Page 1: Introduction
Governments markets are made up of the spending of National and Local governments. Each year the government spends billions of pounds on a range of services both to support its internal operations and to provide the public with services such as defence, education, road systems, public order and safety, housing, recreation and health care.
Many government contracts are very large and can involve millions of pounds of public money. Because the government and its agencies spend funds to buy the products they need to provide services, they are accountable to the public and, as the public’s needs and priorities for services change, so does the demand for products within government markets. The buying process is also influenced by the ‘political atmosphere’ of each government and, over recent years, in response to the need for greater accountability, there has been increasing emphasis upon ‘value for money’.
For certain companies and in certain industries, the government, through its departments, is the largest single client. This is the case in the construction industry where, despite the privatisations of the 1980s, the government still spends significant sums upon vital pieces of the nation’s infrastructure such as schools, hospitals, roads and public building projects.
The established practice has been for the government department (or Local Authority) to employ an engineer or architect to design a project and ask for tenders from construction companies to build the project. Under this system, the government department selects only a few firms, negotiates specifications and terms and eventually awards the contract to one of the negotiating firms. The successful contractor is then paid stage payments throughout the work for the construction undertaken.
In 1992, the then Chancellor of the Exchequer, Norman Lamont, launched the Private Finance Initiative (PFI), whereby companies wishing to obtain work on certain government infrastructure projects would have to fund the projects and retain a responsibility for their upkeep until the government repaid the finance. The aims of PFI were essentially threefold:
- to turn the government from a provider of services to the public into a purchaser of services for the public
- to reduce the amount of capital expenditure the government needs to borrow in an attempt to control the Public Sector Borrowing Requirement (PSBR)
- to inject private sector management and skills into projects which have traditionally been the domain of the public sector.
This case study focuses upon how UK-based Tarmac, a key name in the international construction industry, has taken advantage of the opportunities created through the government’s Private Finance Initiative.
Britain’s earliest roads were built by the Romans as they spread their influence. But, for many centuries after the Roman occupation, there were no real roads. The first serious attempt to modernise the engineering and administration of the country’s roads was made in the early 19th century by John Loudon McAdam. His achievement was to create a proper professional status for road engineers and administrative arrangements for the Turnpike Trusts - the PRIVATELY FINANCED toll roads of the early 19th century.
The Tarmac story itself began in 1901 at the dawn of the motoring age. A barrel of tar spilled from a horse-drawn cart at Denby in Derbyshire. Shortly afterwards Mr E Purnell Hooley, the county surveyor of Nottingham, noticed that after the barrel fell, the resultant mixture of tar and fine blast furnace slag debris from the local ironworks was hard, strong and dust free! It is difficult to believe that this solution to the problem of dusty roads, about which all travellers complained - particularly the huge number of cyclists - could be so simple. But it was and it turned out to be more durable once Purnell Hooley had found out how to mix the slag with tar before it was laid. He called the product ‘Tarmac’, recognising McAdam’s contribution to roads development and set up a company in Nottingham in 1903 - the ‘Tar Macadam’ (Purnell)
Like many new inventions though, the inventor is not necessarily the best person to develop the product commercially and the early financial direction of the venture was erratic. The story may have ended then but for the intervention of Sir Alfred Hickman, MP for Wolverhampton, who owned a thriving ironworks on the edge of the town. In 1905, he became chairman of the venture and changed the name of the company to Tarmac Limited. Tarmac the material and Tarmac the company had arrived.