THE FALLOUT FROM CARILLION – PRIVATE V PUBLIC FUNDING
WHAT NOW FOR THE FINANCING OF INFRASTRUCTURE WORKS?
The fallout from the collapse of Carillion has led to a heightening of the debate among politicians over how public works such, as the building of schools and hospitals, should be funded in the future.
Since the Thatcher years, successive government have embraced the mantra of the need for low taxation and the avoidance of high public expenditure. The Private Finance Initiative (PFI) was introduced by Norman Lamont the Chancellor Exchequer in the John Major Conservative Government in 1992. This marked a move away from Government investment in the NHS, Education and other public services. The argument for it being introduced was that because of the economic climate, fiscal planning and pressure to increase the scope and quality of public services, high public funding for public works could not continue.
After the John Major Conservative Government introduced them into the UK, successive Labour Governments enthusiastically embraced the concept of PFI Contracts. They were introduced for the improvement of the nation’s infrastructure through the reduction of public finance and taxation, the transfer of risk and responsibilities to the private sector for construction of major public projects and the provision of services to those projects, notably for the building of hospitals and schools.
The Labour Government took up the torch in PFI torch in 1997. Successive Governments have accepted that no party would be able to win a General Election on a policy of high taxation to fund public works. This led to the creation of the PFI model for the construction of public works and for the provision of public services.
After Carillion’s collapse the policy of PFI is now seen to be one of sheer folly. John McDonell Labour’s Shadow Chancellor and Rachel Reeves Labour MP now call for an end to Private Finance Contracts (PFI) Contracts in the UK and for all PFI Contracts to brought “in house” by the Government.
John McDonnell wrote in the Guardian on 16 January 2018 that Labour had announced in September 2017 that existing PFI deals would be brought “in house” by a Labour Government by taking over ownership of the special purposes vehicle to deliver savings to the taxpayer. He said:
“It was never true that private was always better but the obsession with outdated dogma and a cosy relationship between a handful of powerful people, means that this sordid love affair between big business and the public purse has gone on far longer than it ever should have…”
Carillion was a multinational facilities management and construction services company. After boasting an “encouraging start to the year” in May 2017 it admitted ten weeks later that contracts had been overvalued and debts were going through the roof. Its Chief Executive was fired and their shares fell by 93%. They were particularly active in construction services delivery for PFI and PPP contracts. This meant the running of schools, hospitals, prisons and other public services and providing a range of maintenance and supply services.
The Public Private Partnership (PPP) refers not to a single form of contract but rather to a broad range of contractual arrangements that allow public entities, such Health Trusts and Local Education Authorities, to pursue economic activities with long tem participation of the private sector.
Common features in transactions designated as PPP’s include a long term contract for a combination of design, construction, finance, operation or maintenance activities related to infrastructure that is or will become the property of the government and to be performed by a private contractor.
PFI as the preferred model of PPP in the UK, was used for roads, schools, university student accommodation, prisons, defence, healthcare and hospitals, waste to energy and waste management. PFI contracts generate a monthly charge from the Government client from which there will be deductions for poor performance and unavailability caused by the Building Contractor or Facilities Management Contractor. The contractor assumes responsibility for design, construction and operation of the relevant asset and will enter into a single design and build contractor with a sub-contractor.
The Financial Times reported under the headline “City continues to back PFI deals despite Carillion collapse” quoted Lord Mervyn Davies a longtime financier and trade minister said:
“Lets learn the lessons of Carillion quickly but let’s make sure that all infrastructure projects don’t suddenly get stopped in their tracks….We must not dive back to outdated thinking that the government can do everything, as all we will do is bankrupt the nation”
Amidst the public’s desire to hold the Carillion Directors to account and to answer the accusation that they lined their own pockets by awarding themselves large pay rises when they should have known that the company was in trouble, and the accusations that auditors and accountants they employed should not have approved accounts that portrayed the company as financially healthy when the opposite was true, the debate is being lost as whether public projects can and should be funded purely from the public purse or whether private finance has a part to play in funding them.
12 Old Square Chambers
16 May 2018