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Carillion collapse: Five urgent questions the Government must answer

Why were public contracts awarded after it was known the company was in trouble? Why was the Government so reliant on a single company? Why was the Carillion chair advising the government on corporate social responsibility? Why hasn't it been nationalised? And shouldn't this prompt a wider re-think of privatisation?

Ben Chu@Benchu_
Monday 15 January 2018 13:53
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What is the Carillion fiasco? Economics Editor Ben Chu explains

The liquidation of the giant Government outsourcing and construction firm Carillion on Monday has put tens of thousands of jobs at risk, slashed the pension benefits of all employees, jeopardised the future of many smaller firms and cast a pall of uncertainty over many schools, hospitals and prisons that rely on the company.

It has also raised hard questions for ministers.

Below we outline the five most pressing ones.

Why did ministers continue awarding Carillion government contracts when they knew the firm was in big trouble?

The company’s difficulties were well-known in financial markets long before its disastrous July 2017 profit warning which led to a share price collapse.

But the very same month the Government awarded Carillion a contract, with an estimated worth of £450m, to build part of the High Speed Two (HS2) rail link, prompting a brief spike in its share price.

At the time, the then Transport Secretary Chris Grayling said: “My wish is that Carillion get through their current problems but we’ve made sure that it’s not an issue for these contracts.”

In light of its collapse, that now sounds rather complacent.

Did ministers do enough – early enough – to safeguard public services from the fallout from what virtually everyone in the markets could see was a looming disaster?

Why did the public sector become so reliant on a single company in the first place?

Carillion received around £1.7bn in total revenues from the public purse in 2016.

It manages around half of the UK prisons estate. Hundreds of schools and hospitals cannot function effectively without its services.

The fact that the Government has been forced to step in to fund its public operations shows that – as an operator – it was effectively too big to fail.

Ministers insist that if they had frozen Carillion out of Government work after it got into financial difficulties it would merely have collapsed the company sooner.

Yet this line of thinking also demonstrates that the firm was effectively too big for the Government to blacklist.

So was it irresponsible for ministers (including, to be fair, ministers from previous governments) to allow the public sector to become so dependent on one firm?

Why was Carillion’s chair an adviser to the Prime Minister on corporate responsibility given its record of staff treatment and corporate governance?

The unions claim Carillion has had an “abysmal” track record as an employer, having been one of the construction firms involved in the secret and illegal “blacklisting” of certain workers over many years. But Philip Green, Carillion’s chair, served as an adviser to David Cameron on corporate social responsibility.

The Daily Mail has uncovered that Carillion quietly relaxed its rules on executive bonus “clawback” payments in 2016, something that prompted harsh words about the firm’s corporate governance from the Institute of Directors on Monday.

Doesn’t this show that the Government is not careful enough when taking ethical advice from large private companies?

Why have Carillion’s public contracts not simply been nationalised?

Lord Adonis, who until his resignation last month was chair of the Government’s own National Infrastructure Commission, suggested today that the Government should nationalise Carillion’s public sector service contracts rather than seek to pass them to other private contractors as soon as possible since those firms will demand a “king’s ransom” to take them on.

This would, according to Lord Adonis, shortchange the UK taxpayer.

So are ministers going to put the principle of private ownership above taxpayer value for money?

Shouldn’t this force a wider re-think on the policy of privatisation?

Over the past 20 years Carillion has been a significant beneficiary of the state’s drive to outsource as well as the controversial use of Private Finance Initiative (PFI) contracts to provide public services.

The value for money of PFI contracts has been widely questioned by public finance experts. Meanwhile firms, including Carillion, have been paying millions of pounds of dividends to shareholders each year, prompting many to regard these arrangements as a taxpayer rip-off.

Shouldn’t Carillion’s ignominious collapse raise questions for ministers about whether this privatisation and outsourcing drive has gone too far, and about whether the state should be doing more of this kind of work in-house?

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