I appear to agree with a Blair Crony

John McTernan:

And last but not least, we have had a bargain – we have paid substantially less for services than they cost to deliver. How can we be sure about that? Again, it is the collapse that is the proof.

Tim Worstall:

This morning, Carillion announced that it has gone into liquidation. The usual suspects are wailing about how the fate of one of the UK government’s biggest contractors demonstrates the folly of privatisation and outsourcing. The truth is rather less catastrophic for the British taxpayer than they would have you believe. After all, the losses suffered by the firm are, by definition, profits that we have made.

Think it through for a moment. The company has been providing goods and services to us taxpayers. The government has been paying for them. There has been a loss. That is, the costs of providing those goods and services were higher than the revenues received for having provided them. We taxpayers have been paying less than the value of what we’ve been paying for – that’s a profit to us.

23 comments on “I appear to agree with a Blair Crony

  1. Doesn’t this assume the cost of providing a service is the same as the value of that service to the public?

    I can think of lots of services where that is not true. Education for instance. The Social Services. Child Welfare. Most of the military.

    A private company is not likely to be as useless as a government department, but in these days of Mission Statements, HR departments and Corporate Social Responsibility, I would not swear that they are efficient either. How do you price in a couple of corporate boxes at Twickenham?

  2. Unless some people have been leeching shitloads of cash out of that private company, in which case we might have not had such a bargain with the contract, and also have to pile in more cash to bail people out. But what kind of crazy country would allow that sort of thing to be legal?

  3. Sure, but public sector procurement is still broken. We don’t want our major suppliers to go bust with hospitals half-built and roads half-finished.

    Unfortunately the only metric the public sector understands is price, and that (along with potentially dodgy internal behaviours – we’ll find out in the wash) is what killed Carillon.

    Wouldn’t be a big problem if they were a company supplying pencils, but financial stability should be more of a concern than it appears to be in procuring large building projects.

  4. SS2:SoTP

    Unfortunately the only metric the public sector understands is price

    Not true any more. The last project I was part of the assessment team for was 60/40 function/price. The previous one was 70/30.

    All bidders also went through a financial stability assessment (that was provided to us by a central team – all I saw was ‘acceptable’ statements from them.) I’m more than prepared to believe that that assessment wasn’t comprehensive enough.

    Anyway, I thought big companies formed SPVs for these sorts of large projects or am I decades out of date?

  5. SE – sure. They say quality, stability, not employing Guatemalan sex slaves and so on is important to them, but it’s amazing how often it turns out the absolute lowest bidder still wins. Even when they’re suspiciously cheap.

    I’m not in the building business tho, so YMMV. SPV’s are still popular in the outsourcing of multi-service contracts I believe.

  6. Labour theory of value. Just because it cost them a million quid to supply it, doesn’t mean it’s worth a million quid.

  7. Sure, but public sector procurement is still broken. We don’t want our major suppliers to go bust with hospitals half-built and roads half-finished.

    And a load of small companies who had supplied goods and services to Carillion in good faith now staring bankruptcy in the face because, in all likelihood, this corporate giant so favoured by the government was engaged in dubious financial games and imposing highly unethical payment terms on their contractors. See my post today.

    How this helps the taxpayer or ordinary citizen is anyone’s guess, especially as Carillion’s management bailed before the chickens came home to roost.

  8. They say quality, stability, not employing Guatemalan sex slaves and so on is important to them, but it’s amazing how often it turns out the absolute lowest bidder still wins. Even when they’re suspiciously cheap.

    Oh, I’ve seen dozens of major contracts with all sorts of assessment criteria put in place for the technical evaluation. Every single time it’s gone to the contractor with the lowest price, with the technical assessment discarded.

  9. It’a simple. If a company makes a big enough profit margin to secure its future it’s guilty of vile, profiteering capitalism. If it settles for too small a margin and goes bust then it is, on the contrary, exhibiting vile capitalism that endangers small firms. If those small firms …..

  10. TN – I suspect what I’ve described above could apply to many, many corporations with household names: they don’t actually do what they say they do, and what they actually do is engage in rent-seeking, pointless bureaucracy, and virtue-signaling, all of which is paid for using unsustainable and highly questionable financial practices.

    Yarp.

  11. Anyway, I thought big companies formed SPVs for these sorts of large projects or am I decades out of date?

    True, they still do but any risk assessment must be made at a group level. Carillion lists 3 pages of subsidiaries and joint ventures in its annual report, maybe 500 or so, many with names such as

    6844186 Inspiredspaces Durham (PSP1) Limited A 100%
    6844166 Inspiredspaces Durham Limited A 80%
    8121567 Inspiredspaces Nottingham (Holdings 2) Limited A 8%
    8121731 Inspiredspaces Nottingham (ProjectCo 2) Limited A 8%
    6506298 Inspiredspaces Nottingham (PSP1) Limited A 100%
    8121929 Inspiredspaces Nottingham (PSP3) Limited A 100%
    6506329 Inspiredspaces Nottingham Limited A 80%
    7017267 Inspiredspaces Rochdale Limited A 80%
    7017410 Inspiredspaces Rochdale (ProjectCo 1) Limited A 8%
    811390 Inspiredspaces Rochdale (ProjectCo 2) Limited A 8%
    7017618 Inspiredspaces Rochdale (Holdings 1) Limited A 8%
    8114138 Inspiredspaces Rochdale (Holdings 2) Limited A 8%
    7017305 Inspiredspaces Rochdale (PSP 1) Limited A 100%
    7017401 Inspiredspaces Rochdale (PSP 2) Limited A 100%
    8114163 Inspiredspaces Rochdale (PSP 3) Limited A 100%
    6436121 Inspiredspaces STaG (PSP 1) Limited A 54.5%

  12. In my two recent examples, neither contract went to the lowest bidder.

    In certain, non-Western cultures they see such tenders as the equivalent of buying a leather jacket in street market, i.e. they lose massive face if they don’t get the lowest bid and “get a discount”.

  13. On the radio yesterday some analyst was saying Carillion should have factored in a larger profit margin to cover for contingencies, and the government as a customer should have been asking: have you factored in a large enough profit margin for this project?

    Only, that runs straight into the buffers of Pols and the Public screaming: how ***DARE**** private companies make profits from public works!!!11!!!!

  14. Tim Newman – yes and some are claiming on their credit insurance. Some will have given credit without carrying out checks. And many will have carried on giving credit after the company has been late in paying existing credit.

  15. Given Carillion do private and public work the claim ‘we got value for money because the went bust’ is not necessarily correct.

    They could have been operating a business model of fleecing taxpayers in order to be artificially cheaper in the private sector, and as public sector contracts reduced (as they reportedly have) this way of operating has bitten them on the arse.

  16. That’s an interesting point, Gareth, but are you able to back it up? The annual report only shows revenues and profits by operating sector – support services, public private partnership projects, Middle East construction services, non-Middle East construction services. All but the second are combinations of public and private projects and the second is by far the smallest in terms of revenue. Its relative margins seem slightly higher but not enough to influence the numbers significantly. I cannot find a complete public/private split so I assume, unless you have better information, that this is just a hypothesis thrown in to muddy the waters

  17. @dearieme

    It’a simple. If a company makes a big enough profit margin to secure its future

    This cuts right to the chase – not enough profit.

    I’ve actually worked for Carillion as an IT contractor. I’m not going to name & shame, but it was on two joint venture projects each worth about £700m and £800m.

    What I saw was unbelievably stupid senior management (C-level) making boneheaded decisions, toadying middle management more concerned with their own nests than anything that might benefit the company or the client and at project level every possible mistake was made a least once. By “mistake”, I mean things that would guarantee large, downstream costs – The equivalent of “saving” money by not getting the car serviced.

    In just the parts of the projects I had any contact with, these inefficiencies probably multiplied the costs by 20 or 25. (i.e it cost 20 or 25 times as much as it would have, were things properly managed).

    In the end I gave up dropping hints and complaining, and enumerated these problems to the senior project managers along with a list of recommended changes. I made sure to do this a few days before my contract was up for renewal, and my suspicions were confirmed – no renewal.

    So yes, @dearieme. Not enough profit and directly caused by out of control costs.

  18. On the radio yesterday some analyst was saying Carillion should have factored in a larger profit margin to cover for contingencie

    Rather than cut their overheads. I expect without Diversity Councils and an army of power skirts Carillion’s profit margins would have been quite healthy.

  19. What I saw was unbelievably stupid senior management (C-level) making boneheaded decisions, toadying middle management more concerned with their own nests than anything that might benefit the company or the client and at project level every possible mistake was made a least once.

    Now there’s a fucking surprise, eh? I’d never heard of Carillion until last week, but yesterday I took a punt on what the state of it was. Seems I wasn’t far out.

  20. Diogenes said: “I cannot find a complete public/private split so I assume, unless you have better information, that this is just a hypothesis thrown in to muddy the waters”

    No. I’m saying Carillion’s collapse alone is not enough evidence to be certain the taxpayer was getting a bargain.

  21. Is that all you have to offer? It could be, from a look at one of the most obscure notes to the accounts that I have ever seen, that Canada was driving the hardest bargain.

  22. More and more the problem seems to be the misallocation of resources through interest rate manipulation. I am guessing that the immediate trigger was refinancing Canadian debt at 6%. I cannot tell how much they were paying on UK debt. But it seems that they were charging too little for their services in general and a change at one point of the envelope burst it.

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