For whom the bell tolls: what does the collapse of Carillion mean for the future of public services

Written by Richard Johnstone on 12 February 2018 in Analysis
Analysis

The fall of construction firm turned outsourcing giant Carillion comes at a time when criticism of private provision of public services is rising. Richard Johnstone looks at Whitehall’s response and takes soundings for the future

When it came, the end of Carillion was as quick as its decline had been steep. On Monday 15 January, the outsourcing giant called in the receivers, after talks to save it from its burden of debt failed, just six months on from its first profit warning.

The firm had an estimated 450 public sector contracts, including building part of the High Speed 2 rail link as well as providing school meals and maintaining sites such as military bases and prisons. Its closure sparked both a large government response and questions about the future of outsourcing.

On the day of the collapse, Cabinet Office minister David Lidington announced that the government would continue to deliver all public sector services following firm’s insolvency, providing the official receiver with the necessary funds.

“It is regrettable that Carillion has not been able to find suitable financing options with its lenders but taxpayers cannot be expected to bail out a private sector company,” he said.

Lidington insisted that, since the first profit warning, government had been “in constructive discussion with Carillion while it sought to refinance its business” but added his responsibility was “to keep our essential public services running safely”.


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In an update published as Civil Service World went to press, the official receiver working to find new providers for Carillion’s remaining contracts confirmed that 452 posts – across public and private sector contracts – would be lost.

The Cabinet Office has led government’s response, but it has not been alone. HM Revenue and Customs has provided practical advice and guidance to those affected through its business payment support service, while the Department for Business, Energy and Industrial Strategy has worked with banks to support sub-contractors and others affected.

The government has also faced questions about its response to those first signs of crisis.

Civil service chief executive and Cabinet Office permanent secretary John Manzoni admitted the key Whitehall link to the company, the crown commercial representative, had been vacant between August and November last year, a key period in the firm’s fall.

Decisions to continue awarding contracts to the firm after that first profit warning also faced scrutiny, with Labour’s shadow Cabinet Office minister Jon Trickett stating £2bn worth of government contracts were awarded after the profit warning. 

Manzoni has said that all contracts awarded after the profit warning were set up as joint ventures to reduce risk in the event of a collapse, and the biggest contracts for HS2 have indeed now been taken over by joint venture partners Eiffage and Kier.

Trickett called on the government to take Carillion contracts back in-house and, following profit warnings by other outsourcing giants Interserve and Capita since Carillion’s fall, warned that outsourcing risked services lurching “from crisis to crisis”.

A key part of the government’s response was indeed the return of some services to public hands. The Ministry of Justice moved quickly to create a new government-owned facilities management company to deliver Carillion’s work. Gov Facility Services Limited will take over the cleaning, maintenance, landscaping and repair work at 52 prison sites across England.

However, this has only served to underscore the wider question: Has outsourcing public services to private companies become too risky?

Nicholas Timmins, a senior fellow at think tanks the Institute for Government and the King’s Fund, believes outsourcing is “no longer the dominant narrative” that it once was.

At an IfG event discussing whether the public sector still knows how to deliver public services, held the week of Carillion’s collapse, he said the belief of successive administrations “that government should be involved in steering, not rowing” in public services was now in decline.

Governments since the 1980s essentially viewed marketisation and outsourcing as “the key instruments across public policy”, Timmins said.

But there has been a loss of faith in choice and competition and quasi-markets as the dominant system for organising public services. Carillion’s collapse comes after G4S’s inability to provide contracted security services for the 2012 London Olympics and a number of rail franchise failures, while the use of private finance initiative funding has been scaled back.

John Tizard, a former senior executive at Capita and ex-Labour leader of Bedfordshire County Council, shared much of Timmins’s analysis.

“The quality of services has not met the expectations and the promise,” he told Civil Service World.

Tizard published a review of outsourcing a week after Carillion closed. The Out of Contract report, undertaken with former Audit Commission communications director David Walker for the left-leaning Smith Institute think tank, called for a pause in new contracts to allow for a root-and-branch outsourcing review to find out what has worked – and what has not.

Carillion’s fall was “a convergence of several things”, including difficulties with construction contracts not linked to its outsourcing, Tizard noted.

“It clearly had very poor governance and leadership, and it had difficulty with construction contracts. I think the lesson from what’s happened in terms of Carillion’s public sector outsourcing deals is that it demonstrates the public sector and government cannot transfer ultimate risk, because services have to continue and have to be provided,” he told CSW. “Consequently, the cost of the failure of Carillion will fall on the public purse.”

He highlighted that, when government has looked to transfer more risk to the private sector, costs faced by suppliers have often risen. But government has also worked to drive down cost.

“If you buy cheaply, then it is less likely the private sector can sustainably take that risk,” Tizard said. “And if it’s working at very low margins, as I think Carillion was, that means their ability to bear risk is even less.”

The government insisted that it continually monitors and assesses supply chains and markets, and last month’s launch of a new standard public sector contract would help both customers and suppliers understand risk.

The lesson from what’s happened in terms of Carillion’s public sector outsourcing deals is that it demonstrates the public sector and government cannot transfer ultimate risk - John Tizard

However, the crisis comes as the cross-party backing for private provision has begun to fracture, with councils of all political control returning services in-house – in fact more of those taking back control are Conservative rather than Labour authorities, according to research from the membership body Association for Public Service Excellence. And in Westminster, Labour has pledged to take Whitehall PFIs back under public control.

Julian Le Grand, a professor of social policy at the London School of Economics and former special adviser to Tony Blair on public service and health management, told the IfG event that Blair – and his successor Gordon Brown – got it right by using the private sector for services.

But he acknowledged that large failures such as Carillion have greater impact than “modest successes” elsewhere.

“Stories of spectacular failure trump stories of modest success and it seems to me that many of the quasi-markets have yielded modest success – not as much as people like me who have advocated for them would have hoped for, but modest success,” he said. “But at the same time we get these massive failures – Carillion obviously but also these dreadful stories about [G4S] and the Olympics and so on.

“There is no doubt to me that engenders a shift of mood, a shift of political climate, and it is a shift away from the shareholder-owned corporations as means of providing public services.”

Le Grand, who also advised the coalition government on plans to expand the number of employee-owned mutuals in the public sector, said he would like to see a move towards non-profit forms of providing services, but admitted it was unlikely. “I would say the political climate is probably favouring a move straight back to state control.”

Although the MoJ’s creation of Gov Facility Services Limited showed this is something that central government can do, there is also scepticism about whether Whitehall has capacity to once again directly run much of what has been outsourced.

Lord David Willetts, who served as paymaster general under John Major and then as universities and science minister under the coalition government from May 2010 to July 2014, said he didn’t think “the civil service machine, not because of the individuals, is capable of running large-scale organisations – it doesn’t have the capacity and it has quite a lot on its hands anyway”.

Many contracts end up with large firms such as Carillion “because the management of small providers and the relationship with them is bloody complicated and time-consuming and expensive”, he told the IfG event.

“You’re not going to get the public sector dealing with lots of small organisations. In today’s Whitehall, they’re under such pressure, they just don’t have the bandwidth.”

As the implications of the Carillion collapse are absorbed, Whitehall capacity is just one area to be grappled with if this is to be the beginning of the end for a substantial part of how government works.

“The idea appears to be running out of road,” Timmins said, “but doesn’t appear to be being replaced by any other dominant way of doing things.”

About the author

Richard Johnstone is CSW's deputy and online editor and tweets as @CSW_DepEd

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