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As the dominos set off by the recent Carillion crisis continue to fall, shortcomings on the part of the bosses, the banks and the government are coming to light. With blame being shared left, right and centre, one question sticks out: was the government right not to bail out Carillion?

 

News broke at the beginning of last week that construction giant Carillion had gone into liquidation – an event which I covered in my previous article for Kaleida’s blog. Days later, and the depth of the chaos caused by the collapse of the UK’s second biggest construction firm was glaringly visible. Contractors lost their jobs, small businesses owed money closed their doors, and headlines were reporting on the government’s ill-fated business decisions.

Now, as the cost of Carillion’s collapse continues to deepen, MPs and members of the public are asking whether the right decision was made after all.

 

A Government at Fault?

If the collapse was their fault, shouldn’t the government step in? This is one line of thinking coming from some critics, all of whom have pointed out the government’s attitude and involvement with Carillion as a contributing factor to the firm’s disintegration.

Serco boss Rupert Soames, for example, wrote in the Daily Telegraph after the story broke, that the government was presiding over a market where “only the dumb and the desperate” wish to compete for public sector jobs. The risk associated with taking on public service projects has, Soames argues, destabilised some construction firms, with policy change making for an unpredictable future as the project continues.

Meanwhile, sources have claimed that the government owed Carillion £40m when it went into liquidation. Whilst that’s not enough to cover the billions in debt faced by the company, the extra cash may have bought Carillion some time.

Finally, some are questioning the handing of projects over to a firm which had already posted a warning about its accounts. It was public knowledge that Carillion was facing a tough time, but in an action that could be described as a ‘soft bailout’, the government continued to award public sector contracts to the firm.

 

A Question of Fairness

Others arguing of the fairness of Carillion’s demise will also likely draw comparisons to how the government has used taxpayer money to save banks, which still see bosses enjoying bonuses. Meanwhile, Carillion had its hand in many public sector projects – including MOD contracts, hospitals, and the Aberdeen bypass. This could have an enormous effect on British infrastructure if contracts aren’t picked up quickly.

On the other hand, taxpayers have been saved from funding a bailout that would effectively turn against the idea of capitalism. Simply put, Carillion didn’t have enough profit when the going got tough, and a free market economy would see such a firm sink as a result. Our choice to live as capitalists means we can’t mourn the natural ebb and flow of the free market.

However, what some critics are considering, is the cost of loaning Carillion the £150m it asked to borrow from the government – which would be paid back following a restructuring to reassure creditors – versus the potentially devastating costs incurred by its collapse. Already, Treasury Minister Liz Truss has admitted to not knowing the full cost to the taxpayer, and Labour MP Pat McFadden has written to the government to ask whether the cost comparison had even been considered.

 

Lessons to Be Learned

Whilst the government owed money, supported Carillion with contracts, and may have underestimated the cost of a bailout versus damage control, the earlier point still stands: this is capitalism in action. And it’s with no doubt that we can imagine how people would react if the government had bailed out Carillion. Suffice to say, bosses – who had protected themselves financially from this disaster – must shoulder much of the blame.

But now is the time to put this argument behind us, and instead focus on protecting the subcontractors and employees on the ground who are suffering because of the collapse. It’s in this arena where the government could excel.

Already, Theresa May has stepped forward to declare an end to ‘pension abuse’ – a contributing factor to Carillion’s ill financial health – whilst ministers have formed a task force comprised of businesses and unions in order to support those affected by the collapse. Whatever the government’s position before Carillion went into liquidation, its stance now is clear: limiting the damage felt by normal people.

From the initial reports of Carillion struggling to the most recent investigations, this has been both a divisive and enlightening topic for discussion. We can hopefully move forward using what’s happened as a lesson: for the government, that’s handling outsourced contractors better, tightening procedure around awarding public sector contracts, and creating a business environment where this doesn’t happen. For everybody else, it’s a crash course in capitalism at its least enticing.

 

Kaleida is a bespoke software development house in Manchester, working with various industries – including construction – to create powerful solutions to challenges. To find out more, feel free to explore our website or get in touch directly.

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