Shareholders creaming off more cash from outsourced public services, says TUC

By agency reporter
April 16, 2018

New analysis published today (16 April 2018) by the TUC shows that private companies running public services are handing out more and more cash to shareholders, despite profits falling in most cases.

The TUC is also publishing a report today on the reforms needed to protect public services and improve quality in the wake of Carillion’s collapse three months ago.

The TUC looked at dividends and profits for the seven largest public limited companies with significant business running outsourced public services.

Dividends have risen in most years since 2010, reaching a combined total of £642 million in 2016 for the seven firms. This is an increase of 67 per cent compared to shareholder dividends in 2010.

The analysis also finds that pre-tax profits have fallen 31 per cent across the same period, undermining claims that higher dividends reward investors for improved business performance.

The pattern is found across several of the leading companies running public services, suggesting Carillion is not an isolated example. And some companies even had years between 2010 and 2016 when they continued to pay dividends despite making a pre-tax loss.

The TUC says this is evidence of a fundamentally flawed model, which prioritises short-term shareholder interests over the sound stewardship of public services, the wellbeing of the workers who provide them, and the needs of communities that rely on them.

The report, What lessons can we learn from Carillion? identifies the problems that led to Carillion’s collapse and proposes reforms to improve the quality, value and sustainability of public services.

It highlights the systemic failures of an outsourcing model that prioritises low cost over quality, and a corporate governance model that prioritises shareholder interests. These combine to encourage firms to further outsource risk, leading to a complex web of subcontractors with little transparency or clarity for where responsibility lies.

The report recommends corporate governance reforms and an improved commissioning process. The TUC proposes a new commissioning model based on public provision of public services, except in cases where it is clearly shown that outsourcing is in the public interest.

Recommendations include:

  • Restore public interests to the heart of public services.  All commissioning decisions should be based on a public interest test with clear criteria.  In-house provision should be the default, unless there is a demonstrable public interest case for outsourcing.
  • Provide transparency for who runs our services. The government should publish comprehensive information on significant contracts across the public sector, including information on value, length and performance.
  • Reform directors’ duties to promote long-term success. Directors should be required to promote the long-term success of the company as their primary aim, while having regard to the interests of shareholders, workers, customers and service-users, the local community and other stakeholders.
  • Strengthen UK law to better protect workers. Companies must have stronger duties in insolvency situations. This should include early and meaningful consultation with trade unions, protection of pay and conditions for staff transferred to a new employer, and recovery of unpaid wages and holiday pay.

The TUC General Secretary, Frances O’Grady, said: “Carillion was a wake-up call. It put the spotlight on private firms hoovering up public services contracts with little public scrutiny. 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.

“The government needs to rethink outsourcing. 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.”

* Read What lessons can we learn from Carillion – and what changes do we need to make? here

* TUC https://www.tuc.org.uk/

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