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Carillion’s collapse is the worst of all worlds for the government

18 January 2018

8:47 AM

18 January 2018

8:47 AM

Having spent the best part of 15 years looking at public procurement data, this is my take on collapse of Carillion. It has caused chaos for a simple reason: the organisation’s tentacles reached into all parts of government, with more than 200 public bodies signing some form of contract with Carillion in the last five years. The sums spent by the government on Carillion were huge: in 2016, this amounted to nearly £1bn. As a result, it goes without saying that many government departments have been badly affected by the firm’s demise this week. The worst hit is likely to be Carillion’s biggest customer: the Ministry of Defence. In the last five years, the MoD has forked out over £2.2bn – and this is just the stuff we know about.

Yet for all the huge sums of taxpayers’ money going on Carillion contracts, the figures were falling, which goes some way to explaining why the firm ran into trouble. Total government spending with the firm is estimated to have dropped by as much as a quarter last year. Of 97 public sector customers in 2017, just 23 increased the amount that they spent with Carillion. Falling customer numbers is also a common thread, from 166 customers in 2012, this fell to 135 in 2016 and 97 in 2017. The customer count was down every year after 2012.

For a time, the firm continued to benefit from healthy billings. But as contracts in Glasgow and elsewhere started to go badly wrong, Carillion endured a slug of contracts which came to an end in 2016. This, combined with the sudden drop in customers in 2017 and falling revenues from existing customers, was obviously too much for the business to handle. The reported £29m which was left in the bank at the end is a shocking indictment of Carillion’s woeful situation.

With so much money handed over to Carillion and so many contracts with the firm yet to be completed, where does this leave the government now? There are several scenarios which could play out, and the bad news for ministers struggling to get a grip on things is that the situation in each case looks dire. Every contract (my organisation Open Opps estimate that there are 450 of them) is going to have to be either brought in-house, or swapped out. Contracts that go back in house will have to have staff re-contracted back to the council or school that let the contract out in the first place. The problem here is that when these staff joined Carillion, those who came from the school or council will have had more favourable employment contracts than their new ones with Carillion. As a result, staff moving back, or staff moving to the public sector for the first time, will naturally want to negotiate better deals. Unions will want the same. So individual public bodies will have to negotiate these new staff arrangements, which will put greater pressure on their finances. If they are not careful, they, too, may end up going the way of Carillion.

Of course, the reason Carillion was brought in to run services in the first place was because they promised savings. Those savings have now evaporated since the firm went under, so even if these public bodies can manage to absorb extra costs, budgets will be trashed. This makes it vital that the government has a policy for what happens if these organisations start to run out of money. Will any budget shortfalls be made up? If so, where will the money come from? Will ministers offer support and advice on how to handle the insourcing negotiations? It can’t afford to get into the weeds, but standing by and doing nothing isn’t an option either.

Not all contracts will be brought back in house, with some going to different firms. Things look even bleaker here, as these firms know that the government has a very weak negotiating position. Every supplier who is going to take on any of the failing contracts is going to demand more money. Mainly because they can and there’s not much government can do about it. Even where contracts are going well, rival bidders will simply say: ‘Carillion went bust, we can’t take that risk’. This means the base costs for everything will go up. What’s more, these firms will also have to work out what’s going on, and manage complicated handovers from Carillion. This will cost money – and taxpayers will ultimately end up footing the bill.

Where contracts are going badly, rival suppliers will say that these contracts are utterly toxic and the only way to deliver them is to reprice and restart. The government has no redress here: Carillion is gone, so they just have to take it on the chin. The best they can hope to do is select the least worst option in a parade of unsavoury choices.

The government also knows that it simply cannot afford to let another Carillion happen. This means that the work has to only go to companies with a stellar balance sheet. Of course, they get those by being profitable, so ministers will be limited to picking from only the most successful companies, which will add a premium for being more reliable than their rivals. Once again, the bad news for the government is that this will push costs up.

The pattern emerging here is, of course, pretty clear: in the wake of Carillion’s collapse, the government is faced by rising costs and shrinking options. But there’s worse still to come. Right now, there will be a cherry-picking war going on. Remaining contractors will be trying to lure away the best staff and, if they can, whole teams from Carillion. This will give potential suppliers significant leverage in any future negotiations, as they can promise not to derail (no pun intended) the most important projects.

So not only will there be rising costs, complex negotiations and the distinct feeling that the government is being held to ransom, the government will have to deal with many of the key staff moving on to other contractors, taking valuable knowledge with them.

Perhaps the government’s best and only hope is to dangle some cherries of their own, and offer profitable contracts as long as the successful supplier also takes on some of the poisonous contracts. Yet things are never so simple and the problem here is that the government can’t aggregate these contracts into packages without the agreement of each buyer.

So spare a thought for the officials having to deal with what must feel like a real storm. They have no good options and ministers are hungry for good news which is unlikely to be forthcoming.

Ian Makgill is managing director of Open Opps


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