Carillion’s financial woes should ring alarm bells for public service managers across the country - and make every taxpayer shudder at what problems Britain’s borrowing habits may hold in store if left unaddressed. As with other PFI companies, the Government has liabilities for billions to them from using them to build and run schools, hospitals, prisons and motorways across Britain. Such firms are the legal loan sharks of the public sector – the costs of doing business with them are excessive, meaning the bill at the end is far beyond what it would have been to build anything outright. Little wonder such companies are keen to win these public contracts - the rewards are significant. A recent study of PFI hospitals shows over the next five years alone, these companies will take nearly £1 billion profit out of the NHS for just 125 schemes. There are over 700 in total - yet the case of Carillion shows the difficulties with PFI come from more than just the intended price tag.
Governments of all colours have argued using such high cost credit was worth it because doing so transferred the risks of constructing and running major infrastructure projects to the private sector; that it is worth paying over the odds to borrow from them because if something goes wrong they have to pick up the tab. But this approach presumed risk only goes one-way - as we’re about to find out, when it comes to our schools and hospitals if these lenders put profit chasing above service delivery it’s still the taxpayer who ends up footing the bill at the end.
Over the past two decades, Carillion has made itself indispensable to the public sector - it has not only built motorways, schools and hospitals, but also runs them and under some of the deals which have been struck, it actually owns the assets and rents them back to the taxpayer. Now that Carillion can’t pay its bills, large parts of the public sector are in threat of coming to a standstill or cuts to services, as the schools and hospitals they run are put in jeopardy of being closed down or sold on as the administrators move in. With a further 43,000 UK workers at risk of being made redundant as well as the pensions of nearly 30,000 people at stake, Britain can ill afford Carillion’s collapse.
Carillion’s problems have been well known for some time, which makes the Government decision to give them a number of the High Speed 2 projects - despite the company issuing a shock profit warning shortly beforehand - inexplicable. One of the reasons Carillion got into trouble is that in the last four years, the current Government gave Carillion two major PF2 construction contracts - the Midland Metropolitan Hospital in Smethwick and the Royal Liverpool Hospital - both of which are behind schedule and so have had payments delayed. Overreaching itself to take on such lucrative contracts, Carillion now carries debts of nearly £1.5bn and a pension fund shortfall of almost £600m.
As public sector managers scramble to check their contracts and what happens if their lenders go bust, the reality is that the public services PFI companies like Carillion deliver are so essential, and the size of these companies so big, taxpayers will always bear the risk when things go wrong. And whilst it is true that PFI companies would not get paid if they fail to deliver the projects they run, in Carillion’s case it was these construction delays which have contributed to its perilous financial state and so the possibility of further cost to the public sector itself. Thus, risk ripples across both the public and private sector to disastrous effect - in this case by bringing a major public infrastructure company to its knees and so inevitable pressure for the Government to intervene.
Nor will taxpayers top the priority list for protection. As Carillion goes bust, those who have funded their building of infrastructure have rights guaranteed under the Government’s standard PFI contract to be compensated for the money they have invested. Thus, whilst the shareholders could lose out, the lenders will still need to be paid off; a fact which also poses a major difficulty if the Government wants to take the schools and hospitals back under direct state control.
This doesn’t mean in responding to this situation the Government can only either throw good money after bad or hope the city intervenes to buy out what is left of Carillion’s projects – whilst unpicking the contracts will be a time consuming and costly endeavour, there are ways of clawing money back from the big PFI companies and protecting tax payer interests. For starters, a windfall tax on their excessive profits would be one option for ensuring we are able to recoup something for clearing up their mess when things hit the skids. So too, the Treasury could take an active grip on renegotiating or even terminating poor performing contracts across the public sector portfolios of these companies, rather than expecting individual councils or hospital trusts to take on these well funded entities alone. One thing is for certain though, the headache Carillion represents shows the time when ministers could afford to relegate PFI to the ‘too difficult to fix’ box is long over.