Skip to Content

Coffee House

The true cost of the Carillion wreckage

22 August 2018

7:10 AM

22 August 2018

7:10 AM

“We’re not doing a very good job of selling the private sector, are we?” So said an old friend of mine, among the Conservative party’s most senior advisors, as we discussed my upcoming Channel 4 Dispatches documentary on Carillion.

Back in January, Jeremy Corbyn declared the implosion of the UK’s second-largest construction firm “a watershed moment” – and, in some ways, he was right. I don’t accept Carillion’s demise seven months ago means private companies should be kept away from providing public services, as the Labour leader has argued, or that Britain now needs wide-ranging nationalisation. The state already employs a fifth of the workforce, accounting for over two-fifths of GDP – which is quite enough.

But when Corbyn seized on Carillion’s collapse in a bid to reflect and even galvanise public anger towards seemingly unaccountable big businesses, he was onto something. “As the ruins of Carillion lie around her, will the Prime Minister act to end this costly racket of the relationship between government and some of these companies?” asked Corbyn from the despatch box, during a particularly heated session of PMQs.

Carillion’s collapse exposed a vast firm, responsible for hundreds of government contracts, that mistreated its sub-contractors, neglected its pension schemes and systemically cooked the books. It damaged the idea of private firms delivering public services, while revealing jaw-dropping failures at the heart of our business and political establishments.

One of several recent Parliamentary investigations into Carillion’s collapse said the Financial Reporting Council, responsible for auditors and accountants, was “timid” in challenging “inadequate and questionable” financial information and “wholly ineffective” in taking auditors to task.

The Pensions Regulator, meanwhile “clearly failed” in its statutory objectives to safeguard Carillion’s 27,000-member pension scheme. This had an eye-watering £800 million deficit when Carillion imploded, the biggest ever shortfall to be absorbed by the Pension Protection Fund – where it will be propped up by levies on other UK workplace pension schemes.

And the government, for its part, “lacked the decisiveness or bravery” to address the failures in corporate regulation that allowed Carillion to become a “giant and unsustainable corporate time bomb”.

Carillion was about much more than construction, of course. While many of the 480 government contracts it held were to build hospitals, roads and other infrastructure, it also delivered numerous “outsourced” public services – from school meals to refuse collection. Since January, vital Carillion projects have been stalled – not least the completion of the desperately needed Royal Liverpool University Hospital.

Having routinely paid Carillion billions of pounds a year, the government then awarded it eight additional public contracts, worth almost £2bn pounds, in a thinly-disguised rescue bid. These came after the debt-soaked company issued a jaw-dropping £845m profits warning in July 2017, the biggest the City has seen in a generation, which saw 70 per cent wiped from its stock price.

Sir John Bourn, the UK’s longest-serving auditor general, told Dispatches he was “appalled” these public contracts continued to be given to such a “dicey” company. “You couldn’t have had a better warning to be careful,” said Bourn, who ran the National Audit Office from 1998 to 2008. “Carillion was clearly in trouble – it was all rather like a Ponzi scheme because it was taking small contracts as a way of keeping the bigger contracts going”.

The company was in such chaos when it collapsed, with an estimated £7 billion of liabilities, that it went into “compulsory liquidation” – with no hope of re-sale, administration or restructuring. After years of ever-rising shareholder dividends and director bonuses, despite chronic debts, Carillion ran out of cash.

As such, the state isn’t only bearing the cost of renegotiating the contracts and public services Carillion left in limbo, often paying through the nose for other contractors to take up the slack. Taxpayers are also footing vast accounting, legal and advisory bills to dismantle the debt-soaked Carillion wreckage. The Official Receiver paid PwC more than £20m over just two months of a drawn-out insolvency process, we learnt last week – charging some staff out at over £1,150 an hour.

It’s a different story at Flora-Tec, a horticulture company near Cambridge, that worked for Carillion since 2004. “They used every trick in the book to delay paying me,” managing director Andy Bradley told Dispatches. “We started off on 45 days, then it was 65 days and, when they went under, we were technically on 126 days – over four months to get paid, it was a form of abuse”. Carillion went bust owing Bradley’s firm around half a million pounds. “I don’t think we’ll see any of it,” he says.

Once the star among a clutch of out-sourcing firms, Carillion rode a revolution in public service provision started by the Tories, but expanded under New Labour. Corbyn is determined to reverse Blairism, of course, significantly reducing the scope of capitalism – and that’s why Carillion is so dangerous.

The firm’s directors and auditors deny any wrongdoing, insisting they’ve always acted within the law. Yet trust in capitalism has lately been badly dented, not least due to Carillon.

This Conservative government, unable to multi-task beyond Brexit, has done little to reassure the public that capitalism still works. After a long-line of corporate scandals, ministers have singularly failed to display the grit needed to rein in excess, face down vested interests and make sure punters don’t feel constantly ripped off.

There needs to be an urgent shake-up of the “big four” auditors like PwC and KPMG (Carillion’s long-standing auditors) – whose relations with large firms are far too cosy. Procurement must get beyond over-bearing large firms. Oversight must improve – with regulations made simpler, but strictly imposed. And, where there is clear evidence of white-collar fraud, prosecutions must follow.

 For the manner in which Carillion was run, and was allowed to be run, was scandalous. It’s become a byword for everything that’s wrong with British capitalism – a Corbynite alibi to expand the frontiers of the state.

“How to Lose Seven Billion Pounds”, Channel 4 Dispatches, is on tonight at 10.30pm


Show comments
Close