I will have more to say about Carillion’s collapse in building and maintenace UK Government infrastructure of schools, hospitals and transport.
- The private finance initiative (PFI) is one of the most controversial domestic issues of Labour’s second term. It has exposed deep divisions between ministers and Labour activists; it prompted a rare and embarrassing defeat for the party’s leadership at the Labour party conference in 2002; and threatens to finally sever the traditional ties between the party and some of its trade union paymasters.
There are also signs that while the public may be enjoying the new schools, hospitals and roads provided under PFI, the method itself is increasingly unpopular.
○ Steve Bell on Carillion’s continued troubles – cartoon
PMQs verdict: Corbyn taunts May over Carillion | The Guardian |
The collapse of Carillion, the construction company which was one of the biggest contractors to the British government, provided Jeremy Corbyn with an open goal at this week’s prime minister’s questions. The Labour leader began by asking why the government had awarded more than £2bn of contracts to Carillion, even after the company had issued three profit warnings and its share price was in freefall.
May replied that if the government pulled out of contracts whenever a profit warning was issued, it would lead to companies failing and jobs being lost. Corbyn retorted that the government had continued to hand the company public contracts, either to keep it afloat or because they were “deeply negligent of the crisis coming down the line”.
…
While Carillion went into liquidation with debts of £1.29bn, Corbyn said, they were paying extravagant share dividends and bonuses, and the chief executive will be renumerated for another 10 months. “One rule for the super-rich, another for everybody else.” Can May assure the House that no more money will go to directors, or on bonuses?May said workers would continue to be paid and that the official receiver was doing his job; where bonus payments were unlawful, they could be recovered. “We were a customer of Carillion, not the manager and that’s a very important difference.”
PMQ’s Memorable lines
“As the ruins of Carillion lie around her, will the prime minister act to end this costly racket of the relationship between government and some of these companies?
Corbyn links the failure of Carillion to other failures of public-private partnerships
“The vast majority of people are employed by the private sector, but [the shadow chancellor] John McDonnell calls business the real enemy. The Labour party will always put politics before people.
May’s final retort
More below the fold …
‘Flimsy’ reassurances anger unions as creditors brace for Carillion fallout| The Guardian |
Thousands of workers stand to lose their jobs as Carillion goes down, with the prospect of many suppliers following suit
Efforts by the government to reassure thousands of staff employed by Carillion to work for private sector clients were called “flimsy”, as the small businesses owed money by the failed company braced for losses.
The prime minister’s spokesman said most of the companies that were using Carillion’s 8,500-strong private sector workforce have agreed to provide funding to continue paying them.
But trade unions warned the promise would not provide sufficient reassurance and voiced fears that Carillion’s financial failure would spread further among suppliers, some of which have begun laying off staff.
As the government grappled with the fallout from Carillion’s collapse:
* Banks and HM Revenue & Customs vowed to assist affected firms.
* Carillion’s former boss quit a £60,000-a-year job at another company.
* Directors’ bonuses and salaries were stopped.
* Government monitoring of Carillion was criticised.
See the diary on my London visit to Canary Island and infrastructure …
○ Solving Pollution Problem in England: ‘Under the Carpet!’
○ Grenfell Disaster: Criminal Neglect Is Manslaughter
H/T to Londonbear @BooMan … a diary as far back as the year 2005!
UK – Economy Shakes as Prudence Abandons Blair and Brown
By Londonbear [User ID #509] | Fri May 20th, 2005 at 01:50:14 AM MEST
Tony Blair’s finance minister and successor in waiting, Chancellor of Exchequer Gordon Brown has a reputation based on his “prudent” handling of the economy. Now it looks like not only are the wheels starting to come off but an elephant has just sat on the hood.
The general indicators like the rate of unemployment, retail sales, house sales and banruptcies were starting to look worrying. Now the Office of National Statistics has made a technical ruling on how debt is recorded that threatens to derail a mainstay of their econmomic management.
HOW THIS AFFECTS THE BUDGET
While these indicators are not too worrying themselves, they indicate a slowdown in the economy to a near freexe. Consumer confidence is obviously at a significant low. The stagnation in the housing market will further affect retailing as much of the purchase of major appliances and furniture co-incides with house moves.
Most significantly, in his Budget just before the election, Brown presumed that the economy would grow at a much faster rate. Unlike the USA, estimates of income from taxes and expenditure are fixed before the start of the financial year. There are built in “contingencies” for things like the cost of the Iraq war or tsunami relief. The spending plans are governed by how much the government calculates it will get as tax income. Built into that is an expectation that the number of people employed and their wages will increase and that income from sales taxes will also rise. Those calculations are undermined by the actual results.
A QUICK PRIMER ON “PSBR”
One of the main measures of economic performance is what in the UK is called the “Public Sector Borrowing Requirement”(PSBR). This is not the same as the “budget deficit” in the US but more like mortgage borrowing.
Let me give a simple explanation. Let’s say you purchased a house for $100,000 and financed the entire cost on a mortgage. You have an asset worth $100k and a debt of $100k which balance out. So long as you can afford the mortgage repayments, everything is OK. The PSBR is like the line of credit you get to buy, if you can afford it, you could borrow more and get more assets. The PSBR measures the amount the government borrows long term each year to build “capital project”. This could be many things like roads,schools, hospitals and public housing. Obviously the nation continues build these whereas you would only buy one home.
Just like your bank manager looking at your income and seeing if you can afford the mortgage, the PSBR is a measure of whether the government is acting responsibly. There are limits in how this can rise. The money market would lose confidence and force a rise in interest rates, there are political decisions about its level and external pressures like the assessments of the World Bank and IMF.
The last Conservative government started to use an accounting device to keep expenditure “off the books”. Under a variety of names and detailed arrangements, they got private companies to borrow money and build say a hospital and to maintain it for a certain number of years. The governememt then leased back the hospital until the end of the contract which could run for 25 years. Then they either buy it at low cost or walk away. Very similar to the sort of arrangements you get when you lease a car.
Although the total cost is more – to pay the profits of the company for one thing – it moves the “capital cost” out of the PSBR and just increases the government’s “current expenditure”. This enables the government to authorise significant and politically advantageous improvements in the infractructure while not affecting the PSBR. (There are considerable democratic downsides to this which I do not have time to explore here).
THE NEW FACTOR
Over the sourse of the years the government has had to make the conditions in the contracts more advantageous for the companies to attract the investment. In particular they have recieved more and more quarantees to pass on to the banks that the lending is safe. As the scope has widened to things like running the London Underground renewal, maintenance and repairs, there becomes a point where the government has to bail out the company in the event of it going bankrupt. Otherwise the country could grind to a halt. Labor has used various names as the schemes changed – “Public Private Partnership” has become “Private Finance Initiative”. Friday the Financial Times will report a significant change in the way these are to be considered in relation to the PSBR:
The Office for National Statistics has decided to include billions of pounds of capital expenditure undertaken under the private finance initiative in public sector net debt figures, a move that will reduce Gordon Brown’s room for manoeuvre against his fiscal rules.
The classification change will also mean that there is no longer an accounting advantage for public sector managers to procure big projects through the PFI. That could lead to fewer PFI deals in future, harming the prospects for companies that are heavily engaged in PFI contracts, such as Carillion, Skanska and Serco.
By the end of 2004, the government had signed PFI contracts worth £42.7bn and the reclassification will affect around 57 per cent of these deals. These are the contracts deemed to be “on-balance sheet” because little risk has been transferred to the private sector.