Conservative policy made Carillion’s failure inevitable. Here’s how it happened

[Image: Reuters].

If this were a movie, it would be called Financial Crisis II: This Time It’s The Outsourcing Firms!

Not the catchiest of titles, This Writer has to admit, but it gets the point across, which is: Carillion went under because its bosses thought it was Too Big To Fail, just like the banks back in 2008.

They were wrong – but I would say this is only because Carillion is the only outsourcing firm to have collapsed – so far.

See, to private companies, government contracts must seem like the perfect scam; the work must be done, so the money will keep flowing. And let’s face it – the Conservatives worked really hard to keep Carillion afloat, even after the profit warnings started arriving.

This is because Tories are determined that private companies must be the best possible option for running public services – even when the evidence tells them the exact opposite.

The ideology held by both Tory government ministers and the company executives who sign contracts with them is that profits are to be privatised and losses nationalised – if anything goes wrong, public money will pay for it.

We see that in every aspect of the way Carillion and the Tories did business.

For a start, according to Cabinet Office minister David Lidington, “rules” did not allow the government to consider all information about a company when awarding outsourcing contracts. Apparently this means that the government could not consider the signs of a company’s imminent financial collapse when deciding whether to award a contract to it, which is quite clearly commercial insanity. Who wrote these rules?

The government, of course.

But even when the rules called for caution, they appear to have been ignored. It was known that Carillion had a serious cashflow problem – there were three profit warnings in the last six months – but the Tories still gave contracts to it. The firm, which has debts of £1.5 billion, issued a profit warning in July, but days later it was given an HS2 rail contract worth £1.4 billion and a £158 million MoD deal. Carillion issued a second profit warning in September, and weeks later got a £62 million rail contract. On November 6, Carillion was awarded £320 million of work on Network Rail’s Midland Mainline improvement programme. On November 17, it issued a third profit warning. The Cabinet manual says firms that issue profit warnings are “high risk” and it is against policy to use them. But the contracts were still signed, because Tory policy is that private companies are better than public services – and they are happy to use public money to perpetuate the pretence.

Carillion had a poor record for completing work on time and on-budget because it was overstretched, but despite this poor record of achievement, it continued to win contracts with aggressive bidding that it could not support, we are told. And who loses out?

The public, of course.

Knowing that it could gain lucrative contracts while providing a poor service and being in financial difficulty provides a huge amount of leeway for questionable behaviour, it seems.

So Carillion raised dividend payments to its shareholders in each of the company’s 16 years in business – for example in 2015 they received £80 million and in 2016, £82.5 million. It changed the rules to protect bosses’ bonuses, right before the company’s financial woes began to bite – a move the Institute of Directors has condemned as “highly inappropriate”, as it allowed top managers to benefit in spite of the collapse of the company for which they were responsible. At the same time, it ran up a £600 million deficit in the pension fund for 27,500 employees.

The company has been short-selling its own stock since 2013 (according to the Financial Times). This is when an investor borrows shares and immediately sells them, hoping he or she can scoop them up later at a lower price, return them to the lender and pocket the difference, an extremely risky and dubious practice.

At the same time, the chairman of Carillion, Philip Green (not the same man who ran BHS into the ground), was an advisor to David Cameron and Theresa May on corporate responsibility. It seems nobody at the government stopped to think that the two might be mutually exclusive – that a director should not advise on corporate responsibility if his company was short-selling its own stock. But then again, it’s possible that nobody at the government knew. Or cared.

Government may appoint so-called Crown Representatives to outsourcing companies if there are concerns about them. These people review their performance and assess possible risk for the state. But Cabinet Office records show that no Crown Representative had been appointed to Carillion as of September 2017, two months after the company’s first profit warning. Worse still, it seems that out of 35 “strategic suppliers” like Carillion, only 20 have Crown Representatives. It’s possible that the others aren’t considered to be under threat – but if Carillion wasn’t in September last year, this could be a gross misconception.

Note also that Carillion was exempt from the Freedom of Information Act, meaning the public had no way of finding out what this company was doing with public money. Obviously, neither the Tories nor their contractors want members of the public to see that their money is being funnelled into private bank accounts rather than going toward vital public works.

While the government – and David Lidington in particular – seems to be unconvincingly surprised at Carillion’s collapse, others certainly seem to have seen it coming. For example, Richard Howson, director of the company up to the point when its share price tumbled, who benefits from the protected executive payments brought in just before the crisis began, jumped ship last July and is now an executive director of a company working on the Hinkley ‘C’ nuclear power plant. Apparently it is perfectly permissible for an executive who ran one company into the ground to transfer to another, without any questions being asked about his competence or trustworthiness.

It seems hedge funds have profited hugely from Carillion’s failure, having read the signs of imminent collapse and bet on it.

And it seems shareholders in Carillion also happen to be shareholders in its competitors, whose value will rise as a result of the company going into liquidation. They won’t lose out.

But the employees will. And so will the public who were relying on Carillion to honour its 450 government contracts.

What will happen to Carillion’s public service contracts and employees? It seems unlikely that a Tory government would bring them back in-house – so we must assume, for now, that they will be transferred to one of the firm’s competitors. That will boost the new contractor’s share prices, building up a nice bonus for its shareholders. But will this firm (or these firms) suffer the same fate?

What will be done to protect the public money that has been invested in Carillion? That’s our money and, as a nation, we should expect to see a return on it – but the Tory government uses our cash to prop up these useless outsourcing giants, so it seems more likely that it will all go to waste.

What is the Government’s contingency plan in case of Carillion’s failure? Ministers have claimed that one exists – but now their bluff has been called, will they do a ‘David Davis’ and admit they haven’t got one?

Finally, there is one very prominent and public way we can gauge the government’s reaction to the Carillion mess: Chris Grayling handed the firm a contract to work on the HS2 rail link, knowing that the company was in serious financial difficulty. As Justice Secretary, he had previously handed out contracts to run probation services to private companies that were completely unable to do so. The man is clearly incompetent and should be flushed out of the Cabinet forthwith.

If he stays, we’ll know that the Tories couldn’t care less and will carry on funnelling our cash to the privateers, and letting us pay for their failures.

That’s not good enough for the Labour Party, whose members have scented blood and have demanded answers from the Tories.

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6 thoughts on “Conservative policy made Carillion’s failure inevitable. Here’s how it happened

  1. NMac

    The failure of this company lays bare for all to see the Tory lies and the corruption of privatisation.

  2. rotzeichen

    The Tories supported by the Irish DUP are responsible for the chaos that is this government.

    The longer they remain in power the more damage they will do.

  3. Brian

    A Tory was defending PFI on the BBC, on the basis it removes risk from the public purse, Oh yea, so whats this gona cost us!

  4. Pat Sheehan

    And so many of the old people lying on the trolleys in the hospital corridors would still vote for their ‘wonderful’ tory government as they draw their last gasps: as would so many who deliberately set out to benefit from tax avoidance and letting property in the deliberately inflated housing market. Sad people, bad people and ‘vultures’ too, deliberately setting out to make a fortune from the collapse of everything while there’s still time. What’s to be done with them all before we can start to turn things around?

  5. Dez

    So I guess how it works these contracts were offerred to an alleged competitive market Carrillion bid the lowest quote and secure the job yet no one knows or cares if they can actually deliver on the price and job. No matter so in bed with Government if job goes over they will be bailed out…..but not this time maybe. A lot of fat cats are going to be feasting off this bloated carcass and one wonders if this was game plan… god knows what these jobs will cost the taxpayers I believe they shoud be retendered and any existing PFI’s scrapped and start again this time at reasonable rates as the old ones just cannot be trusted. There is yet another stench similar to the banks surrounding this debacle. Full inquiry.

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