The collapse of Carillion lays bare the reality of what is really happening to public services

As a nation we either cannot afford the services we demand, including the shiny new hospitals and prisons and the wondrous new rail lines, or we are not willing to pay more taxes to fund these collective ambitions

Carillion, like the Grenfell disaster and the failure of other outsourcing contracts, should teach us no end of a lesson about the way we have been trying, as a country, to avoid paying for our public services. It doesn’t work, or at least not in the way we were led to believe.

For about a quarter of a century now, public private partnerships, the private finance initiative and the general policy of outsourcing contracts for building and running public services were regarded by all parties as a sort of alchemy. Back in the early 1990s, another time of strain on public finances, the then Chancellor Norman Lamont hit on it as rather a smart wheeze, with some convenient free market dogma to back it up. New Labour under Gordon Brown and John Prescott eagerly adopted it as a method of funding their own pet projects. Since the financial crisis and the banks have eaten so much public money it has become a necessity rather than a choice.

So it’s worth reminding ourselves what this was all supposed to be about. The involvement of firms such as Carillion was designed to deliver the following benefits to taxpayers and service users alike: to provide the cost of major projects such as hospital or road building, as with the HS2 rail line “off the books”, flattering government spending figures; better value for money by competitive tendering; improved service provision because of competition; economies of scale where large companies can work nationally to provide facilities or auxiliary activities; less trade union interference than in the public sector, so less producer interest and more consumer power; for the politicians – less troublesome accountability for MPs, councillors and voters where private sector firms can be blamed for shortcomings; off-load the risk of huge cost overruns for building or developing new infrastructure by making private sector companies liable for those with no recourse to taxpayers.

To be fair, some of those were tangible and worked well. The problem is that too often it really is alchemy, and could not abolish the laws of economics. If a certain economic activity, such as running care homes or cleaning hospitals or creating a new railway, is not economic then a private company has no magical powers to necessarily make it so.

At the moment we are in a situation where some contracts are not profitable for a private firm yet also too costly for the public sector to bear. The image of vast profits made by rip-off firms can be an illusion, though of course there have been abuses. All too often it means the Treasury and local councils put so little into these schemes that they will always be inadequately funded, and risky for a private contractor to take on. If they do take it on and run into losses, that can bring the company down and put the device in jeopardy.

Carillion, the troubled Capita and the failure of Railtrack in 2001 show the limits to the public finance initiative. When BHS went bust the shops shut and it was very sad but that was that; but we can’t just shrug because a clinic or school can’t operate one morning.

The only good thing about the collapse of Carillion then is to lay bare the reality of what is really happening to public services. As a nation we either cannot afford the services we demand, including the shiny new hospitals and prisons and the wondrous new rail lines, or we are not willing to pay more taxes to fund these collective ambitions. No doubt, as with Railtrack before it and other lower profile failures of private sector involvement in public services, there may be special factors of debt and mismanagement at work.

In the end, though, we have learned an important lesson – that there is no substitute for properly funded public services and projects no matter who is running them. The collapse of Carillion merely reminds us that there is no such thing as a free lunch, a magic way of creating public services without money, no matter how much taxpayers, politicians, managers, civil servants and shareholders would like to believe in it.