On January 15, 2018, Carillion, a general contractor for an amazing array of work for the United Kingdom’s government sector, collapsed into compulsory liquidation. The collapse calls into question the prospects of its 43,000 employees and 30,000 subcontractors, as well as the fulfillment of government contracts spanning three decades into the future.
Carillion’s fall also calls into question the entire political philosophy that it and other companies now operate under around the world. It exemplified a way of privatizing government functions pioneered by Britain’s former prime minister Margaret Thatcher, and was then copied widely by other nations, especially America beginning under the Reagan administration. Where once governments provided public services, they now contract them from private companies. The argument is that doing so will subject moribund state monopolies to the competition and innovation of the market.
Carillion shows just how wrong-headed this argument is. Not only are there the moral hazard[1] and rent-seeking[2] behaviors, but it is aggravated by the market’s unhealthy concentration. It’s a similar situation in other privatization industries. Only three companies operate private prisons in American and Britain. Governments frequently contract for massive, long-term projects based on fewer bids than the average voter would use to renovate their kitchens.
The corruption, inefficiencies and lack of innovation blamed on government is even worse within these large companies providing government services. There is also greed. Carillion’s board ensured that the bonuses of its managers cannot be clawed back, even while the company was losing billions of dollars. Carillion ‘wriggled out’ of payments into its company pension schemes as its troubles grew, while it carried on paying shareholder dividends and bosses’ bonuses.
Does this sound like a political model that is good for society and its citizens?
1. Moral hazard is the risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.
2. Rent-seeking is the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection.
