“The company that runs Britain”: profits were privatized, costs will be socialized.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
The decline and fall of 200-year old UK infrastructure group Carillion was as spectacular as it will be costly. It was forced into compulsory liquidation this morning, following the breakdown of crisis talks with its banks and the government. The company, with global sales of £5.2 billion in 2016, has 43,000 employees, including 20,000 in Britain and 10,000 in Canada. It’s saddled with debts and an underfunded pension plan.
Its shares had plunged by 95% over the past 12 months, from £2.40 ($3.53) in January 2017 to as low as £0.12 ($0.17).
“We have been unable to secure the funding to support our business plan, and it is therefore with the deepest regret that we have arrived at this decision,” the company said in a statement. And the government is now forced to guarantee public services, ranging from school meals and hospital maintenance to roadwork.
Carillion’s problems began after a spate of contract delays and a decline in new business left it at the mercy of its lenders and battling a burgeoning debt pile. The rot became irreversible once the hedge fund community, scenting fresh blood, began shorting the stock en masse in November 2016.
In July 2017 a partial review by auditors KPMG identified £845 million of contract write-downs, sparking a massive rout in the shares. The finance director who helped unearth those problems, Zafar Khan, was duly fired by management in September, but the damage had already been done: Carillion shares were down 70% and the stock was the most shorted in Europe. As a leading City analyst told City A.M, the extent of the problems was “gobsmacking.”
Last week, senior government ministers held a crisis meeting to discuss further steps. The choice was stark: either bail out the firm or it let it fail, with ugly ramifications for its project partners, employees, creditors, including three lenders, HSBC, RBS and Santander UK, and UK public services as a whole.
The government chose the latter.
This is a company that builds and maintains schools, roads, hospitals, prisons, police stations and army barracks — or at least used to. It was also meant to play a major part in Britain’s High Speed Rail 2 project (or HS2), Europe’s biggest infrastructure project. In total, the firm participated in over 450 public-service projects. The fate of some of those projects and of the jobs associated with them is up in the air.
The UK government has pledged to take over Carillion’s public service projects, meaning a further drain on public spending. Nonetheless, jobs will be cut, schools and hospitals will go unbuilt and big questions will be asked about the wisdom and sustainability of the UK government’s almost 30-year old private finance initiative (PFI) model for building essential services. As Aditya Chakrabortty writes in The UK Guardian, “the dirty secret of PFI and all government attempts to pass public services into the private realm is that the shareholders make profits while the taxpayers remain on the hook for any losses.”
PFI deals were invented in 1992 by the Conservative government and then enthusiastically rolled out by the subsequent Labour government. The schemes usually involved large scale public buildings such as new schools and hospitals which were previously funded by the UK Treasury. Under PFI they were put out to tender with bids invited from developers who put up the investment to build new schools, hospitals or other schemes and then leased them back.
The schemes allowed ministers to harness big sums of private capital to invest in public projects, such as new schools and hospitals, without paying any money up front — and thus keeping the level of current public debt relatively low. Repayments are made over a long time scale, usually between 25 and 30 years but occasionally as long as 60 years, but often at an exorbitant rate of interest.
For the developers involved, the returns are generous and relatively safe, backed as they are by the UK taxpayer. But if the developer doesn’t want to hold on to the asset, there’s always the option of “flipping,” or selling on to some other investor, invariably one based in a tax haven, so not even UK corporation tax is paid on the profits. Carillion was one of four companies (the other three being Balfour Beatty, Interserve and Kier) that pocketed over £300 million flipping PFI schools and hospitals to the highest bidder. And that was before the company’s existential problems began.
In other words, many of Carillion’s PFI assets are already in the hands of foreign-domiciled investors, meaning that while the government will have to take over many of the services Carillion can no longer provide, it may still have to pay leasing costs to the foreign-owned firms that Carillion sold out to. Otherwise, those firms may sue the government for lost profits.
This is all happening as the true cost of PFI is becoming apparent. In April 2017, a bombshell report by the National Audit Office warned that the price tag for paying PFI firms would reach £8.6 billion in 2018 alone. In total, taxpayers owe a mind-watering £121.4 billion on public projects that are worth just £52.9 billion. And the compound interest continues to grow.
An investigation by The Daily Telegraph revealed that young people starting work in 2017 would end up paying taxes for the Government’s Private Finance Initiative until they are nearly 70. In return, they get to use increasingly costly and shoddy services.
As for the companies involved, they will continue to pick up billions in easy, virtually guaranteed profits — unless, of course, they go bankrupt, in which case the shareholders get wiped out, management walks away with well-filled pockets, and taxpayers get to foot an even bigger bill for public services the private sector can no longer provide. By Don Quijones.
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