There was a period during Thatcher’s Britain in the early 1980’s until sometime just before everything was subcontracted out by who was initially contracted to do the work on a plethora of government and public agency contracts. It included cleaning hospitals, running prisons, maintaining roads or indeed building them using the PFI method of procurement where initially, it made some sense and benefit.
The private finance initiative of procuring buildings and infrastructure was, even from its start in the 1980s, criticised for being a more expensive method of public procurement for goods and services- simply put- the government can borrow cheaper than the private sector. Once public staffing levels and inefficiencies in supply chains were considered too high and needed improvement costs could be cut and profit margins for new private sector providers maintained. Dividends could be paid to investors on top of interest payments to banks by contractors or consortiums bidding on multi-year contracts or mega-projects with expanding balance sheets and workloads.
The government’s austerity drive since 2010 after the global financial crisis with many contracts now re-negotiated has reduced the profitability of the business model. New cost reductions are harder to find and operational efficiencies with all- too-scarce labour, often on a zero-contract basis, all add to the woes of contractors operating in a low margin business. Add a looming departure from the EU and labour could become even harder to source or retrain locally at high cost.
It comes as no surprise that senior management have struggled to understand the operational aspects and financial complexities of running companies employing many thousands of people in numerous sectors that another major UK outsourcing contractor- Interserve is in need of a huge financial overhaul to avoid another Carillion style collapse witnessed in January 2018. With high debts, low margins and a destroyed equity base it will need to be completely restructured and re-emerge as a different entity to continue provision of critical public services. The shareholders are simply wiped out. So much for the miserable fate of equity investors as I for one should know.
For the very reasons mentioned changes need to be made including a return to less multi-functional contracts being tendered nationally by a larger pool of contractors pricing work for higher margins being overseen by a local authority or common services agency for stage payments, contract compliance and cost competitiveness.
More regionally diverse contractors could employ a direct workforce and train apprentices at local technical colleges with any complex contracts being handled by specialist subcontractors. The design team could comprise of an architect or engineer with the so-called project manager returning to their original role of quantity surveyors to produce a document that collates the price of the contract-such as a Bill of Quantities remember them – for the contract duration. The cost manager can distribute payments as dictated by a standard form of contract.
The contact sum would be known from the outset and keeping further contract claims to a minimum. Government agencies would know what they requested and how much they pay over the contract period. Also, a trained local workforce would emerge over time helping the economy and the government raise revenues to pay for the resources through taxation and controlled borrowing.
PFI can still be used for appropriate projects and the government doesn’t need to employ or build everything. It just needs to adopt a sensible approach to public procurement where companies, especially once great ones, get a chance to make some money and not collapse mid-process, leaving a mess to clear up and further diminishing public confidence in public service providers.
The current state of the outsourcing industry demonstrates that an idea can be taken too far and once people get beyond their ken or care things go awry. To note Tilbury and RM Douglas were once great UK construction firms before they were combined to become Interserve. No guess which business units are already mooted for spinning out of the re-financed Interserve.
Interestingly the November 2018 Mark it/CIPS PMI showed a little growth in the construction sector from 53.2-to-53.4 indicating growth in output and job creation so not a complete embarrassing disaster then.
LDC.