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What can the collapse of Carillion teach the public-sector about commercialisation?

When Carillion – one of the largest construction companies in the UK and holder of many public-sector service contracts, both in the UK and overseas – announced it was going into liquidation1, it reignited a long-held debate on the security and sustainability of commercialisation within the public-sector.

What is commercialisation in a public-sector context?

Some public-sector organisations generate revenue from their operations as central funding depletes2. Raising tariffs (for example, business rates and council tax) is a popular way to boost cash flow, but local authorities also seek flexible, sustainable income streams that support growing communities too.

Before its collapse, Carillion enabled public-sector organisations to provide additional services without having to self-fund them. Central government would then ‘lease’ buildings – or services – from Carillion, allowing public services to expand in other ways.   

The risks of public sector commercial outsourcing

Carillion’s collapse was primarily due to the company’s decision to invest in service contracts (in addition to construction), blurring its focus from a value-chain perspective and leaving the company vulnerable to diminishing contracts since the 2008 economic downturn3. It committed to too many low-margin contracts and subsequently failed to offset the money it had spent and borrowed.

Susceptibility to geo-economic trends also reveals the risk of partnering with private-sector business. No company is too big to fail, so having a greater understanding of commercial markets could help public sector leaders to better assess the fluctuations and subsequent risks involved.   

Recommended read: Rethinking public-sector education: interview with Senior Teaching Fellow, Helen Hurford-Dawson

Carillion’s financial woes have generated some huge implications. Multiple building projects have over-run, including the Royal Liverpool Hospital (due to be completed in March 2017 but repeatedly delayed4). This highlights the importance of weighing-up the costs with the benefits associated to any form of commercialisation.

The successful commercialisation of public services

Away from Carillion, councils have found ways to successfully supplement funds through different forms of commercialisation. Southampton City Council is a good example5 where investment in property is generating surplus funds that can be used to support other public services. Further afield, public authorities in Costa Rica have teamed up with private providers to create a healthcare scheme that addresses a growing demand from medical tourists6.    

The commercialisation of public services is just one of the many contemporary areas of study covered by our 100% Online Masters of Public Administration. By examining real-life case studies like that of Carillion, you can gain the knowledge you need to contribute to commercial projects as part of an impactful public-sector career. Find out more by downloading our brochure for more information.

References:

1POOLEY, C. et. al (2018) Carillion collapses into liquidation. Financial Times [online] Available at: <https://www.ft.com/content/5ea57733-0c7c-3ccd-9108-6380250c71fc> [Accessed 18.05.2018] 

2BURNS, G. (2017) Council funding to be further cut in half over next two years – LGA warns. Local Government Association [online] Available at: <https://www.local.gov.uk/about/news/council-funding-be-further-cut-half-over-next-two-years-lga-warns> [Accessed 09.05.2018]

3WALKER, D. & TIZARD, J. (2018) Let’s shed some light on public sector contracting. Public Finance [online] Available at: <http://www.publicfinance.co.uk/opinion/2018/01/lets-shed-some-light-public-sector-contracting> [Accessed 09.05.2018]

4THOMAS, D. (2018) Where did it go wrong for Carillion? BBC [online] Available at: <http://www.bbc.co.uk/news/business-42666275> [Accessed 09.05.2018]

5UNKNOWN (2016) Council establishes a property investment portfolio [online] Available at: <https://www.southampton.gov.uk/news/article.aspx?id=tcm:63-388722> [Accessed 18.05.2018]

6UNKOWN (2017) Costa Rica Seeking to Improve Medical Tourism [online] Available at: <https://thecostaricanews.com/costa-rica-seeking-improve-medical-tourism/> [Accessed 18.05.2018]

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