Asset-strippers continue to prowl the public sector

On Sunday it will be five years since the outsourcing giant Carillion collapsed under the weight of £1.5bn debt.

by Rachel Wearmouth go.pardot.com 

The mega-firm held around 450 separate public-sector contracts, spanning schools, prisons, transport and hospitals. 

Its bosses were paid huge six-figure salaries and bonuses before the companycollapsed; 3,000 jobs were lost and 7,000 suppliers and contractors were affected.

Carillion’s collapse was particularly catastrophic because the firm was so deeply embedded in public life. Vital infrastructure projects were delayed; schools suddenly found themselves with no cleaning or catering services.

The accounting firm KPMG was later fined £14.4m for misleading the accounting regulator, the Financial Reporting Council, during inspections of its audits of Carillion and another company. A new watchdog to shake up the audit market and rebuild trust in corporate governance was promised, but after a number of reviews the draft legislation is still buried in a lengthy consultation.

To examine what lessons the government has failed to learn about outsourcing more generally, it is worth looking at children’s social care.

The Competition and Markets Authority (CMA) launched a review of the sector in 2021 amid concern the high cost of private sector children’s care homes was draining council budgets while demand was steadily rising.

In England 79 per cent of places for children are provided by the private sector. The Scottish and Welsh governments are aiming to end for-profit care for looked-after children, but there is no such plan for England. This is despite the landmark Independent Review of Children’s Social Care, published last May, which criticised rampant profiteering and warned that “without a dramatic whole-system reset” of family services there could be 100,000 children in care (up from 80,000) by 2032.

If that unhappy prediction comes to pass, the companies involved in care provision stand to make a lot of money. The service providers considered by the CMA averaged profit margins of 22.6 per cent between 2016 and 2020. Most councils in England have at least one looked-after child whose private placement costs at least £10,000 a week, and in some extreme cases that number can run to £60,000 a week.

It recommended bringing some aspects, such as fostering agencies (many of which rely on agency workers, who can demand higher rates), back in-house, as councils were paying high prices for a service they could provide and save money on long-term, given extra investment. More worryingly, the CMA warned some large providers were “carrying high levels of debt”, especially those run by private equity firms, increasing the “risk of disorderly firm failure, with children’s homes shutting their doors abruptly”. Sound familiar?

There are broader questions as to why asset-strippers continue to prowl the public sector while investment in the wider economy is weak, but Carillion’s ruinous failure should have pushed the government to act half a decade ago. There is scant evidence it has.

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