Carillion, an outsourcing company that had become a major provider of support services in the NHS and other sectors of the economy has joined a select group of once great corporate players, including Enron, Lehman Brothers, Northern Rock, and Royal Bank of Scotland. All, in their times, fell into the category considered “too big to fail”. But they did. In the aftermath of the 2008 global financial crisis Ben Bernanke, the then chair of the US Federal Reserve said “If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved”. It wasn’t.
The problems of allowing these corporations to become so dominant are well known. Firstly, they encourage reckless risk taking, both by the directors of the corporations themselves and by those who have lent them money, believing that if everything goes wrong, governments will bale them out. Secondly, their economies of scale make it ever more difficult for smaller competitors to enter the market. This matters, because small and medium enterprises are often more innovative, their supply chains put money back into their local economy, and lacking the opportunities for avoidance open to by transnational operations, they pay more taxes. All of these are good for the economy and good for health. Finally, they pose a risk to the overall stability of the system. A bankruptcy of a small company might go unnoticed in Whitehall; when Carillion collapsed the government convened a COBR meeting, normally reserved for grave national emergencies such as acts of terrorism.
Given these considerations, it seems hardly surprising that the directors of Carillion behaved as they did, especially given the failure of the government to provide meaningful oversight. They extracted ever larger sums in dividends while allowing the pension fund to fall into increasing debt. In the scramble for growth, they took on projects that were unlikely ever to be profitable. But they ensured that they were personally protected. In 2016, the directors rewrote the terms of their bonus awards to ensure that they would not be clawed back if the company failed. When a chief executive stepped down after a profits warning in July 2017, he negotiated a deal that would ensure that his salary of £660,000 would continue until October 2018. The model of public-private partnership encouraged by successive governments claims the advantage of transferring risk from the government to the private sector. Yet, once again, a major corporate failure is greeted by demands for government bailouts, including further calls on its Pensions Protection Fund, while the much maligned public sector must step in to pick up the pieces.
Finally, as with almost everything that happens in the UK now, there is a Brexit dimension. While blame for the company’s demise lies with its directors, its trading update, published in December 2017, identified the threat posed by a slowdown in government contracts consequent on post-Brexit uncertainty, also reported by other large outsourcing companies. This may have been the final straw. Among the few to benefit from Carillion’s demise were some hedge fund managers who, sensing its troubles, bet against a decline in its share price, yielding a windfall estimated at £300 million. Hedge fund managers also contributed generously to the Leave campaign and are well placed to gain from any turbulence that Brexit causes. One of the few think-tanks to be listened to on Brexit is the Legatum Institute, which made large sums in the chaos that followed the collapse of the USSR. For such groups, chaos and confusion can easily be seen as opportunities. Finally, it is difficult to see how a government weakened by an unnecessary general election and a confused cabinet reshuffle, and struggling even to agree a position on Brexit, can possibly respond effectively to the twin challenges of an NHS in crisis and one of its major suppliers failing.
Jeremy Corbyn has called the Carillion affair a “watershed moment”. He was referring to the many failings of public-private partnerships, even though these have been pointed out repeatedly in the pages of The BMJ. But maybe there is a wider question. Given that Carillion is just the most recent example of a failure of a corporation that was “too big to fail”, should we be asking why the British political system keeps making mistakes and whether it is really fit for purpose?
Martin McKee is professor of European public health at the London School of Hygiene and Tropical Medicine.
Competing interests: None declared.