The Trade Unions Congress has warned that more outsourcing firms could face Carillion-style collapses after its analysis revealed that the UK’s biggest contracting firms saw their collective shareholder dividends rise by 67% in recent years despite pre-tax profits falling by 31%.
It said the research, published to mark the three-month anniversary of Carillion’s plunge into liquidation, was evidence of a “fundamentally flawed” business model that prioritised short-term shareholder interest over “sound stewardship” of public services.
The umbrella group for unions looked at dividend and profit figures for G4S, Capita, Babcock, Carillion, Interserve, Serco and Mitie for its analysis. The numbers showed combined shareholder dividends had risen from £386m in 2010 to £642m in 2016, while their combined profit before tax fell from £1.218bn to £880m.
RELATED CONTENT
Of those firms, Babcock – which provides a range of services to the Ministry of Defence – marked the biggest increase in dividends (249%), although its profit before tax increased by 186%.
Capita’s dividends rose by 101% over the six-year period despite profit before tax dropping by 76%, the TUC figures indicate. The firm, which issued a profit warning earlier this year, has a host of contracts across the public sector, including electronic tagging for the Ministry of Justice and running Department for Work and Pensions enquiry lines.
Serco, whose chief executive Rupert Soames earlier this year called for a new era of “fair dealing” for outsourcers, did not pay a shareholder dividend for in 2015 and 2016 according to the TUC figures, but saw its profit before tax drop 86% between 2010 and 2016.
The TUC said the dividend-to-profit analysis underscored that Carillion, which increased its dividends by 34% between 2010 and 2016 at a time when its profit before tax dipped 13%, was not an “isolated example” in the world of public sector outsourcing.
It said its data had showed some companies even had years between 2010 and 2016 when they continued to pay dividends despite making a pre-tax loss and called for the government to take a range of measures outlined in a lessons-learned report on the Carillion experience, which details what the union argues are endemic problems with the UK outsourcing market.
Among its calls are for the Cabinet Office and the Crown Commercial Service to work with public-sector commissioners to promote a “more dynamic approach” to social value procurement and require all public-service contractors to meet the Committee on Standards in Public Life’s seven principles of public life.
It also wants to see the creation of a “Domesday Book” of all significant public-sector contracts to increase transparency on who runs services, the value of the contracts, their length and their performance.
TUC general secretary Frances O’Grady said the Carillion experience should be treated as a wake-up call for the government to fundamentally rethink its approach to outsourcing.
“It put the spotlight on private firms hoovering up public services contracts with little public scrutiny,” she said. “It showed how these contracts line shareholders’ pockets instead of serving the community. And when Carillion failed, the government had to clean up the wreckage.
“We need to get back to running public services for the common good. Frontline staff work hard and aim high because they care about the community they serve. That should be the motivation for public service managers and boardrooms too, Most services would be better off back in public hands. And the government must reform outsourcing and corporate governance rules so that all services are run for the long-term benefit of the communities that depend on them.”
The TUC’s report, What lessons can we learn from Carillion – and what changes do we need to make?, suggested that maintaining or increasing the level of shareholder dividends was a key way UK-listed companies kept their share prices high and protected themselves from takeover.
However it said a situation that required directors promote the success of a company for the benefit of shareholders encouraged board-level decision-making that was skewed towards short-term financial returns, rather than investing in long-term and sustainable company growth.
“It was this toxic combination of relentless growth through new contracts and acquisitions and the need to provide short-term financial returns to shareholders that drove the aggressive accounting practices and reckless debt accumulation that led to the downfall of Carillion,” the report said.
It also observed that most of Carillion’s shareholders had not picked up on the problems the company was facing before it issued a profit warning in July 2017, questioning the level of oversight of the businesses’ “precarious situation” they had been able to exercise.