Why Carillion’s Fall Is About More Than Privatization
Sound the warning siren—P3 deals will face a new level of public skepticism after the collapse of Carillion in the U.K. That’s not the only issue associated with this debacle.
Jeremy Corbyn, the left-leaning leader of the opposition Labour Party, has declared all privatization and outsourcing to be little more than a get-rich-quick scheme for the ruling class.
“It’s time to put an end to the rip-off privatization polices that have done serious damage to our public service,” he declared. “Across the public sector, the outsource-first dogma has wreaked havoc.”
Such ideological dualisms—government good, business bad—are exactly the kind of thinking that will stagnate public service and the functions of government. Although privatization’s raison d’être is always the public benefit, no one has said such deals are risk-free. Every privatized function of government needs to be judged on its own merits; sweeping them all out with the same broom is just dumb. Were the soldiers housed according to the contract? Were the school lunches delivered hot and nutritious? Was the health data gathered in a reliable and statistically sound fashion? And was the airport operated efficiently and smoothly for the beleaguered coach-class travelers of the world? Find out that kind of information before calling it all a bust.
The Carillion collapse raises numerous questions besides those related to outsourcing.
Was Carillion's Disclosure Proper?
What were the tip-offs that lenders would pull the plug on more financing before and after Carillion's disclosure of the company’s huge July 20 loss? Could reforms in accounting and revenue recognition such as have been adopted recently in the U.S. have headed off the disaster? How was the company’s management able to publish pages and pages of details about its risks and rigorous risk management practices while the enterprise doubled its debt to capitalization and several contracts drained cash?
Look at Carillion's lesson learned and actions following its July 10th disclosure of an £845 million loss.
|What Carillion said it would do to head off more losses like the ones it disclosed July 20th.|
Note the important issue of "design changes agreed without agreeing incremental cost and value." Note also "geographic risk," no doubt related to a bad Middle East project.
Eliminating UK Pay Abuses
The UK has been working gradually to eliminate some of the horrible payment practices familiar to U.S. subcontractors. Significantly, Carillion’s practice reportedly was to pay subs and trade vendors in 120 days, later than the U.K. prompt-pay movement and government guidelines allow. Out of the Carillion debacle, I hope, will come more far-reaching compulsory payment rules and protections for subcontractors and trade suppliers.
About 20 companies working in UK government services have signed on to the UK Construction Leadership Council's Supply Chain Payment charter. Under its terms, they have committed to paying suppliers and subcontractors according to an agreed set of performance indicators. Stanford Industrial Concrete Flooring Ltd., for example, promises to pay within 45 days. Skanska Construction UK says it will pay in 30 days. The prime contractors that haven’t signed on for faster payments may now have to fall in line.
No one who has ever worked in private industry would ever expect public servants to do all they need to do only with the resources of government and government employees. And no one who appreciates the needed flexibility and entrepreneurial aspect of managing government could believe privatization should be rolled back so entire new armies of government employees can do the job correctly.
I agree with anyone who notes that there was an undefined supply-chain risk for the U.K. in buying so many Carillion government services. The real problems illustrated with this spectacular failure have as much to do with lack of adequate disclosure and pay practices.
Any declarations of privatization’s total failure is a vote for stifling, lethargic government. Carillion's fall is a P3 risk textbook about what to avoid, not what to never try again.
A comment posted beneath Corbyn’s anti-privatization Youtube video makes more sense than Corbyn. The comment distinguishes between what should be privatized and what should not.
“It's very hard to disagree with Corbyn on this,” says the comment. “Public services need to be exactly that—public. Core infrastructure of a country needs to be government-run. Secondary operations can be run by private firms.”
Figuring out the difference between core and secondary, that’s the start of a good discussion of P3s and outsourcing.