Lessons that India can learn from the Carillion Crisis

By Surya Rajkumar

Introduction

On the 15th of January this year, Britain’s second largest constructions and outsourcing firm Carillion had announced its decision to go into liquidation, putting 43,000 staff worldwide at the risk of losing their jobs. Analysts have called this a textbook example of the failures of privatization and outsourcing. Between April and June 2017 alone there were 337 administrations in the UK. With another catena of firms entering administration this year, Britain has rekindled the debate encompassing the pros and cons of privatization. It is well known that a major chunk of public contracts in India, especially those involving construction, have seen large scale private sector involvement in recent years. Amidst growing calls to outsource other Indian government services to private players, in this piece, I shall examine with reference to the Carillion case, the bottom line of doing so. I shall also argue how regulations and administrative efficiency contra outsourcing may be the solution to ameliorate the poor delivery of various state services in India.

The Carillion Crisis

Carillion Plc. is a British multinational facilities management and construction services company headquartered in Wolverhampton in the United Kingdom. Some of its major contracts included defense and security (building and maintenance of housing for British troops), transport (it won a £1.4bn contract for construction of high speed rails), health and education (it provides 32,000 school meals in UK everyday and also undertook a £335m contract to build a hospital) and construction (the renowned Heathrow Terminal 5 airport). Carillion also provides for various pension schemes around the world. No one knows the full extent of the problems, but Carillion’s market capitalization had fallen from £2bn in 2016 to just £61m in January 2018. Carillion also owes £900 million to high street banks including RBS, Barclays, HSBC, Lloyds and Santander UK. Further, these banks have also refused to inject more money into the company. Carillion went straight into liquidation for two reasons. First, it did not have enough cash to keep trading during an administration process and secondly because the public services run by Carillion needed funding from the government to carry on and only the official receiver, who oversees liquidations, could deal with such payments. Whilst the government continued to pay those among Carillion’s 19,500 UK staff who work in public sector jobs, workers who provided services to private-sector firms had their wages stopped. A report of the joint inquiry by British parliamentarians concluded that “recklessness, hubris and greed” among the board of directors of Carillion who put their own financial rewards ahead of all other concerns was responsible for its collapse. Evidence during the course of the inquiry revealed that former Carillion directors seemed to be more concerned about their pay deals than the operation of the company in the year leading up to its collapse. The firm, before the publication of the report was also under political fire for raising dividends while racking up big debts and a pension deficit. Blame has also befallen on the big four accounting firms- Deloitte, Ernst & Young, Pricewaterhouse Coopers and KPMG. The allegations of accounting manipulation and mismanagement are as grave that British MPs are now demanding the break-up of the big four.  The onset of this crisis has triggered a debate on a relook of the discourse of privatization which saw its advent in the years of Margaret Thatcher as British Prime Minister.

 

UK’s Latest Privatization Debate

The shockwave emanating out of the company’s demise is primarily, the risk of unemployment faced by thousands of employees, which in general culminates in low income and homelessness in the UK. In addition, in crises such as these, where the stability of government services and public sector employment is jeopardized, the state is saddled with the financial burden of ensuring the delivery of public services. In other words, taxpayer’s money is pooled into the governments service machinery to make up to the follies of a few company executives. There is now a sense, growing with every successive scandal, that the privatization of the everyday has gone too far, a mood captured by startling opinion poll majorities of 80% in favor of re-nationalizing utilities in Britain. Whilst free marketeers argue that lucrative contracts come with risks attached in private business, and the same risks should be borne, and prudently guarded against, when it comes to public projects, on the left, there’s scorn for the idea that profits should be privatized, and losses nationalized.  The Carillion episode has indubitably created an impression of how profit has been put before vital public services and workers. Testimony to this is the unchallenged and overwhelming demand for the nationalization of utilities in the UK.

What India can Learn

In India, an overwhelming majority of projects involving the construction of government buildings is undertaken by private players. The liberalization and structural reform agenda initiated by the government in the 1980s and 1990s also gave a boost to overall private sector participation, albeit with mixed results and continuing hiccups. Among others, Primary Education, Health and Water Sanitation are areas of basic services that have seen private players play a major role in recent years. In April last year, policy think-tank Niti Aayog had suggested outsourcing of public services to private hands in order to reduce dependence on the government’s administrative machinery. This presents a problematic view where privatization is seen the panacea of all ills that breeds inefficiency in Public Services. All that it would take is a Carillion-like crisis to burden our already fiscal deficit-ridden treasury to inject funds for corporate failures in providing state services.

What is most alarming in Carillion’s case was that it had issued three profit warnings over the last six months. Yet following these, the British government awarded nearly £2bn worth of additional public-sector contracts to Carillion. Given the similarities in the role that the private sector plays in government services, there is no denying that such a crisis can take full shape in India too.  The solution obviously is not plain nationalization. Nationalization too, has its own costs. Thus, to preach nationalization in case of a private sector mishap and to sermonize privatization in case of a public-sector mishap presents a myopic view of issues. This is because such an unedifying narrative ignores the real reasons behind such collapses including structural inefficiency, lack of regulatory frameworks and infrequent state monitoring. A study by the University of Birmingham found that in areas of Primary Education, Health and Water Sanitation in India, large scale private sector partnerships have not been very successful, primarily because of a lack of political commitment and will, lack of an effective regulatory framework and guidelines, lack of transparency and vested interests within the state governments and departments as also local contractors, and a lack of capacity to develop and manage large scale contracts.

Privatization in the Banking sector had strong support in the days succeeding the Nirav Modi scam, however it has been argued that the issue is one of poor regulation and not ownership. Be it banking or any other sector that sees itself as a battleground between privatization and nationalization, the issue is one of regulation and monitoring and not one of ownership. It is pertinent to note that some privatization measures have led to spontaneous citizen mobilization that have at times threatened the survival of national governments. On that note, it is urged that the government’s attention must be turned to that of the regulatory framework and not that of ownership. The British government’s experience with Carillion must be a warning to us here in India. Thus, to avoid such a collapse, there must be early warning mechanisms in place, and swift actions against those private and public firms whose financial health is in danger, in addition to blacklisting firms with poor finance from participation in government tenders. Due care and caution must be exercised in granting private contracts for public services to avoid catastrophes with the likes of Carillion.

References:

  1. http://www.socialwatch.org/node/9446
  2. http://www.thehindu.com/opinion/lead/can-banking-recover/article22852646.ece
  3. https://www.birmingham.ac.uk/Documents/college-social-sciences/government-society/idd/research/non-state-providers/india-report.pdf
  4. https://www.newstatesman.com/politics/staggers/2018/01/carillion-issued-3-profit-warnings-so-why-was-it-still-getting-government
  5. https://www.birmingham.ac.uk/Documents/college-social-sciences/government-society/idd/research/non-state-providers/india-report.pdf
  6. https://economictimes.indiatimes.com/news/politics-and-nation/outsource-government-services-and-bring-in-private-sector-talent-recommends-niti-aayog/articleshow/58441779.cms
  7. http://www.bbc.com/news/uk-politics-42688295
  8. https://www.newstatesman.com/politics/uk/2017/09/how-nationalisation-made-political-comeback

Surya Rajkumar, the author is a second year law student at the Jindal Global Law School.

Featured Image Source: Express & Star

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