Here we go again. Just when we thought we’d have a week off writing about the UK infrastructure market, construction services company Carillion collapses in spectacular fashion, with some comparing it to Lehman Brothers because of how it will impact its intricate network of subcontractor relationships.
To put it bluntly, a significant number of jobs will be lost and the government will have to step in and prop up many of the contracts it had outsourced to the company. That means Carillion’s collapse will have an, as yet unquantifiable, impact on the public purse, though mercifully (and rightly) the government is not bailing out the company, which is being liquidated.
Since Carillion’s collapse is partly tied to time and cost overruns on UK PFI projects, it inevitably added fuel to the already raging fire on the inadequacy of all things private. Shadow chancellor John McDonnell, a fervent proponent of nationalisation, called it a “significant blow to the ‘private knows best’ economic dogma”; well-known journalist Robert Peston said it marked “the end of a 25-year love affair between […] governments [..] and private-sector service providers”. We could go on but you get the picture.
The UK matters because, as the Financial Times’ Martin Wolf put it over the weekend: “The UK example of privatisation was a catalyst for imitation by a host of other developed and developing countries, ultimately including the former Soviet Union and China. If the UK were to elect a government committed to a reversal, it might shift — it would certainly shock — opinion around the world.”
The odds of that happening have risen exponentially since the incumbent government lost its majority last summer – and the shadow Labour government’s impact is already being felt in the public discourse, which raises the prospect that some of its policies, even if watered down, will be adopted.
This has a two-fold impact: a narrower one on UK asset owners and the investors backing them, who need to start planning for an intervention; and a wider one on the asset class and its status as a purveyor of steady, low-risk returns.
Again, we don’t think the kind of wholesale nationalisation being threatened by the shadow Labour government will happen. It’s too messy and too costly and we think the shadow government knows it. But it’d be naïve to think nothing will happen if Labour is elected.
In a Guardian piece this week, McDonnell hinted as much when he wrote that a “significant start” would be for government to “refuse to allow PFI projects to pay dividends to offshore fund shareholders, for example – with nearly half of all PFI contracts owned by nine offshore funds”.
The name of the game here is ad-hoc intervention as and when private gain is deemed ‘excessive’, with the threat of expropriation serving as ‘the stick’. The inevitable consequence is, of course, revenue unpredictability and the end of infrastructure as a low-risk asset class. If the UK goes down this path, its “example” will matter and potentially influence other governments around the globe.
For infrastructure investors to stand a realistic chance of protecting themselves, they need to be able to forcefully answer the following question: what social purpose do they serve?
As BlackRock chief executive Larry Fink put it in his just-published annual missive to chief executives: “Society is demanding that companies, both public and private, serve a social purpose.” That means clearly articulating how they benefit all stakeholders, including the community. Failure to do that will result in them ultimately losing their “licence to operate”.
In the end, Carillion didn’t have a good-enough answer to that question. To many, it existed solely as the beneficiary of a system designed to funnel work its way, regardless of how well it performed. But plenty of managers and investors do have a positive answer, and are able to demonstrate conclusively how they add value, create jobs and benefit the communities they invest in.
Get ready to show it.
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