The National Audit Office estimates that the liquidation of Carillion will cost UK taxpayers an estimated £148 million.
In a report published today an investigation into the government’s handling of the collapse of Carillion says there will also be wider costs to the economy, Carillion’s customers, staff, the supply chain and creditors.
The investigation says the Cabinet Office began planning for the possible failure of Carillion after 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 information and Carillion’s own commentary. The government’s contingency planning started in July and was completed by 15 January 2018, when Carillion collapsed.
The Cabinet Office first raised Carillion’s risk rating to red after the July 2017 profit warning but failed to increase Carillion’s rating to ‘high risk’ as it 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.
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. The Cabinet Office believes almost all services have continued uninterrupted following liquidation, although work on some construction contracts stopped, including two PFI hospitals, the £425m Royal Liverpool Hospital which reportedly is currently being surveyed by Arup and the £350m Midland Metropolitan Hospital in Birmingham, which today had its £125m EU funding withdrawn while the building, already part-constructed, is left unprotected from the weather.
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.
“When a company becomes a strategic supplier, dependencies are created beyond the scope of specific contracts. 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,” said Sir Amyas Morse, head of the National Audit Office.
The National Audit Office scrutinises public spending for Parliament and is independent of government.