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Britain’s Carillion moment

In 2008, George Osborne famously berated his Labour predecessor for “not fixing the roof when the sun was shining.”  The truth within this myth was that Blair’s New Labour had been a little too “relaxed” about people “getting filthy rich” in the boom years; leaving the public on the hook for the bank bailouts and broader Quantitative Easing used to keep the filthy rich bankers afloat.  The big lie, however, was that previous and subsequent governments had any concern about the state of the roof – most of which was long ago sold off to profit-driven corporate interests.

This was what the neoliberal revolution was all about.  Where previously governments were concerned about and responsible for the essential elements of the nation and the economy – utilities like energy, water, railways, defence, the money supply, etc. – from the late 1970s they began to sell these off to the highest bidder while absolving themselves of any responsibility for what happened to them afterwards.

Even seemingly unprofitable swathes of the public sector such as the NHS could be privatised by the back door using quasi-arm’s length corporations like Carillion to “outsource” the functions of government to a host of private contractors.  Everything from the provision of new buildings to school meals and from public transport to NHS incontinence pads could be hawked off to the highest bidder by channelling billions of pounds of public money through corporate coffers.

Central to this 40 year experiment was the childishly naïve belief that the private sector is somehow different to and better than the public sector at delivering services while providing value for money.  This was the illusion that Carillion – aided and abetted by the “Big Four” accountancy firms – maintained right up until the day the house of cards came tumbling down.

Privatisation always was about the short-term.  This is simply because of the structural framework within which private corporations work.  Just two simply laws were sufficient to produce the collapse of Carillion – the law that grants limited liability to corporate shareholders and the law that compels corporate CEOs to maximise the return on investment to shareholders.  These, together with the tendency for management recruitment to value the traits of high-functioning psychopaths, are sufficient to create precisely the corporate culture seen within Carillion:

“Carillion collapsed under a £1.5bn debt pile in January. It employed 43,000 people, about 20,000 of them in the UK, thousands of whom have lost their jobs.  It also held numerous public contracts, such as the maintenance of schools and prisons, all of which had to be brought under government control, at a cost to the taxpayer.”

Carillion has also left a pension deficit of £2.6 billion – which its directors “borrowed” to fill the growing hole in the corporation’s finances while continuing to pay themselves huge bonuses.  The £2.6 billion will now be picked up by the public via a raid on everyone else’s pension funds.

Carillion is, however, merely the first in a coming cascade of critical utility collapses appearing on the British horizon.  Virgin Trains’ decision to hand the East Coast rail franchise back to the government (while trousering the cash) is a sign of things to come for the UK’s privatised rail network.  As Gwyn Topham at the Guardian reports:

“At the root of the collapse of the Virgin Trains East Coast franchise, confirmed this week, was the expectation that rail passenger numbers could go only one way: up.

“Two decades of consistent growth had fostered the assumption that demand would keep rising, the only question being how high.

“That assumption has been proved wrong. Instead, demand has dropped not only on mainline inter-city routes but on commuter rail franchises and London’s tube network, where annual numbers are down 1.5%.”

Topham gets one of the two factors behind the fall in passenger numbers – Britain’s failing economy.  However, on the other factor – population – he overlooks the obvious; the baby boom generation is retiring.  As that generation swaps commuting for spending most of the day in a dressing gown and slippers, so demand for transport of all kinds has begun to fall… and it is a trend that will continue for another decade yet.

Who in their right mind is going to invest in a railway whose passenger numbers are guaranteed to fall?  Certainly not Richard Branson; or any other entrepreneur…  This leaves the public to pick up the tab.  Sooner or later, all of these rail franchises will find their way back to the state either because the next government nationalises them or because their current owners choose to hand them back rather than continue to throw good money after bad.

Water, too, it seems, is in a similar state.  Having sold the water companies to the highest bidder back in the 1980s, successive governments kidded themselves that they could rely on the good nature of the new owners to guarantee an appropriate level of investment in essential infrastructure like reservoirs.  Instead, the owners not only walked off with the money paid by households and businesses, but also with a proportion of the cash borrowed supposedly to upgrade the system.  The result – announced earlier this week – is that London and the southeast of England face water shortages and state-imposed restrictions on consumption.  As the Guardian reports:

“People need to use less water and companies must curb leaks to prevent future water shortages and damage to rivers and wildlife, the Environment Agency (EA) has warned.

“Many sources of water supplies are already overstretched and, with climate change and a growing population, much of England could see significant supply shortages by the 2050s – particularly in the south-east.”

While this is being sold to the public as a climate-related problem, it is nothing of the kind.  The located in the northeast Atlantic and directly beneath the jet stream, the British Isles gets more than enough rainfall to meet UK needs.  The truth is that the private sector never got around to investing in the necessary infrastructure.  As James Moore at the independent notes:

“Ofwat’s [the water regulator] own data indicates that water companies took in £11.7bn from domestic and business customers for the financial year ending in 2017. They made a profit of just under £2bn on it. That represents a margin of an eye-popping 17 per cent.

“From those profits, £1.4bn in dividends were paid out to the owners. Between 2007 and 2016 the total payout amounted to about £18bn…

“The questions raised over profits vs investment aren’t new. The recent interruption to supply faced by some is also just one in a lengthening list of problems.  Consider Thames Water, one of the most heavily criticised of the privatised water companies. Just last year it was fined £8.5m for missing leak targets. There was another fine of £20.3m after huge leaks of untreated sewage into the River Thames.

“Ofwat has itself said that a quarter of the water pumped in London leaks away before it reaches customers. At the current rate, it will take 357 years to renew the network of ancient pipes supplying the capital.”

As this site has reported many times, the same process has played out in the energy sector; where the owners and managers of the “Big Six” have given themselves huge rewards while leaving the UK dangerously exposed to energy shortages in the very near future.  While politicians argue and flip-flop over whether renewables, nuclear or fracking offer the best way forward, the companies themselves have invested in nothing like the capacity needed.  As a result, the UK is increasingly dependent upon imported electricity and gas to keep the lights on and the heaters burning.

The same process of hollowing out and the same lack of political foresight has also played out in Britain’s treasured National Health Service.  As the BBC reports:

“Taxes are going to have to rise to pay for the NHS if the UK is to avoid ‘a decade of misery’ in which the old, sick and vulnerable are let down, say experts.

“The Institute for Fiscal Studies and Health Foundation said the NHS would need an extra 4% a year – or £2,000 per UK household – for the next 15 years.  It said the only realistic way this could be paid for was by tax rises.”

Only an idiot would believe that these experts – and the politicians they serve – have only just realised that this is a problem.  I myself sat on a government committee in 2002 – the Health and Wellbeing Council for Wales – that was set up precisely to advise on the impact of an aging population on the NHS.  The stark warning that underpinned that initiative was that it would be impossible to provide “a comprehensive health service free at the point of delivery by 2020.”  Well, that is just two years away, and nothing was done.  The radical shift in investment away from frontline treatment toward public health improvement and early intervention that might have prevented the crisis was too unpopular with the voters.  So the politicians opted to spend their money on political gimmicks, like free prescriptions and free parking for the wealthy, instead.

The confusing factor in this is the ideological austerity imposed by a Tory government that hates the British people.  Spending cuts imposed since 2010 are as much an extension of the Bullingdon Club members’ nasty practice of burning £50 notes in front of homeless people as they are a reasoned approach to managing the public finances.  This gives the impression that the growing list of critical infrastructure and services that have been hollowed out and asset stripped over the past 40 years can be put right through the simple act of electing a different government.

In the event that a Labour (or Labour-led) government stuck to the proposals in the 2017 manifesto, it might mitigate the problems to a small degree.  Nationalising utilities and/or handing them over to not-for-profit companies may free up money to be invested into repairing some of the damage.  A National Investment Bank may also be able to borrow some additional currency to invest in infrastructure.  However, the underlying weakness of the UK economy means that neither of these policies can do more than scratch the surface of Britain’s imminent collapse.

Government borrowing can only work provided interest rates remain low.  But the reason interest rates are low is because the government is not borrowing – via the central bank, it has used currency-printing to buy back debt that was previously held by the private sector.  Were the government to begin borrowing – i.e. issuing new bonds – the interest rate would rise accordingly.  Worse still, too much additional borrowing will lower the value of the Pound.  So while some borrowing is possible, compared to the Herculean task of rebuilding Britain’s critical infrastructure, it will be a drop in the ocean.

The same, of course, is true for nationalised and/or not-for-profit utilities and services.  These can only borrow against the likely returns from customers together with subsidies from tax-payers.  The underlying problem today, however, is precisely that neither customers nor taxpayers can provide sufficient returns to allow anything like the levels of investment required.  As the economy turns down, the amount of taxes government can collect will continue to fall.  At the same time, the amount of cash people have to pay for utilities and services will also be constrained.

Just like the road outside your and my door today, future government borrowing and spending will be the equivalent of the people from the council shovelling small quantities of asphalt into the deepest of the potholes even though what is clearly needed is the resurfacing of the entire network.  This, too, is what most likely awaits all of our critical infrastructure and services.  Not the sudden bankruptcies that are available to the directors of corporations; but rather a slow motion breakdown as ever fewer essential needs can be met.

Where, exactly, we end up will depend upon the energy and resources available to us and the wisdom with which we chose to deploy them (which is why I’m not optimistic).  Sadly, by the time the politicians even acknowledge that the proverbial roof needs fixing, it will be too little, too late.

As you made it to the end…

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