A heavy price will have to be paid for this failure of privatisation

The Herald Scotland, by Iain Macwhirter

17.01.18

PFI for beginners. Civil servant has dinner with mates in City in 1990. They dream up a wheeze for increasing public spending without appearing to increase it. Instead of government departments and local authorities building and running schools, hospitals, prisons and the like, why not hand it all over to the private sector on 30-year leases? That way it stays off the government’s books, your minister gets to open shiny new hospitals and roads and it doesn’t cost a penny up front. Yes, these contracts are more expensive in the long run, but the voters won’t know that. We’ll make a packet from bonuses, commissions and so on, and you can join our board when you “retire”.

Next, the civil servant advises government minister on Private Finance Initiative. Minister can’t believe his luck. He knows he’ll be long gone before the bill is paid for the projects he launches. Roll on 25 years or so and you get Carillion – a school-dinners-to-GCHQ PFI megacorp, which finally goes bust with untold consequences for public services and the people employed by them.

Jeremy Corbyn has said that Carillion is a “watershed” for privatisation, and he is correct. But as one of his advisers, Paul Mason, has pointed out, nationalisation of Carillion wouldn’t make a lot of sense. Indeed, if the Government had nationalised or bailed out Carillion, as it did the banks in 2008, it would have raised an even bigger stink than letting this Frankenstein company go bust. The debts of some £1.2 billion would have transferred to the Government’s accounts, not shareholders’. Every company that gets a contract from the Government would expect similar treatment. Carillion was effectively an arm of the state – rather like state entities in Communist China – which allowed its executives and shareholders to syphon money from the tax payer without having to face the consequences of market failure. It was a way of getting the Government to make long-term financial commitments, which could then be “securitised” and sold off to make quick gains for the smart guys who got in on the ground floor. People in the know have long known Carillion was finished. Since 2015, one-third of its shares have been lent out to hedge funds betting on its collapse.

Most of the money to be made from public private partnerships was made by CEOs and shareholders years ago and is now safely tucked away in London property and offshore accounts. So who picks up the tab now for Carillion’s collapse? Well, us of course. The Government has done the right thing in letting Carillion go into liquidation. But the costs of keeping all those public sector dinner ladies employed, completing the Aberdeen bypass, paying the contracts for school maintenance, will fall to the taxpayer.

The big worry for the Scottish Government – which insists that it had seen Carillion coming and had contingency plans in place – is that no one really knows how many pies Carillion had its fingers in. The Aberdeen West Peripheral Route (AWRP) is supposed to be safe because the other partners in the project will keep calm and carry on. But no one really knows what happens to other Carillion PFI projects in Scotland involving Network Rail, or housing associations or the ministry of defence.

The Scottish Government appears to be making promises to workers that they won’t lose their jobs or pensions, but who exactly will employ them in future is in doubt. You see, Carillion didn’t actually do much of the work – it outsourced it down the food chain. The UK Government has given the tens of thousands of small businesses which had contracts with Carillion only 48 hours’ security. The immediate casualties of this collapse may well be those countless small firms which will go bust because of money owed to them.

What happens now to PFI? Well, the Scottish Government has its own alternative, the Non-Profit Distribution model, which is a kind of public-private partnership which limits the profiteering by PFI companies. The Scottish Futures Trust (SFT) is supposed to have a public responsibility remit, which is certainly an improvement on PFI, thought it did not restore the old rules of public procurement. The SFT has still been outsourcing work to firms like Carillion for projects such as the AWRP. However, even if it could afford it, the Scottish Government can’t simply take every contract back into the public sector. It is tied into long-term contracts it has inherited such as the one for the Royal Infirmary of Edinburgh, which runs until 2028, when critics say that we will have paid for the new hospital six times over.

In future, there will have to be some kind of socially responsible institution to replace public private partnerships. The Common Weal think tank says that the Scottish Government already has the means to do this in the form of the promised Scottish National Investment Bank. Like Mr Mason, Common Weal is no friend of the private sector. However, it realises that the state needs to find ways of financing public projects, in part, by mobilising private sources of funds. The key is to ensure that this is done in the public interest and with full transparency. And to stop executives and shareholders enriching themselves. Carillion was still handing out bonuses to its executives when it was effectively bust.

For 30 years, taxpayers have been taken for a ride by a financial services industry, which has shown itself to be untrustworthy, irresponsible and lacking basic standards of probity. No one expects civil servants to actually build hospitals and schools – it is always going to have to pay Bob the Builder to do it. The trick is to find a way of keeping Snatch the Banker’s hands off the contracts. The truth is that the state has never been particularly good at building hospitals, houses and roads. Look at all those tower blocks that had to be torn down. Government was a sucker for the private sector moneymen, who came along and said they could take the whole difficult business off their hands. For a price. That price is now being paid.