Vox Political
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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.
When people say Government should be run like a business always remember
#Carillion and say governments should be run for the people not the 1%.
— Harry Leslie Smith (@Harryslaststand)
January 15, 2018
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.
Despite the warnings about
#Carillion the Government pumped more and more of tax payers money into its coffers.
A classic case of a private company running out of other people's money.
A public enquiry has to happen!
— Workers In Wales (@WorkersInWales)
January 15, 2018
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.
Carillion doesn't complete anything on time or on budget. It's too overstretched and too aggressive when bidding for contracts.
— (((Frances Coppola))) (@Frances_Coppola)
January 15, 2018
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.
According to
@FT, Carillion have been shorting own stock since 2013. While their boss was advising gov on business responsibility. Mind boggles
— Andrew Baisley (@andrewbaisley)
January 15, 2018
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.
The chairman of
#Carillion Philip Green was adviser to both David Cameron and Theresa May on corporate responsibility.
Just let that sink in.
— Tom Pride (@ThomasPride)
January 15, 2018
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.
Shocking negligence by the Tories.
The Public Administration & Constitutional Affairs Committee has just been told that of 35 strategic suppliers (such as
#Carillion) only 20 have Crown Representatives, who review performance & risk for the Gov. Will we see another Carillion?
— Jon Trickett (@jon_trickett)
January 15, 2018
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.
Hedge funds are the winners out of Carillion’s collapse. They saw the demise coming and laid bets that it would happen and they have cleaned up. This is grotesque and no way to conduct public sector contracts.
— Andy McDonald MP (@AndyMcDonaldMP)
January 15, 2018
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.
The major shareholders in Carillion are also major shareholders in Carillion’s main competitors. The system never loses, just the workers and patients that could be impacted from any fallout.
— Tory Fibs (@ToryFibs)
January 14, 2018
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.
And someone needs to ask why Chris Grayling is handing out massive HS2 contracts to Carillion, despite knowing even Wonga wouldn't lend them £50 if they went cap in hand? Is it because he's totally and utterly inept? The most useless Cabinet Minister in living memory.
— Rachael (@Rachael_Swindon)
January 14, 2018
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.
The collapse of Carillion is a watershed moment. It is time to put an end to the rip-off privatisation policies that have done serious damage to our public services and fleeced taxpayers of billions of pounds.
pic.twitter.com/Q9zjU7o3Mq
— Jeremy Corbyn (@jeremycorbyn)
January 15, 2018
Carillion becoming another tragic case study in what happens when we privatise profits when things go well and nationalise risks so the taxpayer picks up the bill when things go wrong. Vulture capitalism underwritten by the taxpayer. And don’t forget hedge funds made millions too
https://t.co/t804jqNf3c
— David Lammy (@DavidLammy)
January 14, 2018
Shadow Business Secretary Rebecca Long Bailey had some strong words for the government in wake of the
#Carillion Collapse! No more socialising debt and privatising profits – a root & branch investigation regarding why contracts were awarded despite 3 profit warnings
#Forthemany pic.twitter.com/PlcY9Cs1kJ
— WeThePeople (@gaurangmorjaria)
January 15, 2018
CARILLION: Shades of a British Enron. Wild overbidding, fast-and-loose & grossly overpaid management, taxpayers taken for a ride, AWOL auditors & pliant/ignorant ministers and officials. This is going to run & run!
— Andrew Adonis (@Andrew_Adonis)
January 15, 2018
Carillion have continued to fail to pay off debts, meet deadlines on govt contracts, pay suppliers on time but at the same time paid out £80 million in dividends to shareholders. Greed over governance & as usual, workers & supply chain pay the price
https://t.co/0iIPmR0I0S
— Jo Stevens (@JoStevensLabour)
January 15, 2018
What we see in the
#Carillion collapse is the lethal combination of privatisation and limited liability. The shareholders take the profits – in spades – but pick up neither the debts nor the risk of collapsing services.
— GeorgeMonbiot (@GeorgeMonbiot)
January 15, 2018
In their scramble to privatise public services, Tories have been throwing contracts worth billions at this conglomerate, knowing it was failing: ideology and incompetence.
https://t.co/JZa3qmqiNX
— Cllr John Edwards (@JohnEdwards33)
January 15, 2018
yes and look what is happening – company going to the wall… they take their bonus before they deal with the job they are paid to do….. not one penny of tax payers money should bail out these privatised companies.
https://t.co/mAZl0GFewO
— Isobel #PCPEU (@Isobel_waby)
January 15, 2018
Maybe JUST maybe the collapse of
#Carillion – painful though it is for the workers caught up in it – will be the *tipping point* against the REMORSELESS neo-liberal drive to *privatise* public services .
— Clare Hepworth OBE (@Hepworthclare)
January 15, 2018
The government's obsession with outsourcing + privatisation damages our justice sector. Carillion repeatedly failed to carry out basic prison maintenance. Labour had promised to look at bringing repairs back in-house. The government must now do that with the Carillion contracts.
— Richard Burgon MP (@RichardBurgon)
January 15, 2018
Carillion is the latest example of the fact that privatisation is a broken model. The government must act quickly and bring these crucial public sector contracts back in-house.
pic.twitter.com/si15gyNpdT
— Richard Burgon MP (@RichardBurgon)
January 15, 2018
The next Labour Government will introduce provisions to allow local councils to bring their outsourced services back in-house. Never again should public services and the dedicated workforce be put in the position we now find ourselves with Carillion.
pic.twitter.com/QyQqrEOCex
— Labour CLG (@LabourCLG)
January 15, 2018
The People's Assembly – Carillion collapse highlights need for ending privatisation in the NHS
https://t.co/QFPEMv31fG
— leftlinks (@leftlinks)
January 15, 2018
On
#Carrillion senior Tory
@bernardjenkin tells
#r4today that ‘lessons must be learnt’. Indeeed they do.
The private sector running public services does not work and the tax payer (us) lose out in many ways.
— Dr David Wrigley (@DavidGWrigley)
January 15, 2018
We now need urgent clarity from Govt on impact of Carillion news on those hospital trusts where Carillion contracted to provide facilities management such as meals & those hospitals in construction. We already have a winter crisis, patients & staff must not suffer even more
— Jonathan Ashworth (@JonAshworth)
January 15, 2018
