Carillion: the questions to be answered

Cock-up or conspiracy? It is too soon to say whether the collapse of Carillion, the UK’s biggest supplier of public sector contracts and services, can be blamed on a catalogue of errors because of low margins on big PFI projects or appalling, if not irresponsible, management. What is sure for now is that Carillion’s demise is a disaster of epic proportions which is not only jeopardising the future of the company’s 43,000 employees. The livelihoods of many more thousands of people working for smaller firms and sub-contractors involved in the supply chain are at risk.

What is also certain is that there will now be demands for a full inquiry, and so there should be. Heads should also roll over Carillion’s collapse in the City as well as government departments where officials continued to award billion-pound contracts to the company despite alarm bells being rung over the group’s future.

While the government has promised that all workers will be paid, there is less clarity over the funding of the firm’s £800m pension deficit, currently held in 13 different pensions schemes. Then there is future of the 450 projects across the public sector in which Carillion is involved –  from the running of prisons, many schools, to the the building of HS2 and the Aberdeen West Peripheral new road network.

Here in the UK, more than 20,000 jobs in the UK are at risk after the firm ran out of time to find a way to restructure its £1.5bn debt, and another 23,000 around the world are vulnerable, many of them working on big infrastructure projects in the Middle East. Projects which have not been paid for. Indeed, Carillion blames the non-payment or late payment of fees from clients in the Middle East for some of its problems.”

The questions being asked which need quick answers are:

Bonuses: Why did the Carillion board relax its rules in 2016 on the executive bonus “clawback” scheme? The Institute of Directors is already demanding to know why the rules over the clawback – which limited the criteria under which the company could demand the repayment of executive bonuses – was given the go ahead. The IoD’s head of corporate governance, says: “The relaxation of clawback conditions for executive bonuses in 2016 appears in retrospect to be highly inappropriate. It does no good to the reputation of UK business when top managers appear to benefit in spite of the collapse of the organisations that they are responsible for.” Indeed, relaxing the clawback meant the firm could ask for cash back if the business went bust. Yet the new rules stated it could only do so in the event of gross misconduct or if the financial results had been misstated.( The head of the firm’s remuneration committee is Alison Horner, head of human resources at Tesco.)

As well as questions over the propriety of the controversial bonus scheme, there will now be questions over why the former chief executive Richard Howson, who was forced to leave the company after a profits warning and a £845m write-down on the value of contracts last summer, will be paid draw his £660,000 pay packet until October. As it so happens, Carillon’s chairman, Philip Green, was an adviser on corporate responsibility to former PM, David Cameron.

New contracts: Why did the government award nearly £2bn bn of new contracts over the last two years, during which time Carillion had issued three profit warnings and the share price had collapsed? In 2016 alone, Carillion received around £1.7bn in total from public sector contracts: around a third of its total revenue of £5.2bn.

Yet it was only last week that we heard the news that it was being investigated by the Financial Conduct Authority over trading updates sent between December 2016 and July last year.

But the City knew Carillion was in deep water, before that. Once again, the short sellers had been out shorting the stock – betting that the share price would fall further, for the last 18 months. And so it did: the group’s market value dived from around £850m to just £70m by the end of the year.

Liaison role between government and Carillion left open: According to Construction News, the key government role managing the relationship between Whitehall and Carillion on its public contracts was left vacant for months last year despite the contractor’s financial problems. CN’s Jack Simpson reported last year that Carillion was left without a Crown Representative – the person appointed to liase between Whitehall and the private sector – for at least two months, covering the period in which the firm revealed a half-year loss of £1.15bn, and the sale of its healthcare arm.

Crown Representatives were introduced in 2011 as a means of ensuring cost savings for the taxpayer but also to provide a point of focus for supplier-related issues.

There is one Crown Representative, who work part-time,  appointed to each of the government’s 29 biggest suppliers. They work part-time, and they are responsible for developing “improvement plans” if they think the supplier is high-risk. The person responsible for Carillion – a former Rolls-Royce director of operations and supply chain for defence, Julie Scattergood, was in situ in May 2017. But the department’s September list showed she was no longer in the post, and a replacement had not been found at that crucial stage.

The future of PFI/PPP: The government may have to take over Carillion’s 450 public sector contracts, with some services being taken in house. However, the collapse of Carillon raises the much bigger issue of the future of the government’s PFI initiatives.

These were originally designed to improve business relations between government and the private sector, and created to get better value for taxpayers with competitive tenders and economies of scale while at the same time improving the public finances by keeping this work off the books.

In reality, some of these big projects have proved disastrous to construction companies such as Carillion, and others such as Balfour Beatty, because the contracts are highly competitive, leading to wafer-thin margins. They are often subject to cost overuns because of time delays.

Indeed, Carillion blames those low margins, along with higher labour and raw material costs, on many of its government projects for most of its problems. One example being given is the firm’s work on the Aberdeen West Peripheral road, a massive infrastructure project. However, weather conditions have been so bad that work has been delayed – and Carillion has not been paid.

That’s how precarious some of these projects are proving to be for contractors: projects which are not profitable for the private sector but also too expensive for the government to do going it alone.

As critics point out, both government and the private sector have been working under false pretences; successive governments have relied on the private sector to come up with competitive projects, while the private sector has sliced its margins so thin that it cannot make a decent profit.

You only have to look at what happened to Railtrack and Capita to see how hope has not triumphed over experience. If there is a lesson to be learnt from Carillion’s collapse, it must be to look again at how government projects should be funded.