Here’s how it works George

Two hospitals, both urgently needed, that Carillion was supposed to be constructing, the Midland Metropolitan and the Royal Liverpool, are left in half-built limbo, awaiting state intervention. Another 450 contracts between Carillion and the state must be untangled, resolved and perhaps rescued by the government.

When you examine the claims made for the efficiency of the private sector, you soon discover that they boil down to the transfer of risk. Value for money hangs on the idea that companies shoulder risks the state would otherwise carry. But in cases like this, even when the company takes the first hit, the risk ultimately returns to the government. In these situations, the very notion of risk transfer is questionable.

Project goes wrong, there’s a set of losses. Direct government work means that first set fall on taxpayers. Outsourcing means the private sector loses first. Government might then pick up the remaining tab, true, but there has been risk transfer, no?

12 comments on “Here’s how it works George

  1. Has Government ever had the ability to build its own hospitals, schools, offices etc?

    I mean the complete works, soup to nuts: Architects, civil engineers, CDM specialists, PMs, buyers, QAs, QSs…. the list of specialists goes on, not mention the general builders, chippes, sparkies and other assorted skilled tradesman needed to get the job done?

    And what makes those admonishing the government think that an organisation that can’t even let contracts effectively, or even set up something as simple as the rural projects agency, can spec out and complete the build of a hospital without costs running out of control and major delays? That’s before we start on the problems of political meddling in the day to day running of the project.

  2. I can’t believe the general drift of conversation: that we should nationalise everything, that the private sector ‘makes a profit’, ergo, the state would do things cheaper. That Len McCluskey and the boys should oversee our public services. Is this line of thinking really gaining traction – a nostalgia for British Leyland?

  3. In March 2017, Carillion looked in reasonable shape, albeit with a lot of debt and very high levels of accounts receivable. By the time of the first profit warning in July, things looked dreadful : suspension of dividend, profit warning, debt climbing very rapidly, £800m provision on major contracts (probably the reported receivables not being collectable) , CEO demoted to COO – generally a sign of the board losing trust and sending him to clean out the stables.

    Why the government continued to award them new contracts after this is astonishing.

  4. I guess the additional contracts were a recognition (rightly or wrongly) that Carillion’s problem was purely cash flow, and a bit more cash would have kept the show on the road. Worth a punt. Didn’t work – wasn’t enough.

  5. Actually the provisions could easily have been for cost overruns. They might have underbid on contracts and were unable to make them profitable. So more cash would have led to yet more cash….. The way that governments always work when they run projects

  6. My experience is that government contracts always favour the big boys (most of whom subcontract like crazy) who underbid and over promise

    The theory is that they can manage the network of subcontractors, suppliers etc and not a whole bunch of civil servants or council employees

    Problem is that the people who actually do the work probably could have tendered for it and done it properly with little fuss but someone in local or national government would have had to manage that contract – and proportionally many more of them as you have effectively removed a management layer

    These small players cannot compete on price with the likes of Carillion and Interserve and my experience is the lowest bid always wins

    So we have choices:

    Keep it in house and hope that council/government management is not completely inept and inefficient and fail to benefit form inter contractor competition and innovation

    Outsource to a prime contractor, take the savings in your own staff and hope that they don’t screw up managing large numbers of subbies

    Outsource to a number of contractors, avoiding the prime contractor route but requiring more of your own staff to manage a larger number of contractors

  7. @BernieG. This is playing out badly in the court of public opinion though. Yesterday I had to listen to my mother ranting about evil bosses for several minutes without pause for breath. It certainly is the perception that these guys are awarding themselves large salaries/bonuses without ever taking any downsides. Instead it’s the small sub-contractors are suffering. All of this makes room in which Corbyn can make hay. Don’t know what the answer is though,

  8. ‘When contracts fail,’ why does only one party get blamed? Government was certainly involved with creating the contracts and managing them. Yet, they are to be held blameless. And we need more of them.

  9. There was once – a couple of centuries ago? – an investigation into the poor performance of His Majesty’s Dockyards compared to private shipbuilders. Part of the difference was found to lie in the huge amount of theft by the govt work force.

  10. Bernie G. – Right; the drumbeat for more government “investment” on the grounds that it would be cheaper not to have to pay interest or dividends, merely recognizes that you don’t have to account for return on capital if you simply steal it. That is a bug not a feature.

  11. As the company has gone under then perhaps part of the problem is doing the work too cheaply. Government doing the same work will …. be as cheap? Cannot see that happening.
    Government doing the same work will likely be adding management to the problem over and above what the private sector will.

    One of the issues I used to do our tender for was the low temperature homeless provision. Basically got a few hours to a couple of days notice that on x date the provision is needed and have to organise it for the entire night.
    Usual limitations – forms to complete, scoring process to take account of, time limit on bid process and knowing every local organisation capable of doing the work.
    First time the council did the process I wasn’t involved as it was emergency provision – and they were screwed something chronic by the charity I worked for. Later bids put in were costed by me so didn’t seek to screw anyone – still expensive, not far short of a grand a night and a week long cold spell caused chaos for the staffing.

    It was something the council were unwilling to provide with their own facilities and staff, or was too expensive for them to provide – hence it was contracted each year.
    There were times the service was run where no one used it – still needed the staffing, equipment, food and building provision.

    Lots of things that local and national government don’t want to do themselves or that they don’t have the staffing and facilities for.

  12. Just going off the BBC web-site ( don’t trust State broadcasters, but some do ) Carillion got 2 sole and 6 jt contracts after the first profits warning.
    Based on 450 contracts held, so perhaps 30 contracts awarded per 6 months during the good times, then govt really dialled it back after that first warning.

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