When privatisation goes bad – Carillion part 2

We are endlessly being told that “privatisation good, state ownership bad”. There is an implied belief that anything state-run is inherently badly managed, inefficient and wasteful whereas companies which take on former state-run entities are well-managed, efficient and better at using resources.

Carillion (and earlier on this year Capita and Mitie – not to forget all the utility companies) have proved that this idea totally wrong.

“… there is a support services arm [of Carillion], which includes maintenance on buildings and cleaning services. And, thirdly, there is PPP, where it might fund and manage the building of a new NHS hospital.

PPP is one of those financial inventions that was sold as being a win-win for both sides. The government might get some new infrastructure more quickly and without having to pay the huge upfront costs of building it, while the private companies financing the deal gained a valuable long-term income stream – often over 20 years or so. At least, that was the theory.

Just three Carillion PPP contracts – thought to be the Midland Metropolitan hospital in Smethwick, Merseyside’s Royal Liverpool hospital and an Aberdeen road project – are behind the bulk of the £375m losses that relate to the UK.

Industry watchers say that project delays – caused by such astonishing occurrences such as cold weather in Aberdeen over the winter – have introduced huge extra costs. Construction of the Royal Liverpool hospital has also been beset with hold-ups, most recently after workers found “extensive” asbestos on site and cracks in the new building.

Meanwhile, just before the profit warning, it was revealed that another Carillion project – an experimental tram-train linking Sheffield and Rotherham – has cost more than five times the agreed budget and is running almost three years late. The government has been forced to compensate tram operator Stagecoach for the delays with a £2.5m payment.

These types of setback are frequent complaints of investors in the sector and is one of the reasons the City has long taken a dim view of Carillion. For months, the company has been one of the UK stock market’s most shorted companies – meaning that investors have been placing bets on a fall in the company’s share price. …”

So, what do we learn from this? Well, one thing is that big investors, such as hedge funds, never lose. As soon as they sniff failure of a company, they lay bets on that failure and collect if they are right. Other “investors” seeing these bets also bet on failure.

Cream off profits, increase directors’ pay when things are going well, collect on bets when things go wrong and sometimes STILL increase director pay. And the state ends up picking up some, or all, of the losses.

Privatisation: as big as the sub- prime mortgage scandal but more secretive till the excrement hits the climate controller.

And here a couple of observations about the company from commentators on the article:

“Would love to see this company fold this is the best news I’ve heard all year. Having worked for this poorly managed company for 2 years from which I resigned because the management made life difficult this is music to my ears. Please remember this is also the company that operated the black book they kept a lot of good people on the dole because their faces didn’t fit. Hopefully They will be history very soon.”

and

“The FCA should look into this debacle. A company of almost 50,000 employees and annual revenue of £5bn does not suddenly sink like this without good reason. Many companies survive on slim margins in competitive industries. Senior managers must be held to account and for the umpteenth time …. what were the auditors doing?”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s