I never want to hear anyone moaning about the 1970s again

January 16, 2018

by Martin Odoni

Can you imagine if what has happened over the last three days had happened in the 1970s?

Can you imagine what the Conservative Party and the media would be saying right now if what happened to Carillion today had happened under a Labour Government?

Can you imagine what the Conservative Party and the media would be saying right now if what happened to Carillion today had happened to a nationalised industry?

Can you imagine the rants and rage we would have to sit through from boorish right-wing ideologues likes Boris Johnson and Tony Blair about the obsolescence of ‘Old Labour’ and public ownership?

But of course, this would never have happened to a nationalised industry.

An industrial calamity

The cause of today’s calamity is that Carillion have done something very free market and capitalistic in nature. They repeatedly ‘under-bid’ for public service contracts. This is to say, Carillion kept hoarding jobs that were contracted-out by the Government, but so desparate were they to beat all opposing firms to the contracts that they charged dangerously low fees for carrying out the work. So low, it turns out, that they hardly made any real profit from them. The exact reason for following such an insanely, needlessly risky strategy is not yet completely clear. The ugly suspicion is that Carillion was playing ‘corporate hardball’; trying to starve its competition of work until they folded, wih the intention of massively increasing its fees when it had a virtual monopoly in place. But with the pressures of a frequently declining pound in a Brexit environment, the cost of importing necessary materials kept rising, faster than rival firms would decline. The company’s debts rocketed to a starling £1.5 billion. In the unnecessary race to the bottom, it seems, Carillion crumbled first. A last-gasp request for a Government bail-out was refused (perhaps because Carillion is not a bank). The conglomerate is now going into liquidation.

Carillion exploding

Carillion is immediately to blame, but this would not have happened to a public firm, as, even if it had to compete with a private firm for the contract, it would not be allowed to under-bid without permission from the Government.

Where the Government went wrong

The Government itself is also to blame though. Somehow, even when Carillion were quite openly declaring profit-warnings about how dangerously high its debts were climbing and how low its revenue was falling, and when the share-prices kept plummeting, somehow, somehow, somehow, the Government still kept awarding the conglomerate new long-term contracts.

To demonstrate what a bewildering saga of stupidity this is on the Government side, see from the graph below (from the BBC) just how dramatically Carillion’s share-value fell last year. It was around £2.30 as recently as May, and then slumped to around 20p by November, with a particularly disastrous plummet in July, on announcement of the first profit-warning. And all the way through that time, the Government seemed not to notice, and just carried on handing Carillion new contracts.

Carillion shares value graph

Why the Government went wrong

Why did the Government behave in this idiotic way? There are three possible explanations I have been able to think of so far, and all of them are bad.

First, and likeliest, is that the Government were just being unbelievably lazy and mechanical, and simply failed to notice how bad things were getting in the Carillion losses column. Therefore, when issuing contracts, the Government were only looking for the cheapest bid, and not verifying the viability of the bidder. They may even have just carelessly assumed everything was fine because “Hey, it’s Carillion, they’re huge, so they must be in good shape financially!” (EDIT TO ADD: This is close to Mike Sivier’s findings, although the Government behaviour he describes is slightly more complicated – but no less idiotic.)

A second possibility, and somewhat more intelligent, but still reckless beyond all reason, is that the Tories were deliberately trying to stabilise the company’s share-value and therefore stave off a total cave-in. A little like the way the Bank of England buys pounds at a high exchange-rate any time sterling’s value is depreciating, in an attempt to increase demand, the Government may have hoped that by throwing more and more contracts Carillion’s way, they would restore stockholder confidence in the firm, and convince them to stop dumping its shares. While this would be a less complacent explanation, it is still inexcusable. No Government is entitled to make such a gamble with so many public services and facilities. Whenever any Government behaves in this way, it is a classic symptom of a company that has been allowed to become ‘Too Big To Fail’ i.e. so large and with so much of society forced to depend on its continued function that if it collapsed, it would cause an industrial or economic disaster. This is why the Gordon Brown Government bailed out the banks ten years ago. In 2017, the Tories wanted to prevent the collapse of a firm like Carillion, because it runs such large sections of public services, and the knock-on effects would potentially be enormous.

Sure enough, what has happened today could cause a wide range of other companies to fold as well. Carillion has played the role of work-broker to them for many years; a lot of these firms are much, much smaller and lack the ‘reach’ to secure these contracts without a much bigger firm to play as the go-between. They could go to the wall as well without being able to maintain the same amount of business – and there are a lot of these firms. Many of them are already owed cash for work they performed on Carillion’s outsourced behalf, cash they will now probably never receive.

A third possibility, for which I have so far seen no evidence, is that someone at Carillion did a dirty deal with someone in the Government to keep the contracts arriving. By applying Occam’s Razor, it seems the least likely explanation – I usually subscribe to cock-up theory more than conspiracy theory – but it can hardly be ruled out as yet.

The Tories are too slapdash to run the economy

It is likeliest that the Government were just being negligent – where have we heard that song before? But should the real explanation for the Government’s stupidity prove to be carelessness, recklessness, or corruption, what are unmistakable are the echoes of the slapdash handling of Brexit. David Davis showed deceit and casual negligence over the non-existent Brexit impact-assessments, and now someone in Government has shown breathtaking negligence in dishing out contracts to a firm that was clearly on the brink of insolvency.

In rapid succession, the Tories have twice shown themselves to be too foolish to be trusted with the British economy and its industrial base. They are simply too impatient, too sloppy, too careless, to bother with necessary fine detail before making key decisions.

To reiterate, the problems do not stop with what happened today; a lot of smaller firms who received work via Carillion are now in bother, plus a wide range of public services could soon have to be suspended while alternative providers are found. The Government has only guaranteed it will pay Carillion’s suddenly-stranded workers until Wednesday. After that, the workers will be unemployed – around twenty thousand of them – and the services they provide may well be in limbo. If the next few weeks are not handled very precisely, there could be a serious collapse in UK industry.

Compare today to the 1970s

Recalling the occasional paralysis in British industry in the 1970s, and the neverending catalogue of right-wing warnings of how a return to that nationalised era must be avoided at all costs, it is noticeable that developments today in a strictly capitalised era could lead us to precisely the same paralysis. Trade union power is not causing it, corporate power is causing it. It raises once more the old doubts about what really caused the problems of the 1960s and 1970s. They may not have been due to nationalisation in and of itself. They may have been due to the phenomenon of an industrial body simply being too large – too large for the left hand to know what the right hand is doing, but also too large to be dismantled without causing severe difficulties across the wider economy. That can happen in either the public sector or the private sector. There is no reason to assume a private sector body that gets too big for its boots will be any less of a problem than a public one. And given that nationalised industries in the post-war era had a lot more autonomy than is often recognised, they also had far more in common with their private counterparts of today than neoliberal ideology would like us to notice.

If there is not a fundamental change of direction in the ownership of British industry after this, therefore, I do not wish to hear ever again about what went wrong in the 1970s. Because it will be all-too-clear that the people who keep feeding us these one-sided scare-stories about that era do not really care about how well or badly the British economy was functioning back then. Because it has not functioned noticeably better in the neoliberal era (it is often less sluggish these days but it is also far more chaotic with recessions and outright financial disasters more commonplace than before) and all the scaremongers were ever really upset about back in the day was that people like themselves could not have much power in a Keynesian economy.

I am not arguing for the old-style nationalisation model to come back, incidentally. There were significant problems with it, especially a cultural tendency it encouraged to try and maintain old practices when they were no longer viable. But the same problems, and more besides, happen with large private firms too. I cannot emphasise enough what an undiluted shambles the Carillion liquidation is, or the enormity of the damage it could lead to if the Government gets its response strategy wrong.  The Tories should be getting annihilated by the media right now for their stupidity. Typically, they are getting off fairly lightly instead. Labour, who would not be treated nearly so leniently, are doing their bit to hold the Government to some measure of account, with Jeremy Corbyn highlighting the toxic role of the Private Finance Initiatives that his ‘New Labour’ predecessors were so tragically fond of, and which the Tories had initiated under John Major. And Rebecca Long-Bailey has demanded a full investigation into the Government’s handling of public service contracts issued to private firms.

How right they are. Between this and the fiasco of Hinchingbrooke Hospital (the privatisation of which the Tories eagerly endorsed shortly before the Trust running it went bust – again, the Tories have never been taken properly to task by the media over it) it is quite clear that this ‘private company’ model for public services is unworkable.

We cannot keep on throwing money at it, it just is not working!

If that phrasiology sounds familiar, there is a very good reason why. The Tories have used it for most of the last half-century to demand the end of many public sector industries. They cannot have it both ways.

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