Carillion 'hoodwinked the Government' with published accounts

By agency reporter
June 8, 2018

The National Audit Office (NAO) has published an investigation into the government’s handling of the collapse of Carillion. The liquidation of Carillion will cost UK taxpayers an estimated £148 million, although this is subject to a range of uncertainties and it could take years to establish the final cost. There will also be wider costs to the economy, Carillion’s customers, staff, the supply chain and creditors.

The investigation identifies that the Cabinet Office began contingency planning for the possible failure of Carillion shortly after the company posted its first profit warning on 10 July 2017. The scale of the profit warning came as a surprise to the government, as it contradicted market expectations and information and commentary that had been provided by Carillion. The government’s contingency planning started in July 2017, accelerated in October 2017 and was complete across central government by 15 January 2018, when Carillion collapsed.

Carillion’s 2016 accounts were published in March 2017 and showed the company as profitable and solvent. The Cabinet Office raised Carillion’s risk rating from amber to red in response to the July 2017 profit warning. However, it did not increase Carillion’s rating to its highest rating, ‘high risk’ as it accepted Carillion’s argument that it was already in receipt of the sensitive financial information such a rating would require and that they did not wish to risk precipitating Carillion’s financial collapse.

In the months following Carillion’s first profit warning, the company announced £1.9 billion of new government work, including two joint venture contracts with HS2 worth £1.3 billion. Many of these contracts had been agreed before the profit warning, although in some cases contracts were signed, or variations agreed, afterwards. None of the contracting authorities believed they had grounds for disqualifying Carillion’s contracts under procurement rules. In addition, Carillion’s partners in joint ventures were liable to take over and finish the contracts if Carillion failed. In the case of Network Rail, not awarding contracts would have meant re-procuring and redesigning the projects, increasing costs for the taxpayer and delaying work.

In early January, Carillion asked the government for £223 million to help it through to April 2018 and additional support with its financial restructuring. Rather than provide this, the Cabinet Office decided it was better that Carillion enter into a trading liquidation, because it had serious concerns about Carillion’s business plans, the legal implications, potential open-ended funding commitments, the precedent it would set, and the concern that Carillion would return with further requests. At the point of liquidation, Carillion had around 420 contracts with the UK public sector.

The Cabinet Office will pay an estimated £148 million government loss on the insolvency, although this is subject to a range of uncertainties, such as the timing and extent of asset sales. The £148 million would be covered by the £150 million the Cabinet Office has already provided to help finance the costs of liquidation. The Cabinet Office believes almost all services have continued uninterrupted following liquidation, although work on some construction contracts stopped, including two PFI hospitals.

There will also be significant costs to the supply chain, former Carillion workers, and investors. 31 of Carillion’s 198 companies are in liquidation. So far, around 64 per cent (11,638) of the Carillion UK workforce have found new work, 13 per cent (2,332) were made redundant, and the remainder (3,000) are still employed by Carillion.

Carillion’s non-government creditors are unlikely to recover much of their investments, and the company’s extensive pension liabilities, totalling £2.6 billion as of 30 June 2017, will need to be compensated through the Pension Protection Fund.

Amyas Morse, head of the NAO, said, “When a company becomes a strategic supplier, dependencies are created beyond the scope of specific contracts. Doing a thorough job of protecting the public interest means that government needs to understand the financial health and sustainability of its major suppliers, and avoid creating relationships with those which are already weakened. Government has further to go in developing in this direction.”

Commenting on the NAO report, Frank Field MP, Chair of the Work and Pensions Committee, said: “This invaluable report adds new weight to what we found: Carillion hoodwinked the Government as they did many others who were so naïve as to trust their published accounts. Philip Green, Richard Howson and Richard Adam were desperate to attribute their company’s explosion to some of its more exotic forays overseas. But the NAO’s explanations of why common or garden UK public sector construction contracts failed betray extraordinarily negligent planning. Surely they could not have been so incompetent? It is difficult to shake the impression that this was conscious cash-chasing, bugger the long term consequences and bugger the interests of suppliers, workers and pensioners.

“As Special Managers, with a contract to print money awarded without any competition, PwC will draw £50 million for six months’ work. More money for PwC is less money for sub-contractors and the PPF. We have further questions about those payments—and how PwC’s conflicts of interest arising from their long history of work on Carillion are being managed—and have written to PwC and the Official Receiver requesting further information. I am particularly concerned that PwC’s conflicts could jeopardise action against individual directors.”

Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy Committee, said: “Carillion was the gift that kept on giving – for the Big Four, at least, as they raked in millions for their audit and other work. The collapse of Carillion was a catastrophe for those who lost their jobs and the small businesses, contractors and suppliers left fighting for survival. The company’s failure has left the taxpayer with a bloody nose too as we are all left on the hook for the vast sums needed to clean up this mess.

“The dice are loaded in the Big Four’s favour. They make a killing in fees advising struggling companies how to turn them round and then they pocket millions tidying up when that advice fails On Carillion, taxpayers are left to foot the multimillion pound bill for corporate failure. PwC, who profited from Carillion as it inched towards collapse, are expected to wring at least another £50 million from its ruins as the Government appointed Special Managers to the insolvency, while thousands of smaller creditors will get nothing at all”.

* Read the full report Investigation into the government’s handling of the collapse of Carillion here and the summary here

* National Audit Office

* Work and Pensions Committee


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