How do you solve a problem like Carillion?

Helen Mercer of People vs PFI explains the collapse of Carillion and how we might begin to solve it: 

The collapse of Carillion affects multiple sectors of the economy and threatens jobs and public services. Carillion has £1.3bn of debts, but the major banks have refused a restructuring package. The company must go into liquidation and the firm which is assisting the Official Receiver, PWC, has previously worked on lucrative Carillion contracts. Companies are earning extra dosh, the entities which have helped created this crisis, banks, accountants and government, shrug their shoulders and walk away and public sector workers and taxpayers are left to fill in the gaps and pay the price.

A clear-headed, analytical response is required from opponents of privatisation and especially opponents of Public Private Partnerships and the PFI programme. It is unlikely that radical voices will be heard in the next few months, but we should take the opportunity to analyse what such a response would look like, not expecting results from government and public authorities now, but to have something coherent to suggest for the inevitable further collapses.

To begin to grapple with Carillion’s problems we need to understand them. Much attention has focused on Carillion as a PFI company, but we need to be more precise and we need to understand the nature of PFI contracts.

A PFI contract is signed between a public authority and a type of limited private company known as a Special Purpose Vehicle (SPV). SPVs are fundamental to the PFI model - they are the legal and financial structure at the centre of every PFI scheme. They raise the loans to pay for the project and contract other private companies for the design, build and operation of the buildings. In return the hospital, local authority or other public body pays a regular unitary charge to the SPV, which covers repayment of the loan raised by the SPV and on-going charges for services like maintenance, cleaning and catering.

The owners of SPVs are able to cream off 10-15% interest on their loan to the project and this is on top of directors’ fees, administration charges and dividends from profits. Many of these investment companies are registered in tax havens: nine off-shore funds hold majority stakes in nearly half of the UK’s PFI contracts. 

The same basic principle goes for two variants of PFI: PF2, introduced in England under Osborne and the Non-Profit Distributing model (NPD) which operates in Scotland, although here the level of profits is capped.

Carillion owns shares in just 12 SPVs (see table below), including shares in two PF2s which have had an immediate impact on Carillion’s demise. The PF2 for Midland Metropolitan Hospital is owned 50% by Carillion and 10% by IUK Investments Ltd. The PF2 for the Royal Liverpool is owned 50% by Carillion and 50% by Aberdeen Asset Management, which is a leading investor in SPVs and was recently merged with Standard Life. Actual ownership of PFI SPVs is therefore a small part of Carillion’s business.

Shareholdings in SPVs need to be distinguished from Carillion’s stake in PFI as a contractor – a provider of services: construction, building maintenance and ancillary services such cleaning and catering. The point to note is that most of Carillion’s contracts under PFI are not as an owner or manager of PFI contracts but as a contractor to an SPV.

Carillion has a poor record as a service provider on PFI contracts.   https://www.nuh.nhs.uk/communications-and-media/news/2016/october/carillion-contract/;

 As a building constructor, the delay in the opening of the Royal Liverpool Hospital was due to workers discovering cracks in concrete beams early last year. 

Carillion was also notorious in the building trade as a blacklister. The Blacklisting Support Group has commented:

When you invite blacklisting human rights abusers to run the NHS and school meals, don’t be surprised when vampire capitalism attempts to suck the taxpayer dry…..http://uniteresist.org/2018/01/blacklist-support-group-statement-on-carillion/

Once we understand properly the nature of Carillion’s role in PFIs we can be more specific, and more sweeping in demands to bring public services back into public control and provision.

Carillion has three main types of contracts with public bodies: it owns a few SPVs, it has building and servicing contracts through PFI projects and it has direct contracts – essentially outsourcing of various types. From these contracts it derives an income stream which in turn is derived from taxpayers. On the other hand Carillion has massive debts – giving access for the lending banks to that same taxpayer funded income stream.

The public wants to see public services provided by public bodies, eliminating the profit motive. So we need an approach which will secure that outcome, but leave the banks to stew in their own indebted juice. Carillion’s spectacular failure provides a superb opportunity for just that.

On Monday the Official Receiver pledged to continue to pay workers on Carillion contracts at least until Wednesday. The implication is that Carillion itself is unable to fulfil the terms of the contract. This being the case the government and other public authorities concerned should simply cancel the contract with no compensation. Payments which were being made to Carillion would go instead directly on the now publicly provided works. Indeed, given the profits accruing to Carillion and the retinue of accountants, directors and management companies involved in private outsourcing there could be a net gain to the public. Workers would become direct employees of the public authority concerned and could continue in their work under that arrangement. Workers would be assured of comparable or better wages and conditions, with full pension and trade union rights secured.

This model can apply easily where Carillion has a contract directly with a public body. Where its contract is in fact with an SPV, mediating and acting as a middleman between Carillion and the public body, the situation is in some ways more complicated. However, if the Official Receiver is paying the workers wages, then the SPV itself is no longer delivering on the contract, and the contract with the SPV can be cancelled. The public authority concerned can again take the work directly under its control and provision.

Where Carillion owns shares in SPVs, a solution presents itself where it has a majority stake, for here the government could again seize control of assets by nationalising those SPVs. This solution is outlined in a paper produced by People vs Barts PFI. https://peoplevsbartspfi.files.wordpress.com/2016/02/pfi-nationalise-the-spvs-pple-vs-barts-pfi-version-1.pdf. The book value of Carillion’s shares in such SPVs is about £1.2m, but, perhaps this does not need to be paid as it is the public sector that needs compensation for the chaos caused by Carillion’s collapse.

We need a lasting solution to all PFIs and PF2 in the UK and one which will challenge the PFI / PPP model. The solution which fits that bill is to nationalise the Special Purpose Vehicles – the limited private companies, owned by (usually offshore) investment funds. SPVs sign the PFI contracts with public bodies - hospitals, schools, prison authorities, government departments etc. Once the contract is owned by the government, a variety of mechanisms can be used to reduce costs – by refinancing loans and ending as many service contractors as possible for instance. The contracts could, indeed probably would, need to be ended by mutual consent. Nationalisation is only viable if it is cheap, and, as an Act of Parliament would be needed, legislation can stipulate formulas and assumptions to keep compensation to a minimum.

The effect of nearly forty years of outsourcing and privatisation has denuded public bodies of management experience, service personnel and infrastructure to administer the services it used to provide in-house. Nevertheless in an emergency these can be quickly built up again, as was proved, for instance, during the two world wars, so the with the political will and economic resources in place, the administration can follow. In order to bring Carillion’s contracts back ‘in-house’ in the way outlined above, it may be necessary to establish a Task Force within government to provide support for public authorities to build up the administrative support needed to bring public services back under public provision.

This route to solving a problem like Carillion is preferable to nationalising Carillion itself. For many, possibly the majority, of Carillion contracts for construction, maintenance or service provision Carillion is contracted to the SPV.  We know from studies of SPV accounts that the SPV derives significant operating profits, derived in part from paying companies who are contracted under PFI less than what it is paid for the same services in the unitary payments. 

 So, if Carillion's stakes in these hard and soft FM contracts were to be nationalised, the SPV owners would be deriving a profit from a government-owned service provider! 

There are financial implications of nationalising a heavily indebted company, and do we really want to end up owning Carillion’s operations in the Middle East?

We need, furthermore, to consider what nationalisation is for. One purpose of nationalisation is to be able to plan investment, prices and wages, training and R&D across a whole sector. Nationalisation of one or two firms who dominate that sector would allow that planning to occur, but although Carillion is big in terms of its revenue and contracts, it is but one in a field of many players and its activities straddle several sectors. No such planning of construction and service provision would be made possible by its nationalisation. To nationalise those firms who were ailing the most or willing to be nationalised can easily become simply a bailout.

Those of us opposed to privatisation, outsourcing and similar works of the neo-liberal Devil need a solution to the Carillion problem that is cheap, effective and really does start to drive nails into the coffin of the Private Finance Initiative, and all other forms of privatisation.

Source: HM Treasury, Infrastructure and Projects Authority Private Finance Initiative and Private Finance 2 projects: 2016 summary data.

NB: All figures for future unitary payments are nominal and undiscounted, as provided in the HMT database.