The collapse in January of Carillion PLC, the UK’s second largest construction and outsourcing company has attracted considerable media coverage. Carillion was principally engaged in public sector contracts to build (and in some cases operate) hospitals, prisons, roads, and part of the new high-speed rail link between London and Leeds.
Mainstream media rightly reported many unpalatable aspects of the collapse: aggressive accounting, suspension of pension fund contributions, the company’s rapid growth by acquisition. However, they generally missed the parallel with the story of systemically important financial institutions. The truth is that companies such as Carillion, Capita, G4S and MITIE now manage such a large slice of UK public services that the failure of more than one raises the spectre of the armed forces being deployed to keep schools open. Unfortunately, all these companies might be in financial trouble because, just like large banks, it is impossible to assess their health or lack of it by studying their financial reports and accounts.
Background – 25 Years of Privatisation of UK Public Sector Procurement
Since the early 1990s, all British governments have embraced public-private partnerships as the preferred construction procurement method. The initial appeal of such partnerships was an accounting trick whereby the payments were expressed as conditional upon service provision, and hence the long-term liabilities did not appear on the public sector balance sheet. They came on balance sheet in 2012, but the procurement method persists.
However, the privatisation of public sector infrastructure quickly changed the industry. So great was the volume of business, and so complex was the tendering process that initially consortia of building companies and facilities management companies were formed to pool resources and submit joint tenders.
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