Economy and Infrastructure

23.05.18

Carillion board’s belief government would bail it out contributed to collapse

The Carillion papers identify “clear and compelling problems” which the government had the opportunity to deal with in the months leading up to its collapse, according to the Public Accounts Committee.

Back in January, the House of Commons agreed that the government’s risk assessments of its strategic suppliers should be released to the committee. Although they are subjective documents intended as confidential advice, they are no longer considered to contain live and material risks since the company is no longer trading.

Each strategic supplier is assessed on a red-amber-green (RAG) scale, with some being designated a black high risk status.

According to the Carillion assessments, the company had been rated amber due to its performance against contracts with the Ministry of Defence and Ministry of Justice.

The government did not downgrade Carillion to red until it had issued a profit warning in July 2017, before which the government appears not to have been aware of the company’s financial distress.

Officials recommended a provisional black rating be allocated to the company in November 2017, but the Cabinet Office did not confirm the designation.

The company collapsed less than two months later.

Chair of the committee, Meg Hillier, argued that there is “great secrecy” surrounding the large contracts that the government has become dependent on in order to deliver public projects and services.

“If a company providing a number of these contracts fails, this is bad news for service users and the taxpayer,” she said.

While there are commercial sensitivities around the relationship between the government and suppliers, with a potential impact on jobs and small businesses should certain information be made public, Hillier said that the strategic supplier risk assessments give rise to many questions.

“We have been mindful of the workers and businesses who could lose out through no fault of their own if certain information is in the public domain.

“But equally we are concerned about the lack of transparency and its potential to create an environment where poor practice takes root,” she explained.

“The Carillion papers identify clear and compelling problems with the business in the months leading to its collapse. Government had the opportunity to deal with them,” she said.

Hillier explained that although the government did not bail out Carillion, with the company going into liquidation, costs and responsibilities were inherited that were ultimately borne by the taxpayer.

“The fall-out from Carillion’s collapse and the resulting burden on the public purse is still not clear. We will be seeking clarity on these critical matters and probing suppliers and government about what they are doing to ensure such a catastrophic failure is not repeated,” she added.

Deputy chair of the committee, Sir Geoffrey Clifton-Brown, described the RAG scale for strategic suppliers as “too slow and clunky”, pointing out that profit warnings were issued in July and September 2017 and yet a high risk recommendation was not made until the end of November 2017.

“The City, in contrast, knew well before July 2017 that Carillion was in trouble,” he said.

“Too many government facilities contracts were concentrated in one large firm giving the impression that it was too big to fail, hence the perception that the government would bail them out when push came to shove,” added Clifton-Brown.

He argued that the Carillion board’s “erroneous belief” that the government would not let the company collapse appears to have contributed to the failure to take necessary action to save the company and prevent the “sad loss of jobs and damage to numerous suppliers and subcontractors.”

Top image: PA Wire

 

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