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Carillion’s brutal demise is testament to free market mechanisms

For a short while, if some reports were to be believed, the ..

For a short while, if some reports were to be believed, the government was considering some form of a bail-out for stricken construction services company Carillion.

Thankfully the government has done the sensible thing – nothing – and the company has gone into liquidation.

Taxpayers can breathe a cautious sigh of relief: rightly, the company’s shareholders, along with its major creditors, will take the hit. Sure, re-tendering the contracts will impose an additional cost on taxpayers, but nothing like what a bailout or nationalisation would have cost.

Read more: Carillion rescue "undermined" by Royal Bank of Scotland and Santander

Yet, bizarrely, voices usually critical of what happened during the financial crisis are calling for exactly the same response in the case of Carillion, condemning the fiasco as yet another failure of “privatisation” and calling for the government to nationalise it, potentially pouring untold amounts to prop the company up. All while accepting – in an impressive form of doublethink – that the government should not have continued to contract with the company once its problems became clear.

Which means Jeremy Corbyn is wrong – nationalisation is not the answer. If the company collapsed, it’s because it was not making enough profit. Margins at the top 10 contractors are around 0.8 per cent. If that’s true, how could it have been ripping off the state?

The reality is that what happened to the ailing company has nothing to do with “privatisation” (was Carillion ever owned by the state?) and everything to do with bad management – at Carillion, but also in Whitehall.

Last year, the company issued three profit warnings in five months, wrote down more than £1bn from the value of its contracts, and suspended paying dividends. Hedge funds had been betting heavily against the company long before that. Yet the government, apparently oblivious to what was going on, continued to dish out contracts to Carillion, including some for High Speed 2.

The government’s own procurement policies, designed to minimise taxpayers’ exposure to risk, were largely ignored. Under these rules, a company which has issued a profit warning ought to be classified as “high risk,” meaning that a decision to nevertheless engage it should be made only in extraordinary circumstances.

In other words, the issue was not too much profit, it was too little.

The company was providing the service for less than it costs to provide it – it wasn’t fleecing the taxpayer, it was, in fact, being fleeced. If the government was to bring those contracts in-house, the cost of providing the service would rise.

It takes a truly enormous leap of faith to believe that the government, having demonstrated itself incapable of even keeping up with financial news, is best-placed to manage all these construction and facilities management projects.

Read more: Carillion boss previously found guilty of breach of trust over pensions

What evidence is there that the same mistakes will not be made? Why give more responsibility to people who are partly responsible for the fiasco? The answer apparently lies in eliminating the supposedly enormous profit margins and cutting out this “waste,” but as already mentioned, the fact that Carillion has entered liquidation suggests these margins were not as spectacular as many seem to believe.

Still, things would probably have been worse under public ownership. So often the main criticisms of private management is that it is too efficient. Consider the discontent with the huge efficiency gains made in privatised industries in the 1980s and 1990s, as new management, free from political meddling, stripped out unnecessary jobs which had built up under state ownership.

And yet what is the ideal model according to the unions? According the GMB union there is “no place for private companies who answer to shareholders, not patients, parents and service users in our public services.” No computers from Microsoft, no drugs from Pfizer and no biros from Bic.

So what should happen now? As many of those contracts were joint ventures with other companies, these will simply be taken over by Carillion’s venture partners. Others should be re-tendered, this time following the government’s own procurement policy. Firms such as Kier have already expressed an interest, which means they think they can learn from their predecessor’s mistakes. And this learning process, allowing the market to trial and error different solutions, is what a market in public sector contracting should be all about.

The market’s brutal treatment of Carillion’s owners isn’t an indictment of the private sector. It’s a major reason why it is, on average, more efficient. If only the government could adopt a similar approach in the public sector, perhaps we’d enjoy the kind of public services we all want.

Read more: Pressure grows on government to investigate Carillion executive pay

Original Article





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