The real culprits behind Carillion’s collapse

Back in January 2018, after years of ever-rising shareholder dividends and gushingly positive press releases, the UK’s second-largest construction company plunged into “compulsory liquidation”.

The collapse of Carillion exposed a vast firm – responsible for hundreds of government contracts and benefiting each year from hundreds of millions of pounds of public money – that had mistreated its sub-contractors, neglected its pension schemes and systemically cooked the books.

The day after Carillion imploded, I argued in an essay for UnHerd that the nature of the collapse “threatens to upend British politics, and could have policy implications that are felt far beyond these shores”. Having spent the last few months investigating the company for an upcoming Channel 4 Dispatches documentary, I would go further. Carillion is, quite simply, the single-most shocking business story I’ve covered in over 20 years as a national print and television journalist.

When Carillion went bust, it had almost 500 contracts with HM government – including the construction of hospitals, roads and other key pieces of infrastructure. The company went down owing an astonishing £1.2 billion to sub-contractors – many of them small- and medium-sized family-owned businesses – that are unlikely ever to be paid.

Carillion also left behind a record £800 million pension deficit, the biggest ever shortfall to be absorbed by the Pension Protection Fund (PPF). That means many of the 27,000 scheme members will now receive inferior occupational pensions, subsidised by those paying in to other private UK workplace pension schemes.

When the state finally ordered that Carillion be dismantled, the company had total liabilities, according to the Official Receiver, of almost £7 billion – the largest trade insolvency in UK history.

Founded in 1999, Wolverhampton-based Carillion was formed from fabled British names like Tarmac, McAlpine and Mowlem. It emerged as the flagship among a select group of huge private sector outsourcing companies that, particularly under the New Labour governments of Tony Blair and then Gordon Brown, were awarded countless lucrative contracts to deliver all manner of public sector projects and services. Now this once lauded company lies in ruins, having folded under the weight of debts so heavy, and contracts so toxic, that the Official Receiver dismissed any notion of administration and a possible rescue plan.

Yet this is a story about far more than the failure of one company – although, with 43,000 employees worldwide, and responsibility for multiple public-sector projects Carillion was an extremely important company.

It’s a story about whether the British public can have faith in private firms delivering public services, and about jaw-dropping failures at the heart of our business and political establishments. Above all, it’s a story about how UK capitalism works – and fails to work.

How can a company issue a rosy set of audited accounts and pay-out the highest dividend in its history, as Carillion did in the spring of 2017, and then, just weeks later, issue a £845 million profits warning – the largest the City has seen in a generation? Why did ministers and the civil service, with Carillion’s share price enduring a near-instantaneous 70% drop, and just weeks after that profits warning, then hand the same outfit eight new contracts, delivering vital public services, worth over £2 billion?

Capitalism involves and indeed requires the occasional corporate failure, of course. But the scale of Carillion’s mismanagement, the hidden losses, the ever-rising shareholder and executive pay-outs as the pension deficit grew – all of it kept afloat with taxpayers’ money – points to an astonishing lack of both private and public oversight.

One of several recent Parliamentary investigations into Carillion concluded that MPs have “no confidence in our regulators”. The Financial Reporting Council (FRC), responsible for auditors and accountants, was “timid” in challenging Carillion on its “inadequate and questionable” financial information and “wholly ineffective” in taking its auditors to task, according to a joint report from the Work and Pensions select committee and the Business, Energy and Industry select committee.

The FRC was “content with apportioning blame once disaster has struck,” concluded MPs, “rather than proactively challenge companies and flag issues of concern to avert avoidable business failures in the first place”.

The Pensions Regulator (TPR), said MPs, meanwhile “clearly failed” in its statutory objectives to reduce the risk of schemes ending up in the PPF and to protect member’s benefits. The regulator “had concerns about the schemes for many years without taking action, even when Carillion’s trustees repeatedly asked it to intervene”.

Taken together, the FRC and TPR – the two leading corporate regulators in a country that prides itself on commercial savvy and business oversight – were, according to MPs, “united in their feebleness and timidity”, too “passive and reactive” to make effective use of their powers, with “any extra powers they may receive having little impact without a change of culture and outlook in both”.

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”. As Parliamentary reports go, the language of this joint committee – co-chaired by Frank Field and Rachel Reeves, two Labour MPs widely-respected for their financial nous – could hardly have been stronger or more urgent.

And Carillion’s collapse “could happen again”, according to another Parliamentary investigation chaired by Tory MP Bernard Jenkin, “as the government has not yet learned how to outsource work effectively”. Public services are deteriorating as the government prioritises costs above all else in outsourcing decisions, said MPs on Jenkin’s Public Administration and Constitutional Affairs Committee (PACAC). The public sector has become “too reliant on a small handful of big businesses”, which are effectively “too big to fail” as they run “vast swathes of public services with little effective competition”.

Successive governments have “accepted bids below what it costs to provide the service, so contracts have had to be renegotiated”, said the PACAC, calling on ministers “to use this moment as an opportunity to learn how to effectively manage its contracts and relationship with the market”.

Certainly, my Dispatches investigation unearthed a pattern whereby Carillion repeatedly booked and declared profits on contracts that were unrealistically high – using those profit announcements to then justify generous dividends and senior executive bonuses. The company, at the same time, relentlessly chased and was often awarded new government contracts, often at unrealistic prices, to get fresh money in the door, and thereby keep existing and often struggling projects going.

By using aggressive accounting techniques and amassing debts that were kept out of the headline figures with the use of obscure trade financing schemes and endemic sub-contractor late-payment, Carillion kept the plates spinning for years – running a company which more than one interviewee in my upcoming film, including a very senior former civil servant, describe as “a Ponzi scheme”.

The UK’s public-sector procurement is a mess. As the only buyer in major markets, the government “has huge power to set prices, standards of quality and to determine the behaviour of participants,” according to the PACAC. Yet ministers and civil servants focus heavily on awarding, rather than managing contracts. Across Whitehall, the noble and hugely important pursuit of continuing commercial checks and contractual oversight is marginalised and starved of resources. There’s an indulgent and counter-productive emphasis, instead, on politicking, strategising and the promotion of headline-grabbing gimmicks.

Parliamentarians, the National Audit Office and some other public servants have been trying hard – issuing warnings a-plenty over many years, not only about Carillion, but also the broader failings related to how billions of pounds of taxpayers’ cash are spent on outsourced public services. And, since Carillion’s collapse seven months ago, a succession of cogent and powerfully argued Parliamentary reports have appeared, full of good ideas. All these documents, before and after Carillion’s implosion, have generated far too little media attention and scant ministerial response.

My Channel Four film goes further, featuring fresh and important testimony from insiders across Westminster, Whitehall, the City, the construction industry and Carillion itself. The UK’s public-sector procurement chaos is a long-standing, cross-party problem. This is about delivering decent public services, and securing some semblance of value for taxpayers – goals that are widely shared across the political spectrum.

The UK public’s trust in business is at its lowest ebb since 2012. Only 43% of the adult population now “trusts business”, according to the latest Edelman Trust Barometer. That should be no surprise. Along with Carillion, we’ve seen the failure of BHS in 2016, shortly after Sir Philip Green sold the retailer with a £600 million pension deficit. Then there’s been the seemingly endless string of financial scandals, from Libor-rate rigging to PPI mis-selling, to the persistent tax avoidance strategies employed by the world’s largest technology firms.

And all this follow, of course, the 2008 financial crisis itself – an episode sparked by the reckless and, in some cases, fraudulent activity of white-collar professionals across the world’s leading financial capitals, not least the City of London. Ten years on, despite the tens of thousands of ordinary businesses destroyed and millions of lives upended, there’s been no major public enquiry, very few court cases and little in the way of any kind of public reckoning

Carillion’s directors and auditors deny any wrongdoing. They say they’ve always acted entirely within the law. Yet capitalism is in danger of becoming a four-letter word. And that’s disastrous – capitalism and broader private enterprise, if they are to flourish and spread wealth, must be built on public consent.

Carillion, and episodes like it, dent and seriously damage such consent. That’s why we need clearer rules, stronger and more vigilant regulators and ministers with the courage and presence of mind to back them. It’s also why we need journalists and broadcasters who pursue such stories – taking economics and business coverage beyond punch-and-judy political headlines and venturing deep into the analytical undergrowth.

“How to Lose Seven Billion Pounds”, Channel 4 Dispatches, Wednesday 22^nd August, 10.30pm

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Liam Halligan writes his multiple-award winning weekly “Economics Agenda” for The Sunday Telegraph. A panellist on CNN Talk, he has previously worked for The Economist, Financial Times and Channel 4 News.

LiamHalligan