Connaught collapse

Perhaps not you know:

Construction union UCATT said councils should stop outsourcing essential services. Alan Ritchie, general secretary, said: \”Outsourcing is expensive and leads to poorer services. With private contractors, unlike council services, there is always a danger they could go out of business.\”

That \”expensive\” bit might not be true:

Despite a debt-for-equity swap being considered, it is understood that the lenders believed many of Connaught\’s contracts were just not viable.

Untangling that \”not viable\” we can say that, certainly in the opinion of the lenders, Connaught was in fact too cheap. It had bid so low for the work that it simply couldn\’t do it and still make a profit.

Those who hired the company therefore got the work cheaper than they otherwise could have done.

The proof in this pudding will come as the half completed contracts are passed on to someone else or are renegotiated with someone else.

If the prices paid go up then we\’ll see that indeed, Connaught was bidding too low and thus there was, in the end, a transfer of economic resources from the company\’s shareholders to the company\’s customers.

Exactly the opposite of what Mr. Ritchie says in fact: Connaught were not expensive, they were cheap, which is why they went bust.

14 thoughts on “Connaught collapse”

  1. “With private contractors, unlike council services, there is always a danger they could go out of business.”

    With council services, unlike private contractors, there is always a danger they will say “Fuck it, we’re only gonna collect your rubbish one a fortnight from now on.”

  2. @TM
    The answer being that most whimsical piece of romantic naivety : competitive collection of bins from contracted-in customers only: different leased bin vans going down roads (preferably unadopted and pot-holed)every day of the week with uncontracted people fly-tipping or filling the lakes outside their houses with rubbish.Uncivilised but quaint in its way; romantics are suspicious of civilisation.Better the (unsurfaced) open road !

  3. Oh, yes, it’d clearly be awful, utter anarchy.

    Far better to pay people (under threat of imprisonment) who then tell YOU how they plan to do the job, if at all, right?

  4. This is an example of corporate fetishism – the notion (to be founds on left and right) that companies matter. They don’t. What matters is that the techniques exist to repair council houses. As long as these are not destroyed with Connaught, Connaught’s demise is not significant.
    A similar thing happened to BP. A few weeks ago, there were scares that it might break up – but so what, as long as the ability to extract oil remains?
    Companies are only curators of resources (capital, skills etc). They might waste them or enhance them – but it’s the resources that matter, not the logo of the van that they are carried in.

  5. my first thought was “that doesn’t make sense”; by far the biggest cost in these businesses is labour, so if outsourcing is more expensive that means it must involve hiring more workers and/or paying them more. Not something unions usually oppose. Hence something doesn’t add up, and it’s probably the claim that outsourcing costs more.

    But the obvious rejoinder is that private provision is more expensive because shareholders make a profit (well, except in case of Connaught). I think this is quite a hard question to think about, because although there may be some excesss profit made, most profit is just reflecting the cost of captial. The hard bit is identifying the cost of capital for council run services, to enable something resembling a like-for-like comparison of costs. If we take the council’s cost of capital to be central government borrowing, we’re still not there, because private companies borrow on the basis that if they go tits up, the lender might not get repayed, whereas the government borrows on the basis that if things go tits up (with the council) the lender will get repaid but the government will just stump up more money to the council. And that liability – the in-practise obligation to stump up more cash – is a real cost that cannt be ignored. These arguments involve a lot of things like “expected costs” rather than accounting costs, and the subtlties are quite hard to get across in, for instance, interviews on telly and radio when you are debating a union spokesperson.

    There is a bunch of economic literature on private versus public, which I’m not familiar enough with to summarise. A good place to start is probably here:

    http://www.bristol.ac.uk/cmpo/publications/ppfinal.pdf

  6. “The hard bit is identifying the cost of capital for council run services”

    The cost of capital isn’t borrowing, since you should only borrow for investment – it’s the cost of the income. This is tax, and there is a considerable cost to tax.

    There is also the efficiency issue :in the private sector failure has consequences more than in government. This pressure leads to better decisions on average, and the effect accumulates over time.

  7. Kay Tie,

    I think you’re confused. Council property maintenance services are funded by taxpayers (or govt borrowing) both when they are fulfilled by a council run organization or when outsourced to a private firm.

    Both council run organizations and private firms employ capital, both face something that can be thought of as a ‘cost of capital’ – both private and council can fund capital using what might be thought of as internal cash flows (income), I was merely using govt. borrowing as simplest way of capturing cost of capital in state sector, as one would use a blended equity/debt measure of private sector cost of capital. If you want to get fussy, and think about internal cash flows (income/taxation) then you need to use opportunity cost type arguments to equate those to market interest rates.

  8. The answer being that most whimsical piece of romantic naivety : competitive collection of bins from contracted-in customers only

    Not quite what I was thinking. I was thinking more along the lines of a council contracting out the collection services after a competitive tender.

  9. What incentive does a council have to write a good services contract, compared with its incentives to run a good service?
    I think it’s a wash either way.

  10. with outsourcing, you pay for what you get and it is transparent. When you do it inhouse, you tend to forget the overheads…the time and labour spent on arranging for things to be done, people to be managed, recruited and dismissed, etc etc…all those incidental activities that just get covered by local taxes without too much thought for value-for-money

  11. @TM
    I thought contracting out council services after a competitive tender was what got Connaught into trouble( according to Mr Worstall.) This way we could have the bin collecting business go belly up and then a few weeks/months of legal wrangling while the lawyeras get stuck in .(No rubbish collections in the interim).

  12. I thought contracting out council services after a competitive tender was what got Connaught into trouble( according to Mr Worstall.)

    Yes, and I expect that it was because the council, like Middle Eastern oil companies, automatically went for the lowest commercial bid whilst ignoring completely the technical proposal. But a service provider going belly up is far more preferable than a council simply deciding that it isn’t going to be providing a weekly collection isn’t any more, with no corresponding reduction in council tax bills.

  13. Let’s not forget the key hre. As with many corporate scandals what went on here was accounting fraud. Connaught bought up smaller companies with debt. As Tim implies, the revenues could then not keep up with the debts incurred. CNT (lovely stock market monicker!) then tried recognising revenues before they had any, evernualy this cuaght up with them, new management camein and realised the truth and it was all down hill from there. Companies who go on massive acquisition sprees on bank debt often come a cropper; more often than not it is in indsutry’s where the margins are too tight to make it viable.

  14. @C
    Strange that ordinary Manchester Utd and Liverpool fans smelt a rat with highly leveraged buy-outs of their football clubs but the financial institutions and the banks did not. Time for green and yellow scarves in the City and less of this “If its market forces it’s wonderful”.

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