The collapse of Carillion

Financial and political commentators are suddenly ‘discovering’ that PFI and the privatisation of services might not be such a good deal after all.

Proletarian writers

Proletarian writers

How the poverty of these unfortunates, among whom even thieves find nothing to steal, is exploited by the property-holding class in lawful ways – Frederick Engels

“The reality is that capitalism is the most incredible prosperity building machine the world has known” – the Sun newspaper on Carillion’s collapse

The Carillion collapse dominated news headlines for much of January after the company failed to get bailed out by either banks or the government.

After the government announced that its finances were so awful they would be liquidated and not put into administration, thousands were left wondering whether they would get paid, and the television and corporate media reported that hundreds of schools and hospitals might be without cleaners and cooks. The furore even led some bourgeois politicians and media pundits to ask whether wholesale privatisation had been such a good idea after all.

Over the weekend of the 13-14 January, a seven-person management team from Carillion met with 160 bankers at Canary Wharf challenged with finding a few quid to keep the company ticking over whilst the big cheques cleared. The 167 highly-trained financial gurus came up with a plan to ask Cabinet office for £25m to save the company – not very original, but a tried and tested method of rustling up such paltry sums.

Had those bankers done a whip round they probably could’ve covered the bill themselves, but why bother when there’s a cash cow that needs milking? Unfortunately for Carillion’s 43,000 workers (19,000 in Britain alone), the government decided to pull the plug when it took into consideration the £1.35bn of debt on the company’s books, its derisory £29m bank balance and the £587m pension deficit in its pension fund.

As is usual in times of crisis, the entire labour movement looks to both the Labour party and bourgeois liberal opinion for answers to questions that it should be able to find independently. The Guardian began by asking: “What went wrong and where do we go from here?”

Luckily by Friday an answer had been furnished (Jeremy had spoken): “We will rewrite the rules to give the public back control of their services,” said Mr Corbyn, who explained that a simple change to rules would mean that the public sector would become first choice to provide government services.

If that doesn’t sound very ‘competitive’ to you, that’s because it isn’t, and if Britain is to remain a member of the single market, it’s positively impossible, which puts Jeremy Corbyn once more at total odds with most Labour MPs.

What is Carillion?

Formed out of the demerger of Tarmac in the 1990s, the newly-founded Carillion went on to buy out construction giants George Wimpey, Mowlem and Alfred McAlpine. The Tarmac side of the business went on to focus on making building materials (bricks, asphalt etc) and the Carillion arm undertook construction and the provision of public services (everything from the maintenance of utilities through to dinner ladies and NHS services).

In the words of one commentator: “It seemed that every couple of years or so it [Carillion] would buy another troubled contractor with a support services component, which would add to turnover. It would forecast earnings growth from savings – mainly on staff costs – and the costs of implementing the savings would be dismissed as exceptionals.

“The strategy of acquisitions and contract wins gave the company the chance to trumpet its growth, boosting the company’s share price and in turn the earnings of key executives.” (Lack of political support doomed Carillion by Gill Plimmer, Martin Arnold and Jim Pickard, Financial Times, 20 January 2018)

Such ‘logic’ was well founded, because Tarmac and Carillion had good contacts and excellent relations with the Labour government of 1997, and those who came subsequently. Most readers will have forgotten by now that Proletarian from its very beginning ran stories on the Labour privatisation of the NHS.

In 2006, for example, we publicised a number of important exposures made in Allyson Pollock’s book NHS Plc:

“The incoming Labour government imported a cohort of mainly young people from the private sector to be civil servants on secondment, thereby opening what rapidly became a great revolving door between the public and private spheres [to the profound, not to say corrupt, benefit of the latter – Ed]. Briefly heading the PFI unit in the NHS, for example, was Robert Osborne, on secondment from the construction company Tarmac, a major beneficiary of PFI (later PPP) contracts. Richard Granger, a 37-year-old former management consultant for Deloitte & Touche, was appointed director general of NHS IT at £250,000 a year – £90,000 more than the NHS chief executive, Nigel Crisp, received.

“Another key figure in the commercialisation of the public service was Dame Sheila Masters (later Baroness Noakes) from KPMG, another large management consultant firm … She had been instrumental in persuading the Conservative government to abandon the Ryrie rules – rules that protected public sector expenditure from the inroads of venture capitalists and bankers … Labour put her in charge of a review of NHS ‘estate’ – its land and buildings – making her a key player in the ensuing great sell-off of NHS property.” (End in sight for National Health Service, Proletarian, August 2006)

Carillion feeds on PFI

As the years went on, and the labour movement continued to throw all its backing behind Tony Blair and then Gordon Brown, Carillion benefitted from £485m of PFI jobs gifted to it by the Labour governments of the first decade of this century. That figure was bolstered by another £347m from the ConDem coalition government during the worst years of the crisis and another £439m in similar projects by the Tory administration of Cameron up to 2015. (How many PFI contracts did the last Labour government sign with Carillion? Full Fact, 18 January 2018)

“Richard Howson, chief executive from 2012 until last July who received a £1.5m pay package – including a £245,000 bonus and a £346,000 share-based award – just a year before the group went bust.” (Financial Times, op cit)

The bill for the existing Carillion contracts is likely to cost the taxpayer £6.5bn from 2016/17 to 2038/9. The government can add to that figure the social insurance bill for the thousands who will be forced to make a claim on the dole whilst they try and find new work. (Full Fact, op cit)

With 90 percent of its work outsourced, Carillion’s supply chain included thousands of subcontractors and smaller businesses that were already facing 120-day payment delays. Many will now have to fight court battles to get paid at all, pushing hard-pressed builders, electricians, and materials suppliers to the wall. (Financial Times, op cit)

As was noted in the CPGB-ML’s pamphlet A Class Analysis of British Society at the Start of the 21st Century: “To lump all employers together today is to ignore the acute antagonisms that have been developing between the smaller employers and the monopolistic concerns. Owners of small and even medium-sized factories and proprietors of a wide variety of small businesses find themselves continually in conflict with big business and with government policies that favour the larger concerns.” (Ella Rule, 2017)

Disaster or an opportunity?

Lenin said in his 1902 work What is To Be Done? that workers must learn to appreciate the political outlook and economic interests of all strata of society; they cannot confine their investigations to their own narrow economic conditions.

In the first instance, it should be possible to explain to the Carillion workers, and to a large number of the ruined petty-bourgeois subcontractors, that a slavish worship of market forces is against their real (and not perceived) class interests.

It is a disaster for workers associated with the firm, not because they had any great stake in the growth and profiteering of the company up to this point, but rather because its collapse now offers the largest ‘redistribution of wealth’ (redistribution of exploitation) the construction industry in Britain has ever seen.

Big profits are to be made from the acquisition of outstanding contracts and the restructuring of various parts of the business by the vultures that are already circling.

Workers will lose their jobs, and small businesses lack the capital necessary to compete for the lucrative scraps. Those workers whose jobs are ‘saved’ will find that they have been saved by investors (parasites) intent on driving down wages and restructuring jobs so as to make their acquisitions more profitable.

When the carnage is over, what is left of various arms of what was once Carillion will be sold to other monopolies pursuing the same strategy as Carillion once pursued, all in the race for maximum profits.

The Financial Times of 19 January reported what was considered extremely good news for the exploitative strata of our society: “Private equity groups and distressed buyout firms are circling collapsed British construction company Carillion to cherry-pick assets from one of the UK’s most politically sensitive corporate failures.

“The interest from private investors – including the Canadian fund manager Brookfield and British private equity group Endless, which specialises in turnrounds – comes as the government struggles to protect thousands of jobs left at risk by Carillion’s liquidation.

“The prospect of investment funds picking up Carillion’s best assets at cut-rate prices could add to the political difficulties confronting Downing Street, which has faced criticism from unions and opposition MPs for relying on the company to perform critical public services.

“The market capitalisation of Carillion, which continued to win government construction contracts even while it issued profit warnings last year as its debts mounted, fell from £2bn in 2016 to just £61m this month, becoming the largest financial collapse in UK construction history.

“Despite the failure, several private equity groups are seeking to identify any divisions that could be rescued, according to people familiar with the talks. Investors said the liquidation process, which is being overseen by accountants PwC, needed to accelerate for the assets to retain their value.

“‘I’m waiting on information from PwC,’ said an investor with an interest in bidding for parts of Carillion. “I have received nothing yet.’

“Endless bought the British and Irish units of engineering services company Imtech in 2015 from its Dutch owner. Like Carillion, Imtech was one of the Netherlands’ biggest insolvencies, employing more than 2,000 people and Endless had just 11 days to complete the deal.

“‘Investors will be looking for the jewels in the damaged crown,’ said Garry Wilson, chief executive of Endless. ‘If deals are not done quickly the value will disappear as contracts will be terminated.’

“Brookfield held talks last year to buy a part of Carillion’s Canadian business, where 6,000 people are employed, according to people briefed on the negotiations. It made an initial £200m offer in September, but cut the offer by two-thirds three weeks later after doing due diligence. Carillion rejected the bid because it was ‘deemed too low’, according to three people familiar with the deal.

“Bruce Flatt, chief executive of Brookfield, which has $275bn under management, said Carillion’s assets would fit well into its portfolio, which already includes a construction business in the UK.

“‘When things are in distress we are always looking at them and there may be some opportunity for our businesses to participate,’ said Mr Flatt, adding that while ‘there may be contracts that we can participate in’, some potentially attractive agreements were being dissolved as part of the insolvency process.

“Those with direct knowledge of private equity interest said there are expected to be multiple bids for parts of Carillion. A seasoned distressed investor said firms will be looking at buying units, improving them and then selling them on to larger corporations.

“The investor also said several potential bidders believe some Carillion units ‘have got lost in a huge company’, which would allow distressed investors to snap them up and run them independently. A slimmed-down unit freed from a large debt-laden group could be run more easily without being ‘weighed down with huge head office and company overheads’, the investor added.” (Private equity investors circle collapsed Carillion by Javier Espinoza and Gill Plimmer, 19 January 2018)

Capitalism with Corbyn characteristics

The political ramifications to the collapse are most welcome. Labour under Corbyn now promises to nationalise large swathes of what was formerly Carillion, and the collapse has added grist to the mill of the Corbyn wing of the Labour party’s argument that the government should take back into public ownership the railways, water, energy and mail.

Such arguments are so much against the grain these days that everybody and his dog is queuing up to denigrate Corbyn and shadow chancellor John McDonnell as dangerous Marxists, even though the proposals for democratising the contracting out of public services and even nationalising various industries (buying some for below the market rate), whilst welcome, are more John Stuart Mill than Karl Marx.

Be that as it may, for the first time in many years the consensus is, at least in words, broken. A real debate is opening up in ruling circles, as increasing numbers of bourgeois are coming around to the idea that it might be better for their particular business interests if certain key sectors of the British economy were under national control. This in turn is forcing the most aggressive right-wing sections of British society to go on the attack, which may, in the end, only help rather than hinder the Corbyn project.

For example, the Sun newspaper bleated: “The implosion of the construction and outsourcing giant, its executives having made fortunes out of public sector contracts, leaves a trail of bad debts … is shaking faith in ‘the system’.”

“A new survey shows youngsters now fear capitalism more than communism. Pollsters ComRes found seven percent of 18 to 24-year-olds think Marxism dangerous but almost double that are afraid of capitalism.

“Let’s not pretend that the demise of Carillion, worth £2bn back in July but now a pile of IOUs, is not disastrous. It is not, however, a ‘watershed moment’ for capitalism, as Karl Marx fan Jeremy Corbyn declared this week.” (After the implosion of the construction firm Carillion threatens tens of thousands of jobs – the remedy should be more capitalism by Liam Halligan, 18 January 2018)

The Sunday Times commented: “Labour’s 2017 manifesto and its subsequent policy announcements have committed the party to the nationalisation of the energy, water, rail and mail sectors, as well as an unknown number of private finance initiative (PFI) deals.

“The CPS says Labour’s plans would cost £55.4bn to renationalise energy infrastructure, £86.25bn for the water sector, £4.5bn for Royal Mail and £30bn for PFI nationalisation.

“If Labour renationalised the whole energy sector – not just the national grid – it would raise the total cost to £306bn.

“Labour has threatened to buy the businesses for less than they are worth and run them at no cost, arguing that profits would cover the extra borrowing. Yet it has also promised to use the same profits to cut household bills by £220 a year …

“Daniel Mahoney [from the Centre for Policy Studies, a right-wing thinktank], called the plans ‘an expensive gamble’. He said: ‘John McDonnell’s claim that bills will fall by £220 after nationalisation does not stand up to scrutiny. By his own admission, any profits from the industries would end up going to pay debt interest, so how can they be used to lower the cost of bills?

“‘It is also deeply concerning that Corbyn and McDonnell appear to be planning to seize assets below their commercial value. If Labour pursued this, business confidence would slump, confidence in the government would plummet and pension funds — which are big investors in the utilities sector — would end up particularly badly off.’” (Corbyn’s nationalisation plan is ‘£176bn gamble’ by Tim Shipman and Caroline Wheeler, 21 January 2018)

The future is socialism

Whilst supporting all attempts to nationalise public services and protect workers’ jobs and futures, we are forced to recognise that only the removal of the market can guarantee that workers will be able to plan the economy of our country on the basis of providing for the needs of the people and not generating profit for the benefit of those who are already super-rich.

It is only when the working class seizes power that a planned economy (the only possible alternative to a market economy) can be installed, and when that happens there will be no question of compensating the bloodsuckers for nationalising their means of production – they will simply be expropriated.

The opening up of the debate is a welcome development, and as the crisis of capitalism continues, so too does the ruin and impoverishment of ever wider sections of our society. Communists must be up to the challenge of getting our message to them.