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Government Must Rethink Outsourcing Model in Wake of Carillion Collapse

By Jo Sellick, managing director, Sellick Partnership

Carillion hit the headlines again this week, as its former leaders went before MPs from the Work and Pensions Committee to explain what led to the company’s liquidation last month. The former executives were relatively silent during the proceedings, shunning total blame but with some small concessions to admit responsibility for elements of the collapse. The whole saga was undoubtedly catastrophic, with a series of errors leading to the demise of this global business that employs tens of thousands of British workers.

We can − and indeed should − scrutinise the specific elements of Carillion’s operations that resulted in its liquidation. Factors such as its huge debt pile, mounting pension contributions, low-margin contracts and acquisition model are all to blame for for the company’s collapse. But it is equally important to step back and look at the bigger picture regarding the government’s approach to outsourcing large contracts to private businesses. Theresa May must take a close look at the government’s outsourcing model and examine whether it is truly sustainable for private firms and their tens of thousands of workers who fulfil such contracts.

Carillion was responsible for projects including prison maintenance, school meals, hospital construction and public transport, amongst many other public services. Some of these private finance initiatives (PFIs) were won more than a decade ago and only recently neared completion, by which point it became clear that the costs were far higher than anticipated and the margins much too slim to sustain. Many of them were also fulfilled on a 120 day payment plan that weakened Carillion’s cashflow and added to its mounting debts. Both these elements are typical of PFIs that similar businesses such as Kier, Serco and Capita are continuing to fulfil today. My concern is that Carillion’s rivals may well head the same way if nothing changes. While Carillion’s collapse came as a surprise to many of its employees, the writing was on the wall and many firms in the City had been hedging their bets towards its liquidation during recent years. These same indicators are starting to emerge for some of the other large contractors, which is a cause for concern.

The government’s outsourcing model forces the big players to aggressively compete to win these huge contracts. Due to tight public sector budgets, there is little scope for private firms to negotiate and they are forced into impossibly tight margins in order to win the business over their rivals. We have a limited number of options to avoid them going the same way as Carillion and risking thousands more jobs, not to mention the ramifications of the incomplete projects they leave behind. Just this week, we heard that the new Royal Liverpool Hospital is now unlikely to be finished in 2018 as a result of Carillion’s collapse.

One option would be to move away from PFIs and back towards nationalising these projects, which is something the current government would never consider − but Jeremy Corbyn could possibly tout this if he were to lead Labour into government at the next general election. It would be a huge statement and extremely costly to the government’s budgets, as well as being years away, by which point Carillion’s rival firms may well have already headed the same way. Another option is for the government to step in and bail out these businesses, which would be incredibly costly to the taxpayer and one of the least efficient ways of managing the problem.

In my opinion, the most realistic and effective solution is to revisit the outsourcing model and for the government to increase the margins offered for new contracts. Budget will have to be allocated to do this and it may well be a bitter pill for May and her Cabinet to swallow, but it would be far less costly in the long-term and would safeguard tens of thousands of jobs, as well as ensure these crucial public sector projects are completed. Carillion’s rivals may well see a brief boost as they pick up the contracts from the carcass of their former competition, but this will not protect them in the long-term if the outsourcing model remains unchanged.

www.sellickpartnership.co.uk