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Outsourcing: the vultures feeding off billions

Rubble: a Carillion building site in Birmingham. Nothing will now be built there for a long time. Photo Elliott Brown (CC BY-SA 2.0).

The tsunami of outsourcing over the past decade has led to a culture of rotten business practices. When the merry-go-round finally comes to an end, it’s the workers and the public who are left to pay the bill…

Writing in The Daily Telegraph on 22 January, Rupert Soames, chief executive of Serco, quoted Lenin: “capitalists will sell us the rope with which we will hang them”, in trying to pin the blame on everyone else. 

This is rich coming from Serco considering it nearly caused Carillion’s collapse in 2014, when that company was ensconced in scandal following the London Olympics security fiasco and the tagging of offenders fraud. Though Serco is distancing itself from Carillion, its own financial health is also parlous as witnessed by the Barts and the London NHS Trust contract in 2017.

Everyone is blaming everyone else for the collapse of Carillion, though in fact the whole outsourcing “industry” reeks of the corruption of rotting business practices.

It is largely the same audit companies that failed to see the 2007-2008 banking collapse that have been signing off Carillion’s accounts: KPMG, PWC, EY and Deloitte. 

The “big four” audit companies handle the accounts of 90 per cent of Britain’s so-called blue chip companies. They have pocketed over £71 million in fees – while missing the estimated £1.5 billion debt, the £1 billion pension deficit, and the fact that Carillion only seemed to have £17 million cash reserves at the time of collapse. 

Bonus payments

Yet Carillion managed to pay £376 million from 2012 to 2016 to shareholders in dividends and bonus payments. And now the estimated £50 million cost of the insolvency will come from the asset stripping of Carillion. 

To date 16 of Carillion’s 326 “companies” have gone bust with the domino effect continuing among the rest. What was Carillion’s core objective? Presumably securing another contract just to keep running on the spot.

As Carillion sinks, so the asset stripping and seizure of contracts by competitors becomes a frenzy. Serco, BGIS/Brookfield (Canadian) and OCS to name but a few swoop in to feed on public sector contracts in health and education. 

‘Carillion managed to pay £376 million to shareholders from 2012 to 2016.’

Almost immediately the existing terms and conditions of workers are attacked. Trade union recognition is denied or withdrawn. Transfer of undertakings regulations and redundancy protections are denied. Redundancy issues are referred to the Insolvency Service, which will place workers’ recompense at the bottom of the heap after investors, shareholders, businesses and HMRC, which will take priority. 

Every conceivable weasel word and slippery practice emerges. The TUC, coordinating the trade union response, meets and exchanges “thoughts” with the government. Meanwhile the crowd of vultures grows. Sadly, the squabbling between Unite, GMB and Unison continues, with each trying to poach members off the others. 

But Carillion is not alone. Capita, which “manages” – among others – the London Congestion Charge, Jobseekers Allowance, Teachers Pension Scheme, TV Licence collection, local government contracts, Ministry of Defence, Department of Work and Pensions, has seen its shares halve in value since the end of January. 

‘Short-term focus’

Even Jonathan Lewis, Capita’s chief executive, describes Capita as “too complex” and “driven by short-term focus”. The government calls Capita a “strategic supplier”, a phrase used previously to describe Carillion. 

Capita harvested 154 new public sector contracts in 2017. Unlike Carillion, Capita has large cash reserves, estimated at over £1 billion. Profit forecasts are for a return of £270 to £300 million, down from £400 million last year. 

Faced with the downturn, the company is ruthlessly cutting jobs, dumping unprofitable businesses, moving away from collecting contracts for contracts’ sake – focusing instead solely on profit returns. Its staff, 50,000 in Britain and 70,000 worldwide, must feel nervous about the future. Incidentally, Capita is audited by KPMG.

Interserve is another major outsourcing company, with an estimated £3 billion revenue and contracts covering the NHS and local government. After a £200 million loss on its waste-to-energy business in Scotland, it has tried to shift the bill to its 80,000 workforce, with attacks on wages and on terms and conditions.

Babcock provides another example. Essentially an engineering company, it has been bidding for contracts in everything from shipbuilding, the railways and local government construction to NHS soft facilities management. 

‘From 2010 to 2015 government ministers have outsourced over £120 billion of public service contracts.’

As crisis surrounds Babcock’s competitors it has dusted off its engineering credentials to distance itself from them: 20 per cent outsourcing, 80 per cent engineering is the mantra. Its order book of £31 billion looks healthy. But as the prime customer is the Ministry of Defence, and the MoD has a £21 billion black hole in its accounts, alarm bells are ringing.

Carillion, Serco, Capita, Interserve, Babcock are just five players, but the list goes on – ISS, G4S, Virgin and so on. The privateers like Serco head Rupert Soames argue that “[state] monopolies are always bad, and always become inefficient and focused on protecting their own interests”. 

Private outsourcing, he said in January, brings to the public “choice, new ideas, greater efficiency, reduced costs…along with the assurance that the taxpayer is getting best value for money”. The financial crises rippling through the outsourcing monopolies say otherwise.

From 2010 to 2015 government ministers have between them outsourced over £120 billion of public service contracts – almost double the value of all contracts outsourced up to 2010. They cannot blame civil servants for this: the drive came from the Treasury and then-Chancellor Osborne. 

In addition to the management failures of the outsourcing companies, Carillion was attacked by hedge funds and the aptly named vulture funds which gamble on a collapse in share prices by buying, selling, re-buying cheap and then selling on at a profit the shares or bonds in companies in crisis. 

An estimated £300 million was made by hedge funds betting against Carillion’s collapse. Blackrock – the world’s largest hedge fund – is said to have made £40 million from Carillion’s collapse. Ex-Chancellor Osborne reputedly earns £650,000 per annum working one day a week for Blackrock. It’s a small world.