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.
“When a company
becomes a strategic supplier, dependencies are created beyond the scope of
specific contracts," said
Amyas Morse, head of
the NAO.
"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.”
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% (11,638)
of the Carillion UK workforce have found new work, 13% (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.
