The collapse of Carillion was an accident waiting to happen. This is no consolation to the thousands of employees and subcontractors who now face an uncertain future. But the warning bells of spiralling debts and unpaid subcontractor invoices relating to Carillion had been sounding for some time.
This is no consolation to the thousands of employees and subcontractors who now face an uncertain future. But the warning bells of spiralling debts and unpaid subcontractor invoices relating to Carillion had been sounding for some time.
In 2017 Carillion issued three profit warnings in five months and reduced the value of its contracts by more than £1bn. Despite this, the company was still awarded further public sector contracts, not least a four-year £84m contract for maintenance services for public housing in Northern Ireland in November.
It is also not a unique incident. In 2010, property giant Connaught went into administration. There are clear similarities. These cases have in common an aggressive pursuit of winning more contracts, some of which were clearly loss-making. Construction has perilously low margins and once a few contracts end up in trouble, it affects other parts of the company. Profit warnings and loss of confidence by the bankers usually follow. The risk is of a Ponzi-style situation where new, highly marginal contracts are needed to temporarily mask the loss-making obligations of the existing ones.
The Official Receiver must liquidate Carillion is to ensure the operational continuity of 450 public services, while securing the best outcome for secured creditors. Only time will tell whether there is capacity in the affected public bodies to manage the handover of complex outsourced contracts.
There are four issues to consider:
- Carillion had made a series of poor decisions. How is corporate governance and external audit oversight improved for corporate group structures?
- Organisations monitor their own contracts, but how do they collectively monitor the company itself? Clients can wrongly feel in competition with other clients to get the best deal, rather than using their collective leverage to monitor and assess performance. We have agents in government to overcome this, but to work across the public sector they need to avoid the risk of regulating the client instead of the supplier. How is this best achieved?
- All public bodies use the private sector to take on the risk of building infrastructure. Clearly though, the private finance initiative has afforded poor value for money, not only because the state can borrow more cheaply, but those contracts with services attached are unwieldy. It’s all been too clever by half, where the priority for the investment to be off-balance sheet has created perverse structures. The better priority is for good infrastructure and good services that uses the private sector but without creating perverse off-balance sheet vehicles.
- The advice given to every Chartered Institute for Public Finance & Accountancy trainee is to never sign off anything they don’t fully understand. This is pretty good advice for boards and leaders of public sector client bodies too.
The biggest issue the public sector faces is a lack of confidence its leaders are acting in the public interest. Once the media interest dies down, Carillion is not an issue from which we can afford to move on quickly. We need to get this right.
Rob Whiteman, chief executive, Chartered Institute of Public Finance & Accountancy