Of the many issues to be faced in the wake of the Carillion collapse, two are particularly pressing. The first is the plight of an estimated 30,000 companies owed money. Particularly vulnerable are the smaller firms at the end of the Carillion food chain – those that supplied building materials, brickies, roofers and plumbers to its major projects.
The second is reform of public sector out-sourcing amid the glaring failures of the standard Private Finance Initiative model.
A report by the National Audit Office last week found a group of schools cost 40 per cent more to build and a hospital 70 per cent more when financed by government borrowing.
The deceit at the heart of PFI was to disguise borrowing and debt so that it did not show up in public sector accounts – enabling governments to boost spending while still claiming to operate within their “fiscal rules”.
But there may be a home-grown way forward that could become a model for the rest of the UK. In Scotland we have already seen a different approach to the management of public projects such as schools, road improvements and health care through the creation of the Scottish Futures Trust. It has overseen projects totalling £10.4 billion since its inception, creating non-profit distributing structures and capping profit arrangements.
SFT has brought about regulated returns, simplification of contracts, a sharper focus on needs rather than wants and claims to have achieved material savings of more than £600 million since its launch in 2008. More on this below.
The priority over the coming weeks is damage limitation for thousands of SMEs who face cash flow problems arising from unpaid work. Carillion seemed to have a strategy of chasing risky, low-margin contracts, resulting in a net margin of just 3 per cent on sales last year of more than £4bn – wafer-thin given the many uncertainties that surround all major building contracts. The risks were further disguised by the practice of taking profits early in the life of a contract rather than waiting for its completion.
Hand in hand with this was a policy of keeping sub-contractors unpaid for up to 120 days – even while government ministers urged an end to late payment.
Searching questions also need to be asked on how government officials approved the award of contracts to Carillion in the face of three profit warnings.
An understandable reaction is to insist that all future schools, hospitals and public work projects should be managed in-house. But that would require a permanent, fully staffed, fully skilled, multi-specialist public works army: an approach likely to result in extra costs for the taxpayer.
Even on a reduced volume of out-sourcing, how could we avoid contracts being awarded to large conglomerates of the Carillion type, able to outbid through economies of scale? There has long been criticism of the way smaller firms find themselves being shut out by public sector procurement rules. As the FSB’s Colin Borland pointed out last week, “the average Scottish council spends less than a fifth of their procurement budget with local firms. More should be done to power local firms.”
Reform and culture change must emerge from the searching enquiries and post mortems being conducted by the liquidators and the Financial Conduct Authority. In Scotland we have already seen reform with the creation of the Scottish Futures Trust, the government-owned infrastructure delivery company. It handles road schemes, school building, affordable homes, hospitals and community health projects.
So what does it do that is different to, or better than previous PFI arrangements? Since its launch in 2008 it has overseen projects totalling £10.4bn. It has a public interest director monitoring each contract, introducing greater openness and transparency and an extra level of governance to ensure public objectives are delivered.
SFT has completed 50 schools and more than 100 community-based buildings. And over the past financial year it has generated over £50 million from the sale of surplus public properties with the proceeds invested back to the public sector. And last year it completed an award-winning health and social care centre in East Renfrewshire which brought together East Renfrewshire Council and NHS Greater Glasgow.
Overall, SFT provides an alternative model of public-private partnership arrangements where the private sector can complement and augment public sector skills and capacity – an example that surely now merits attention across the UK as a whole.
We need jam today rather than Brexit hand-wringing
Official Scottish Government analysis last week warned that our economy would lose £12.7 billion by 2030 – £2,300 per person, equivalent to an 8.5 per cent fall in GDP – if there is a “hard” Brexit. Forecasts with decimal points 12 years ahead, really? Never mind 2030, I say, what about now?
The latest State of the Economy report from the administration’s chief economist says Scotland’s economy is expected to continue to grow in 2018, “despite Brexit” with “positive growth” expected this year of between 0.7 per cent and 1.4 per cent. Not quite doomed, then.
But it is still slow growth. And how much blame can be heaped on Brexit? It has long preceded the Brexit vote. As economist John McLaren points out, in GDP per capita (standard of living) terms, Scotland has experienced 10 quarters without growth compared with a rise of three per cent for the UK over the same period. Manufacturing output has fallen over the past two years by 2.5 per cent, compared with growth of over four per cent at the UK level. And construction continues to fall, down by over 12 per cent from its peak of two years ago.
Will the budget tax hikes help? The documents reveal changes to income tax will take £164m out of consumers’ pockets in 2018/19, while council tax could result in up to £77m extra in tax. Combining the two means almost £250 million could be taken from households.
So much for allowing wealth and spending to fructify in the pockets of citizens. A little more focus on the here and now would surely help.