Carillion: Extractivism takes hold

The justification for outsourcing public sector contracts was that the efficiency of private enterprises would mean better delivery of public series at lower cost. The Carillion catastrophe neatly unravels this, showing us the true nature of the beast.

The real reason for outsourcing is that when most of Britain’s major industrial enterprises folded one by one — the ICIs, GECs, ICLs, STCs, British Leylands, British Steels, Swan Hunters — very little was left of large-scale capitalism as we knew it; the public sector grew as a proportion of the economy. Trying to restart a major industry that has been lost is a pretty hopeless task. But here were giant industries — the NHS, national infrastructure such as the road network, the armed forces — ripe for picking Why not let private capital invade such areas? Indeed, there was nowhere else to go.

What has happened is that the companies who have thrived in the public-private era — the Carillions, Sercos, and Capitas — are not really bona fide lean private enterprise vehicles. They are dependent on public contracts and have an unhealthy relationship with the government departments that award them. They also spread their nets far wider than their expertise should allow and, combined with civil service and political ineptitude, often create a perfect storm of incompetence and cost over-runs, as in the disastrous Great Western Electrification.

The mess that the state and its favoured private contractors can cook up is seen at its craziest on the railways. Modern Railways recently observed: “Perhaps the greatest unintended consequence of privatisation is that the railway today is under even greater state control than at any time since the days of the British Transport Commission following nationalisation in 1948”. The result is that civil servants who know nothing of railway technology lay down a compulsory brief for the various players in the industry: Network Rail, the train operating companies, the rolling stock leasing companies, the manufacturers (almost all foreign companies), and contractors like Carillion who build the infrastructure, then try to implement it. The result can be seen in the GWR electrification: three times over budget; several years late; unnecessarily cumbersome overhead electric wiring; a sans-electric-wires point at Steventon because they can’t thread the wires under a listed bridge; the wires stopping 12 miles short of Bristol; new trains that in some of the bi-mode versions are underpowered in diesel mode and can’t keep to the schedules of the 40 year old, British Rail-engineered HSTs.

The same loss of expertise and private encroachment on the public sector pervades the armed forces. I once took part in a symposium at the Defence Academy of the United Kingdom at Shrivenham. The proceedings were fine but in my room every item of (sparse) furniture had a label on it proclaiming “Property of Serco”. The Officer’s Mess wasn’t a Mess any more: it too was outsourced to Serco. At the time I was reading that the MOD had signed a contract worth several hundred million pounds for jet training simulation with the US firm Lockheed despite the fact that none of the planes in the RAF are made by Lockheed. Of course there will be one day, as we await the long awaited F35, but for years before that Typhoon pilots (made by BAE at Warton, Lancs) are being trained on a Lochheed simulator. Not only that, but the contract was updated in 2017: Lockheed Martin’s press release reads: “Ascent, a joint venture of Lockheed Martin and VT Group, has today signed the contract which will see it provide military flying training to the UK Armed Forces for the next 25 years. The initial contract is valued at £635 million and is projected to rise to approximately £6 billion over the life of the programme”. A Lockheed spokesman said: “UKMFTS is a model private-public initiative that will enable us to work with the Ministry of Defence for the next two and a half decades”. Six billion! We have been warned.

As for Serco, can anyone with half a brain not have realised the hideousness of that title? In 1984, Orwell coined names like Ingsoc and Miniluv to convey the horror of organizations whose job was to lie on a massive scale. Why would you choose the sleaziest name possible for a company whose sphere of operations is the entire gamut of service industries. This is service with a cold shrug of “what did you expect? this is all you’re going to get”.

The companies at the heart of this process have been creaming off money in bonuses and paying dividends when in fact they are close to bankruptcy. Last year Carillion paid out £83 million in dividends whilst its pension liability was £580m (one of the factors that brought it down). Smart people in the city realised this and apparently since 2015 have been shorting Carillion’s shares. So this process has channelled hundreds of millions into the pockets of shareholders and directors’ bonuses, jobs have been lost, small firms who worked with them ruined; the pensions liability falls on the texpayer and, most wonderful of all — hedge funds have made a profit by shorting the soon-to-be-a-carcass. This is modern extractive capitalism in action.

After the carnage, the money that many people have extracted from debacles like this mostly sits off-shore, waiting for the next opportunity to extract value and destroy more real productive capacity. This is a pernicious leaching of real wealth that can have only one end.

The consequences of this process has been explored in vivid telling detail in Why Nations Fail (2012) by Daren Acemoglu and James A. Robinson. Its essential message is simple: that there are two kinds of states: extractive and inclusive. Extractive states are locked into a vicious circle of kleptocracy, suppression of technological innovation and economic and personal freedom and, consequently, they are extremely poor. Inclusive states have no single centre of economic and political power but are innovative and prosperous thanks to the jostling of competing interests under the rule of law and secure property rights.

The reason that inclusive states are far more successful than extractive ones is the concept popularized by Joseph Schumpeter: creative destruction. Of course totalitarian societies are good at destruction — the kulaks can be liquidated — but this is destructive destruction. Creative destruction means challenging vested interests in order to develop a better way of doing things. It means replacing canals with railways, steam trains with electric, typewriters with word processors. It means that once proud companies and sometimes whole industries go to the wall when the mode of the technology changes but the overall result, thanks to dynamic new industries, is more widely spread wealth.

Although coercive states such as the former Soviet Union can sweat the economy under the threat of terror, this eventually fails because innovations that might threaten the power system are suppressed. In extremes cases, technology even goes into reverse. Acemoglu and Robinson give vivid examples, such as Sierra Leone where, in the late 1960s, the dictator Siaka Stevens tore up the railway line built by the British because it was seen to benefit his political rivals.

Poignantly, given the current situation, the hero of the book is England: the pioneer inclusive state. Inclusive states are rarer than extractive ones and they virtually all stem from just two models: Britain and France. Together they ensured that Western Europe would eventually become inclusive and British colonialism spawned inclusive states in North America and Australia. These are still pretty well the only such large states, with the exception of Japan, which began the process in the late 19th century and joined the club after the Second World War.

There is a large library of books proclaiming the virtues of the inclusive Western Way but over them all now hangs the question: why does it appear to be going wrong? The frontrunners of the inclusive society, Britain and America, are showing worrying signs of lapsing into Extractivism. To put meat on that: whereas a Henry Ford knew that there was no point in making cars by the thousand if people like his own workers couldn’t afford them, the gap today between the very rich and the rest has widened to the point that the elite don’t need incomes to be widely spread to enhance their own riches.

In Britain: the era of growth in our inclusive structures came to an end with Mrs Thatcher, who undermined sections of the economy — the former commanding heights of coal, steel, railways and other heavy industries — that produced a culture (ie Labour voters) that she deplored (shades of the Sierra Leone railway). She put nothing tangible in their place but instead unleashed the financial forces that have led to the current wave of Extractivism.

The system in which Carillion operated is often characterized by critics as a “race to the bottom”. It’s worse than that: if’s a slow trudge — so slow most people don’t see how far down the road we’ve gone — towards the kleptocratic failed state.