead end.’ ”

      Well, he would say that wouldn’t he or he would not be getting paid by that distinguished organ? I recall reading a former journalist with ”El Pais” admitting that if he had written positively about Cuba he would have lost his job.

      The Financial Times last year carried a review of “Red Famine” by Anna Appelbaum, the American ideologue and propagandist. There was an illustration of a kulak and of his house supposedly burnt down during collectivisation in 1932-33. Leftists however have exposed the picture as of a poor peasant whose house had been burnt down by kulaks in 1928!

      For similar distortions see ”Fraud, Famine and Fascism” by Tottle(1987 e.g. pp6 and 33). Fortunately the last time I looked this could be read online, as the book itself if it can be found at all is prohibitively expensive. Another useful book is ”Gekaufte Journalisten” by Udo Ulfkotte ( 2014). The English translation, which was due out May 15th. 2017, has been ‘disappeared’. If you check Amazon, it says unavailable. The publishers, Toyen Lane, carry no reference to the book. Ulkotte explains that he and other major journalists in Germany were all bought by the C.I.A. The book repeats a joke by the head of the CIA station in Bonn. ”High class (sic) journalists in Germany come cheaper than high class hookers!”

      Paul Craig Roberts, former Assistant to the Treasury under Reagan, calls Western journalists ”pressititutes.” And what are bourgeois economists and historians but presstitutes with Ph.D’s?

  2. Of course, I agree with both the gist of the analysis and the policy implications, whilst finding Wolf’s op-ed somewhat disingenuous (if he can conceive of multiple ways to carry out privatisation – both good and bad, why doesn’t he extend the same charitable pluralism to socialisation, which instead seems to be available in only one hierarchical and bureaucratic variety?). Nevertheless, a few quibbles:
    1. Is it really right to say that: “the reason for privatisation and outsourcing has really been to cut the costs of labour, reduce conditions and pension rights for employees and to make a quick buck for companies and hedge funds”. Leaving aside the third reason listed (which is how outsourcing is justified from the perspective of the private sector), the first two don’t really make sense as motives for either private or public actors; at most, they can be considered means to the end of cost reduction. Besides, if we now know that privatisation hasn’t actually saved the government any money and that all prior assumptions that it would were empirically unsound to begin with, this implies that the real motives for which successive governments have been taken in by this scam are a) ideological (i.e. unquestioning deference to neoliberal nostrums) and b) plain venal because of their own personal and class ties to the beneficiaries of privatisation.
    2. Secondly, I am not entirely persuaded that the Carillion episode can be held up “as a microcosm of capitalist economic collapse”. Carillion was the object of indiscriminate and continued government patronage despite its own inefficiency, even when its very vulnerability had come to light. Though privately owned, the conditions it was operating under were not particularly market-like given the absence of costs involved in failure (the government socialised the losses whilst the shareholders and managers still got the profits). Surely, this is an economic model more befitting of a feudal rentier than a capitalist enterprise?

    1. Carillion is a genuine capitalist enterprise. Just because it only has one customer (the State), doesn’t make it ‘feudal’.

      Manorialism (the economic system of feudalism) is a completely different system. In it, the worker is bound to the land and has to pay tribute in kind to the nobility (serfdom) in exchange for protection (from other nobles). In its pure state, there’s no monetary economy in manorialism (although pure manorialism never existed in reality).

      Capitalism is not synonym with efficiency and competition. When we talk about ‘efficiency’ in capitalism, we’re strictly talking about the capacity of extracting surplus labor: if you’re stealing and overexploiting labor, you are, in capitalism, by definition reducing costs, therefore, by definition, being more ‘efficient’ (because reduced costs rise profit rate). When we talk about ‘competition’, we’re talking strictly about centralization of capital: a fusion/merger is as competitive as many small companies doing a price war. But competition can only go so far: what keeps capitalism afloat is surplus value relative to total capital invested, the profit rate.

      The best metaphor I’ve ever read about what is capitalism is by late philosopher István Mészáros (dead in October 2017): it is a very potent suction bomb (of labor), by far the most strong and efficient ever created by humanity. But it’s a bomb that, once you turn it on, you can’t turn it off, it goes on on auto pilot.

      1. Well, putting aside the question of how feudalism is defined, I think that what most definitions of capitalism have in common is the centrality of the market to the functioning of enterprises. Carillion evidently did not depend primarily on a market to get most of its commissions and so, in this one important respect, was not a market-dependent actor. We are in agreement as to the fact that efficiency is pursued as a means to achieving greater profitability. However, efficiencies can take many forms and paying out bonuses to bosses when the company’s financial health doesn’t allow it clearly does not constitute an efficient deployment of scarce resources, instead prioritising private enrichment (not really specific to capitalism) over the company’s long-term profitability. Under market conditions such poor governance is rewarded with bankruptcy; in this case, the company was kept on life support by government patronage – not unlike unprofitable enterprises under state socialism, I’ll have you note.

  3. There used to be a “labour movement” in which there was a widespread belief that ” democratically run public companies as part of a plan for production for need are not “a dead end”, but the future”.

    That died many decades ago.

    I gather there has been some attempt at resuscitation with Corbyism in the UK, some weird combination of Eurocommunism and anarchism in Greece and Spain and even in the USA there is another variety of resuscitated Social Democracy represented by Bernie Sanders.

    My view is that this resuscitation reflects the utter bankruptcy of mainstream bourgeois politics. But the corpse of Social Democracy died for good reason and attempts to revive it is still a dead end.

    When a new movement does arises I think it will be actively hostile to the bourgeois state and instead of seeking to entrench the state as “the national capitalist” it will develop a new Communist program in the direction first expressed clearly in the Communist Manifesto:

    “We have seen above, that the first step in the revolution by the working class is to raise the proletariat to the position of ruling class to win the battle of democracy.

    The proletariat will use its political supremacy to wrest, by degree, all capital from the bourgeoisie, to centralise all instruments of production in the hands of the State, i.e., of the proletariat organised as the ruling class; and to increase the total productive forces as rapidly as possible.”

    First step, become the ruling class, win the battle of democracy.

    1. The problem with Corbynism is that it exists in the UK.

      The UK is a tiny country, without any significant industry, without any significant natural resources (apart from the fading North Sea) and whose living standards depend entirely on its financial sector.

      There are absolutely no objective material conditions to install socialism in the UK. Thus Corbyn is in time, but out of place.

      1. I think social ownership and democratic control over the collective product of labour can be established whenever the working class decided it wants such a change in ownership and control over what it produces.

      2. Marx had already argued, “The English have all the material necessary for the social revolution. What they lack is the spirit of generalisation and revolutionary fervour.”

        This comes ( I think) from a letter of about 1870, but I am afraid I cannot now place it. Does anybody know of it?

        So I feel ”There are absolutely no objective material conditions to install socialism in the UK” is wrong.

    2. Whether it starts in one or a few countries or not, first step has to be the working class winning the battle of democracy and establishing a State that is based on the working class organised as the ruling class. That will be enormously difficult, especially as any revolutionary government in any country would still be part of a global capitalist system based on wage labour and would have to learn how to rule while wage labour and capital are still the dominant relations of production both locally and globally.

      But “democratically run public companies as part of a plan for production for need” is rather more than difficult. It goes far beyond mere impossibility. An entire historical epoch will be required for transition from social relations based on wage labor to production for need. Pretending a program for “democratically run public companies” under the existing class rule could be a substitute for having at least some sketch of an idea as to how the working class should organize production as a ruling class under attack from the previous ruling class at home and abroad does not even reach the level of naive fantasizing.

      If we are going to fantasize, lets discuss how a working class that has come to power “somehow” in “some countries” might deal with the economic crisis that had resulted in it coming to power. What ideas do we have on dealing with mass unemployment, restoring international trade and investment and restoring the productive forces to pre-crisis levels as rapidly as possible so as not to be overthrown before proceeding to increase the total as rapidly as possible and spread the revolution worldwide? None whatever from the lemminist sects. Can people interested in Marxist economics at least start to think about it?

    3. ”First step, become the ruling class, win the battle of democracy.”

      Agree, absolutely. Any concrete proposals? How about that all politicians, public officials and contributors to public media have to declare their sources of income, i.e. who is paying them, any income not declared to be confiscated and the money invested in health care, such a proposal being put to a referendum?

      1. Umm no. I am looking for proposals as to how the workers who become responsible for organizing production when the present politicians, public officials and public media have had both their income and assets confiscated actually carry out OUR responsibilities. If we want to invest in health care we also have to provide for hospitals and steel to build them and so on and we have to do so as part of a global economic system. We won’t be able to just “DEMAND” things, we have to be able to actually “DO” them. Holding referendums as to what should be done instead of doing something about crisis and mass unemployment would be a pretty good way to incite a mass movement to put the old politicians, public officials and contributors to public media back in charge as they at least PRETENDED to have some idea what to actually DO.

      2. Okay, Arthur, but what are the FIRST steps, i.e. how do we get there?
        Can’t follow the rest of your argument. If you mean that ‘we’ should not first consult ‘us’ about what to do before we do it, then why bother with democracy at all?

      3. Actual first steps in a revolutionary transition are a long way off and I don’t expect any clear economic program for a revolutionary movement seeking to win the battle of democracy to emerge without extensive consultation of all kinds (with the blindingly obvious exception of a “referendum” which could not possibly help decide anything much and is generally used by dictators as “plebiscites” to PREVENT such democratic consultation by demagoguery).

        I certainly don’t have any program of my own ready to roll out. But I am pushing, quite sharply a PRELIMINARY step that should be taken by the few people studying economics. That is reject fantasizing about proposals that do not deal with how a working class that had become the ruling class would ACTUALLY manage the economy and start discussing the MANY and HUGE problems of doing so.

        More specifically two separate streams:

        1. The points of immediate program stated in the Communist Manifesto were obsolete very shortly after they were written. Way past time to start drafting equally transitory replacement in the same spirit.

        2. We are rather closer to a situation in which it would be necessary for a working class in power to actually deal with recovering from mass unemployment and breakdown in world market relations than at ever before. (Ok that involves both an assumption that such a situation will arise and a tautology about future events being closer to the present than the past was, but that is where I am coming from in getting really irritated about fantasies re “democratically run public companies as part of a plan for production for need” and proposals for supervision of existing regime being “put to a referendum”.

        I don’t claim to know how to deal with crisis and mass unemployment. I am sure that winning the battle of democracy is necessary for the working class to “use its political supremacy to wrest by degree all capital from the bourgeoisie…”

        Equally sure that no actual working class would, could or should attempt that without some ideas about how to actually run things. Specifically there would be widespread support for fascists with more concrete proposals to deal with mass unemployment than “democratically run public companies” and “holding referendums”.

        So, if others do claim to have ideas worth discussing about how a working class in power should deal with the economic crisis that had brought it to power, lets discuss them.

        If not, lets discuss the topic headings that such ideas could be about. eg

        1. Global multinational industries. National governments, some revolutionary, some counter revolutionary, some paralysed. What gets proposed to restore and extend global interchange?

        2. How do national governments wrest capital from global multinationals?

        3. Wage labor and commodity production still completely dominant relation. Unemployed workers want jobs with wages, not “production for need”. Capital wrested from the bourgeoisie previously jammed up by crisis and further disrupted by the wresting. What IMMEDIATE steps to at least gain a breathing space to avoid getting thrown out of power by fascist mobs demanding jobs while coming up with a longer term program for transition?

  4. The first step in becoming a ruling class is to act independently as a class and assert those class objectives aggressively. For the working class those things clearly have not happened during most of the 20th century and certainly not at all in the 21 century. The working class has never really gone beyond trade unionism and even with that they have been found wanting.

    While ever the media can just brazenly peddle the lies they do on a daily basis we know there is only one ruling class the capitalist class. The rest just serve as consumers and workers.

    I see no evidence of a working class actually (and demand evidence from those who say it exists), i.e. a class that thinks and acts for itself and in its own interests. All we have is a working class in technical terms, people who exchange their labour with a firm. The working class as a ruling class or a rival class to the bourgeois is a myth. I guess our job is to give life to this mythical beast.

    Therefore the only tactic for socialists is to relentlessly expose the lies of the ruling class media, to relentlessly take an anti imperialist stance in every single situation without exception. To create the working class as an independent class, not as a lapdog of their masters or a class of mindless consumers.

    This brings us to the other problem, not only does the working class not exist in any meaningful way but a good portion of the left take a pro imperialist stance and still spout off about the virtues of the free press!

    Therefore rather than trying to bring life to this mythical beast we instead squabble about irrelevancies.

    Until all this happens history is on hold.

    1. I would have thought the central lie of the bourgeoisie was that the working class is incapable of thinking and acting for itself and consequently needs a ruling class.

      Or at least the traditional bourgeoisie in developed countries. The kleptocracies in former colonies tend to emphasize an “anti imperialist stance in every case without exception” to get some support from the “anti imperialist” pseudoleft which takes a more consistent stand against solidarity with their peoples than even the isolationist Obama and Trump administrations. But having registered my dissent I really don’t want to divert from topics more directly related to this thread and don’t intend to pursue that further.

      It isn’t history that is on hold. Socialists condescending from on high to “give life” to the working class were put on hold more than a century ago, by two things. First a song, The Internationale, which starts “No saviours from on high deliver, no trust have we in prince or peer, our own right hands the chains must shiver, chains of hatred, greed and fear”. Second, a Manifesto, the authors of which explained in 1847 that they could not call it a Socialist Manifesto because Socialism was bourgeois.

      People studying economics now cannot excuse failing to develop economic policies for a future working class movement on the excuse that the workers aren’t interested yet. Waiting until they are means not helping. The numbers who could help on that have always been small but they didn’t just give up the work they could usefully do and instead confine themselves to “relentless” whining about the bourgeois media.

  5. Hi Robert! I once read an article by you, in which you referred to a meta analysis of privatization in Europe, reaching the conclusion that costs went up and the quality of services went down, could you please give me the reference.Thanks, Dordi Westerlund

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: