Interserve: another outsourcing giant hits the wall


In the pursuit of monopoly profits, another building corporation turned ‘public service provider’ has gone bust – and the public will be picking up the tab

At Liverpool Women’s hospital, cleaners, catering workers, porters and security guards who work for outsourcing leech OCS are striking for living wages while their managers take home bonanza pay rises.

And this bitter experience is being replicated nationwide in every nook and cranny of our former public services, even as one bloated outsourcing giant after another hits the wall.

The collapse of resourcing behemoth Interserve did not come out of the blue. The company issued profit warnings in May 2016, October 2017 and November 2018. In February, the company, with debts heading for £700m, announced a debt-for-equity rescue deal, swapping hundreds of millions of pounds of debt for shares in the company (Mark Kleinman, ‘Outsourcer Interserve closes in on debt-for-equity rescue deal’, Sky News, 3 February 2019).

The service provider finally went bust a month later, when negotiations with shareholders failed. On 15 March 2019, it went into administration, with administrators (leeches) from EY (Ernst and Young) expensively parachuted in as company assets were transferred to a group controlled by its major creditors (banks and hedge funds).

Interserve employed 45,000 workers in Britain (75,000 worldwide) and received over £2bn annually from government contracts, clearly bringing it into the supposedly ‘too big to fail’ league – like Carillion before it. Seventy percent of its £3.2bn annual revenues came from work in the public sector, across some 450 contracts.

As one of the government’s largest contractors, it provided an array of cleaning, security, maintenance, probation, healthcare, waste management and construction services across the country – everything from cleaning town halls and schools to building waste-to-energy plants and running probation services. It even provided former Tory minister Iain Duncan Smith’s notorious ‘welfare-to-work’ service for the Department of Work and Pensions in 2014.

So desperate was the government to keep Interserve staggering along that, even as it teetered on the brink of collapse, the company was spoon-fed public contracts to the tune of £432m in 2017 and £233m in 2018. It received another £6m worth even after the abortive rescue attempt had begun last December (‘Interserve handed £660 million taxpayer contracts months before facing collapse’, GMB, 18 March 2019).

Contradiction between big business employers and their workers and small contractors

According to the Financial Times: “Around 200 companies that provided IT, HR and property management services to the now defunct parent group risk losing their contracts or not being paid for work carried out.

“The hit to these businesses, which will be told this week whether their services are still required, is expected to fuel mounting anger over Interserve’s collapse, a year after the failure of rival outsourcer Carillion. Around 16,500 smaller shareholders in Interserve have seen the value of their investments wiped out” (Gill Plimmer, ‘Interserve suppliers face losses from outsourcer collapse’, 18 March 2019).

As the CPGB-ML wrote when Carillion collapsed last year: “It should be possible to explain to these workers, and to a large number of the ruined petty-bourgeois subcontractors, that a slavish worship of market forces is against their real (and not perceived) class interests.

“It is a disaster for workers associated with the firm, not because they had any great stake in the growth and profiteering of the company up to this point, but rather because its collapse now offers the largest ‘redistribution of wealth’ (redistribution of exploitation) the construction industry in Britain has ever seen.

“Big profits are to be made from the acquisition of outstanding contracts and the restructuring of various parts of the business by the vultures that are already circling.

“Workers will lose their jobs, and small businesses lack the capital necessary to compete for the lucrative scraps. Those workers whose jobs are ‘saved’ will find that they have been saved by investors (parasites) intent on driving down wages and restructuring jobs so as to make their acquisitions more profitable.

“When the carnage is over, what is left of various arms of what was once Carillion will be sold to other monopolies pursuing the same strategy as Carillion once pursued, all in the race for maximum profits” (‘The collapse of Carillion’, cpgb-ml, 1 February 2018).

While the vultures begin picking over the pieces and working out which parts of Interserve they can pick up for a song and rinse for a fat profit (all subsidised by the public purse, no doubt), workers delivering the public services that Interserve is responsible for will remain in limbo, unsure whether their jobs will last, or what changes might be forced to their pay and conditions in return for gracious permission to continue trying to deliver those hard-pressed services to a public that desperately needs them.

And what might happen to the services themselves is anyone’s guess.

No lessons learned from Carillion

It is only a year since Carillion went down the tubes, and for much the same reasons as Interserve. For one, it had moved into too many areas in which it had no expertise. Interserve started life as a cargo transfer company in 1884 and transformed itself into a nationwide construction company in more recent times. Carillion likewise started life as a demerged arm of the Tarmac construction company in the 1990s.

Having become bloated off the back of the construction bonanza of PFI (private finance initiative – the private construction of public buildings at exorbitant prices which has led to the bankruptcy and closure of so many hospitals), these companies felt emboldened to spread their wings further, ready for more fat profits to be taken from the public purse.

But not only were these diverse contracts leading the companies into areas of business far removed from construction, but the competition to land what was assumed would be equally fertile milch-cows as PFI led rival firms to consistently underbid in a race to the bottom, presumably with the aim of securing a monopoly position that might pay high dividends in the long term.

No doubt they also assumed that they would be able to deliver the promised services on a shoestring by the ‘efficient’ expedient of subcontracting their responsibilities to a suitably nasty outfit that would be happy to cut staff numbers, slash pay, pensions, work breaks, travel time and other rights of their employees, and increase the workload of each individual remaining on staff.

All of this has been done, of course, with the expected lowering in standards of vital services and increase in stress for the workers, but the profit margins have been low to non-existent despite the most concerted efforts to increase the rate of exploitation of staff. And this has been further exacerbated by the need to pay big bonuses to managers and shareholders, which have often been funded through borrowing rather than out of existing funds.

Driving for monopoly

Commenting on the drive towards monopoly in the provision of public services, the New Statesman has noted: “The state currently invites companies to bid for contracts and awards them to whichever contractor is able to deliver the project most cheaply. This encourages the emergence of huge conglomerates that gain a cost advantage from operating at such a large scale.

“Recently, these firms have moved away from privately financed construction projects and have started to deliver frontline public services too. These firms then subcontract the delivery of these contracts. They make their profits from the difference between the price paid by government and that which they pay to suppliers. As the political economist Colin Crouch has argued, the bidding company becomes a specialist simply in winning public contracts, rather than actually in delivering public services.

“Instead of creating competitive markets that compete for public contracts, the government has effectively created outsourcing monopolies whose primary expertise is in extracting value from the public sector.

“Over the last two years, five companies have won over 80 percent of all the public sector’s outsourcing contracts, with Capita alone responsible for almost half. This kind of market concentration spells a very unhealthy market. We need a fundamental rethink of public procurement in this country” (Grace Blakeley, ‘The problem with outsourcing is not Carillion but the market itself’, 1 February 2018).

Moreover, as pointed out in another New Statesman article: “Not only have most voters never heard of these meaningless company names – G4S, Serco, Capita, Interserve, Sodexo, Mitie, and previously Carillion – running our country, but they may ask: are they even running it at all?” (Anoosh Chakelian, ‘Interserve, and the other companies running Britain that you’ve never heard of’, 11 March 2019).

Throwing good money after bad, outsourcing conglomerates have borrowed to fund their extension, buying up other businesses, consolidating their monopoly positions and hoping in this way to keep the whole show on the road. In the end, it was the spiralling debt to net worth ratio that did for Carillion and Interserve, and which has other outsourcers like Capita, Serco and Keir looking equally shaky.

Chickens coming home to roost

According to the Guardian: “Carillion’s failure in 2018 cost the taxpayer an estimated £150m. More than 1,700 workers were made redundant, and resulted in major delays to two multimillion pound hospital construction projects in Liverpool and Birmingham. The firm had been awarded £1.3bn of government contracts despite being known to be in financial difficulty” (Miles Brigrnall, ‘Interserve given "public contracts worth £660m in run-up to collapse"’, 18 March 2019).

When the government report into Carillion finally landed last May, it exposed liabilities of nearly £7bn when the company collapsed. According to City AM, at the time of Carillion’s demise, “Pensions liabilities totalled £2.6bn, forcing the Pension Protection Fund to take its largest ever hit” (Alex Daniel, ‘ Financial Reporting Council extends probe into Carillion’s accounts’, 26 February 2019).

Meanwhile, it emerged that “Carillion owed £2bn to 30,000 suppliers, subcontractors and other short-term creditors when it collapsed. Frank Field MP, chair of the Work and Pensions Committee, spoke of Carillion’s ‘utter contempt’ for suppliers, who it used as ‘a line of credit to shore up its fragile balance sheet’.” (Alex Daniel, ‘A year on from Carillion: 12 months that brought outsourcing to its knees’, City AM, 15 January 2019).

The report came out on the same day that the government was forced to admit that outsourcing of public transport was also failing, and to take back control of the East Coast rail franchise – the line’s third failure in a decade (‘Privatised rail industry totters’, cpgb-ml, 19 May 2018).

Three months later, in August 2018, the government had to step in once again to take over the running of Birmingham prison, sacking outsourced provider G4S after inspections revealed the institution was “falling into a state of crisis” and had become an “exceptionally violent” dystopia, where prisoners high on drugs wandered around like zombies in “a war zone” (‘Prison report reveals truth about Britain’s dreadful concentration camps’, cpgb-ml, 3 September 2018).

TUC response

The TUC is talking a good fight over this latest outsourcing catastrophe, indignantly pointing out that the average household is paying about £3,500 in taxes every year to fund the profits of these profiteers.

But our ‘movement leaders’ are less than inspirational when it comes to proposing solutions, with TUC general secretary Frances O’Grady bleating: “We need much more scrutiny when public services are handed to the private sector and far more robust oversight of the private firms handed millions by the government. This means a proper watchdog and a national risk register.

Rather than demand complete and immediate renationalisation – an end to the butchery of our public services by outsourcing privateers and their return to local and national government control – it wants to tinker about with yet another toothless set of regulators, in the forlorn hope of civilising the ruthless profiteering of capitalism.

Sure enough, the TUC is calling for “a Domesday Book for public service contracts” so as to secure “better data, better value for money”. The pious wishlist of objectives includes better data collection on outsourced contracts, the establishment of a new public body operating ‘at arm’s length’ from government with powers to secure data from commissioners and contractors, and a new office for ‘equity, efficiency and effectiveness’”(!) How the outsourcers must be shaking in their shoes. (‘Government must sit down with unions to protect Interserve jobs’, TUC, 15 March 2019).

There is no end of data now spilling out about the Interserve debacle, just as we saw in the case of Carillion. When a company sends up yearly distress signals about its viability and then embarks on a very public search for a rescue package, it does not take a Sherlock Holmes to sniff out something rotten.

The decision to press on with awarding public contracts to Interserve under such circumstances is not a mistake brought on by faulty data but a demonstration that capitalism in crisis is prepared to make a bonfire of all public services sooner than neglect any opportunity for maximising profits.

And, as Ernst and Young will testify, the service-users’ loss is the vultures’ gain.