Stephens, who sat on the UK Parliamentary Carillion Inquiry, also called for the break-up of the ‘big four’ auditors
GLASGOW SOUTH WEST SNP MP Chris Stephens told a fringe event at SNP annual conference that the outsourcing industry should disappear altogether, arguing that he has “never seen anything that was outsourced that’s led to a better service”.
The fringe event, hosted by the Local Authority Pension Fund Forum, on Monday [9 October] evening, looked at “why companies fail?” in the context of the collapse of outsourcing giant Carillion in January.
Stephens sat on the joint inquiry into Carillion at the UK Parliament which examined the company’s collapse, and said that he found it to be a “a damning indictment of a total failure of a political ideology that presumes privatisation and outsourcing is always value for money and better than the public sector”.
He described the collapse as a “systematic multi-organisation failure: there was corporate greed, lack of regulation, pension scheme stability sacrificed for dividends”.
Carillion were paying dividends of £75 million per year, while paying just £50 million per year into their pension pot, Stephens said. He added that the company’s business model was to take over existing companies, many of which had large pension deficits, and thus “the pension gap was growing and growing”.
The Glasgow South West MP then turned his ire towards the auditors, who he said were a “cartel” that existed “to massage the company account”, and called on the ‘big four’ auditors – Deloitte, KPMG, Ernst & Young and PwC – to be “broken up” so that there was more competition in the sector. The auditors should be reported to the Competition & Market Authority, he argued.
Finally, Stephens said Carillion were consistently making payments late to sub-contractors, and called for a change in the law so that the principle contractor "picks up the difference" when a company collapses, to protect small business sub-contractors.
Ian Greenwood, chair of the Local Authority Pension Fund Forum, which manages £30 billion worth of pension investment assets, said he "agreed with every word" of what Stephens had said, saying Carillion was a "massive Ponzi Scheme" with regulators, asset managers and auditors all at fault for looking solely at short-term profit.
He described a "club of people circulating" between companies and regulators, with the latter "not fit for purpose" to manage the former.
Greenwood said he had met 40 of the chairs of FTSE 100 companies, each say that they believe in corporate responsibility, but "when they come in to the room privately they say, 'but we want the money as well'. And what they are really saying is we're not bothered about what we do, we want the money. It's absolute shocking. There's a culture of corporate greed."
He called for asset manager contracts to be made longer to incentivise long-term thinking, with the current average contract just 3-5 years, driving "short term decisions taken on the basis of short-term market movements".
Stuart Mckinnon from the federation of small businesses in Scotland, called for changes to protect small businesses who are sub-contractors to corporations, saying that a third of payments to small suppliers in Scotland are late, with the average value of each late payment £6,000.
50,000 businesses in Scotland close due to late payments, Mckinnon said, arguing that if the same enforcement rules on payment practices as Norway existed "2,000 small businesses in Scotland could be saved every year".
He also challenged the Scottish Government to change its approach to public procurement, a £12 billion industry, so that small suppliers had more chance to win contracts, with the number of small suppliers winning public procurement contracts falling 42 per cent since from 2008-2017.
Mckinnon said companies like Carillion "had mastered the art" of winning public contracts, and described recent changes to procurement in Scotland as "very weak indeed".
A question was then asked of Greenwood about the pension funds investment in the arms trade and whether he could pursue divestment.
Greenwood said it "was very difficult", saying they analysed the models of FTSE 100 companies, and said "every single one had model failure", leading him to the conclusion that engagement was a better approach than divestment.
The chair of the pension fund was backed up by Jamie Hepburn MSP, minister business, fair work and skills, who said divestment could also mean taking investment away from the ships built on the Clyde. Hepburn said an engagement approach was beter, and that restricting the arms trade than divestment was to challenge the UK Government's licensing of arms sales to Saudi Arabia.
Former councillor Fraser McCallister said on procurement that 20 years ago councils would have 20 suppliers to choose from, "now they only have two", he said, adding: "outsourcing is a huge problem".
Doug Thomson from the SNP Newington & Southside branch said that while big pension funds had benefited from the Bank of England's Quantitative Easing policy which inflated asset prices due to "ten years of free money", "small businesses have no access to that” . Thomson also criticised the fact the meeting was an all-male panel, which the chair responded to by stating that a female panellist had pulled out shortly before the meeting.
An ex-Carillion employee said that the company had been using the same practices when she worked for them 20 years ago, and said that the public procurement portal used to make applications for procurement contracts was "not easy used", arguing that it was set up to be very difficult for small companies.
A speaker from the floor then said “not all outsourcing was bad”, which Stephens challenged, arguing for the whole outsourcing industry to be brought back under public control.
The speaker questioned what such a move would mean for small sub-contractors, which the Glasgow South West MP responded to by saying “that is not outsourcing, to me. Outsourcing is services run in the public sector being taken out of it. Like the roads for example.”
“The case for outsourcing was always premised on the idea that giving the contracts to private companies takes away the risk for the public sector. Carillion’s collapse proves that’s nonsense,” Stephens added.
The SNP has announced at its annual conference that it is going to look at establishing a Scottish National Infrastructure Company, which could see companies like Carillion and private banks removed from the public infrastructure development process.
Picture courtesy of Elliot Brown
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