Carillion: the public sector strikes back

George Osborn with workers on HS2, a Carillion project. Credit: PA

If I am reeling from the collapse of Carillion it is because the company, the banks, its advisers and the government apparently thought it was worth having a conversation about a possible bailout of the outsourcing and construction company.

Because what we learned this morning is that the gap between Carillion’s debts and the value of its assets is big, and that a significant number of its contracts are toxic.

If that were not the case, if many of its businesses were fundamentally viable and valuable, Carillion would have been put into administration, a form of life support, under insolvency rules.

And instead it is being liquidated, under the auspices of the Official Receiver - who is an official at the Business Department, or BEIS.

Given that Carillion is obviously neither too big or important to the British economy to fail - unlike the banks in 2007 and 2008 - any provision of public funds to prop it up as a going concern would have seen taxpayers’ precious money protecting commercial creditors and shareholders from the painful consequences of their cupidity and negligence.

Which would have been a cripplingly expensive precedent - because if it were proper for we - the taxpayers - to rescue Carillion, by implication all businesses providing services to or on behalf of government would have been seen as underwritten by government.

And that in turn would have blown up the entire point for government of outsourcing services, which is to make providers of those services incentivised to succeed and disincentivised from failing.

The other important point about liquidating Carillion is that it should minimise the costs of its collapse for the government, and by implication probably increase them for banks and commercial creditors: it turns the government or taxpayer into the senior creditor, ranking ahead of banks for repayment, for any new funds its provides.

  • ITV News Business Editor Joel Hills explains what happens next for Carillion

This matters, as the government is starting to lend additional money to the Receiver, so that the Receiver can pay the wages of Carillion’s thousands of employees, who are providing public services and building public infrastructure.

This public money is buying a bit of time, during which an assessment can be made of which businesses and contracts are salvageable and sellable, and which are so intrinsically loss-making that they have to be torn up and nationalised (as a start, a couple of Ministry of Justice contracts are, I am told, in the hopeless category).

What I am already hearing from the outsourcing and so-called public-service industry is that the basic problem is that the government pays too little for intrinsically risky and complicated work.

Carillion has built hospitals in the past. Credit: PA

Which is a bad joke.

No one forced Carillion - or any of the other members of a bruised and battered industry - to bid for the contracts.

When George Osborne and Francis Maude put the screws on them in 2010 as part of their austerity drive, the outsourcing companies could have just walked away.

That they didn’t is another triumph of short-term thinking, the endemic disease of British industry.

Carillion’s collapse marks the end of a 25-year love affair between Tory and New Labour governments on the one hand and private-sector service providers on the other.

To use a Star Wars analogy, the public sector strikes back.