With dizzying speed, over the past few days, the outsourcing group Mouchel teetered, went bust and will now be majority-owned by its creditors through an ?87m debt for equity deal.
Since those creditors include Royal Bank of Scotland, we now have a situation where local services are being provided to the residents of, for example, Middlesbrough, Lincolnshire and Bournemouth, by a part-nationalised company (the latter facing calls to bring its workforce back in house).
Mouchel claims that despite its near-death experience it?s ?business as usual? for the company. But it can?t and shouldn?t be. What the collapse of this company shows is that outsourcing isn?t a clean cut. Local authorities and other public bodies can?t just sign a contract and walk away in the expectation the service will be seamlessly provided.
Before and after contracting, public bodies ought not just to do what the lawyers call due diligence and assess the financial viability of the contractor, but maintain the utmost vigilance over their business affairs.
Take Mouchel. Once upon a time, the company bearing this name was a straightforward engineering specialist, helping build the Royal Liver Building and Battersea Power Station.
Then, a decade ago it merged with another former engineering outfit called Parkman. Mouchel Parkman start popping up as a generic supplier of maintenance and repairs to social landlords and councils, working in schools and elsewhere. In 2007 they took over Hyder Business Services (formerly owned by Terra Firma, it had major problems with a Bedfordshire outsourcing contract) then rebranded as Mouchel. After falling into difficulties (including a law suit with Westminster city council over a parking contract), the company next faces takeover by VT Group (former the shipbuilder Vosper Thorneycroft ? now itself taken over by Babcock), and by Costain (another builder become ?service supplier?).
How far could public bodies buying Mouchel services ever keep up with this whirligig of corporate restructuring? What could they do when, last December, Mouchel announced a ?65m loss, knowing that the resulting turmoil was bound to affect the quality of service offered locally by the firm.
Public bodies are often na?ve about business. Here?s John Beesley, the Tory leader of Bournemouth, welcoming the banks? takeover of Mouchel: ?It removes the uncertainty surrounding the future of the company?. On the contrary, the banks are likely either to try to exit very quickly or dismember the company to minimise their potential losses.
Another example. After the Olympic security debacle, any responsible police authority would think hard about the capacity of G4S to deliver. But shouldn?t they also examine that company?s finances? Read the Guardian?s Nils Pratley and ponder his conclusion that G4S is ?running out of steam?.
How many public bodies buying G4S services were even aware of its recent attempt to take over the Danish company ISS ? a decision (some analysts say) that if consummated would have been akin to the disastrous capture of Dutch banking group ABN-Amro by RBS, just before its collapse?
A prime lesson from the Private Finance Initiative is that companies will engage in complex financial engineering in order to reduce their borrowing costs, inflating the profits. The Jimmy Reid Foundation, a new Scottish thinktank, has been doing some work on the privatised utility companies. Ofwat and other regulators allow price rises based on one estimate of the cost of capital; the companies then find ways of lessening their borrowing costs and their profits rise accordingly.
The moral of this has to be: eternal vigilance by public bodies over private companies motivated by profit maximisation. But do councils and civil servants have enough financial expertise to know what?s happening? Are they capable of becoming part-time stock analysts?
This article is published by Guardian Professional. Join the Guardian Public Leaders Network free to receive regular emails on the issues at the top of the professional agenda.
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