25.01.2018

‘Dead end’ of privatisation

The collapse of Carillion blows apart a key myth, argues Michael Roberts

A few weeks ago, Martin Wolf, Keynesian economics journalist for the 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.¹

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

But it seems that it had taken on too many projects from the 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 £900 million. But this did not stop its board lying about the company’s financial state, continuing to pay its members large salaries and bonuses, together with fat dividends for its shareholders. In contrast, Carillion did little to reduce a mounting deficit on the pensions fund of its 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 £587 million. It paid out nearly £200 million in dividends in the last two years alone. The recently sacked CEO had been taking home £660,000 a year plus bonuses.

But eventually the bank creditors had enough and pulled the plug on further loans and Carillion had to close. 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, the official receiver for the bankrupt company stated on January 15 that all the top executives - including the recently sacked chief executive - were “still on the payroll”and receiving their salaries. The government announced it would guarantee the salaries of employees in 450 public-sector contracts that Carillion ran. 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 around £1 billion that are unlikely ever to be met.

Nonsense

Carillion is a very graphic confirmation that outsourcing public services 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 is 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 £170 million. In the UK, outsourcing of public-sector operations has reached 15% of public spending, or about £100 billion. 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,² 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, where a total of 121,095 businesses 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 rightwing Labour administrations under Blair and Brown - has resorted to ‘private finance initiatives’ to fund the building of public-sector schools, hospitals, rail and roads. Under the PFI, banks and hedge funds finance the projects in return for interest and income paid by the operators, 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 a new report from the National Audit Office,³ taxpayers will be forced to hand over nearly £200 billion to contractors under PFI deals for at least the next 25 years. And there was little evidence that there were any financial savings resulting from 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 £10.3 billion in 2016-17. Even if no new deals are entered into, future charges that continue until the 2040s amount to £199 billion. According to Labour MP Meg Hillier, who chairs the public accounts committee,

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 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, as they were “chronically overmanned and heavily politicised”. They “either underinvested or made poor investment decisions”. Unlike the private profit monopolies that now run Britain’s utilities, rail, energy and broadband, of course.

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 their private counterparts.⁴ Wolf also cites research from 2002, claiming 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 travellers and staff.

There is, however, a pile of research that reaches opposite conclusions from Wolf’s sources. I quote from the recent Public Services International Research Unit 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.⁵

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”.⁶

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

Bound to fail

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”.⁷

Public ownership is not of “totemic significance” to the left, as Wolf harps. There is clear evidence that delivering services that people need is best done within a plan and should not be based on the level of profitability for the likes of Carillion.⁸ 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”: they are part of the future.

Michael Roberts blogs at https://thenextrecession.wordpress.com.

Notes

1. www.ft.com/content/0470ad62-f623-11e7-88f7-5465a6ce1a00.

2. See www.theguardian.com/business/2017/nov/
02/more-costly-mortgages-in-wake-of-rates-rise.

3. www.nao.org.uk/press-release/pfi-and-pf2.

4. https://pdfs.semanticscholar.org/0f12/5d05a
583792edcdd90e175411357b4dfde7f.pdf.

5. www.psiru.org/sites/default/files/2014-07-EWGHT-efficiency.pdf.

6. Ibid.

7. M Wolf The shifts and the shocks London 2015.

8. See https://b.3cdn.net/nefoundation/78cfe0444c
38b5b9d0_3hm6iyth8.pdf.