The last time the prime minister summoned the government’s emergency committee COBRA was after the botched terror attack at Parsons Green last year. Now it has been reported a session will be convened for an altogether different crisis – the collapse of the major government contractor Carillion.
The government spends an estimated £700m a year with Carillion on a multitude of contracts, according to consultancy Spend Network, though it is being speculated by others that it was just three that led to its downfall.
The future of the firm itself isn’t what’s in doubt; the Official Receiver has taken the unusual step of liquidating the company straight away without looking for a buyer first, indicating there is little worth selling. The pressing issues are what will happen to firm’s supply chain, and what will the government do with its outstanding contracts.
Mike Cherry, national chairman of the Federation of Small Businesses, said it was critical firms in Carillion's supply chain got paid, though there is a bigger question around the concentration of public contracts in the hands of a few large companies.
“It is vial that Carillion’s small business suppliers are paid what they are owed, or some of those firms could themselves be put in jeopardy,” he said. Cherry claims the contractor’s unpaid bills date back several months, though this is not necessarily a sign of the looming crisis because it’s a practice “all too common among some big corporates”.
The government quickly ruled out a blanket bail out for the firm, which lost a lot of money on non-government contracts, particularly in Canada and the Middle East. It has so far pledged to pay, as minister for the Cabinet Office David Lidington said earlier today, only for public services “as they are received”.
However, John Colley, professor of practice at Warwick Business School, predicts the government is likely to end up underwriting more than this. The large capital contracts in particularly have a huge number of subcontractors, “and they’re all going to down tools unless they’re reasonable reassured that they’re going to get paid for the work they do,” he told SM.
“The government wants these big construction projects to continue, they don’t want them to grind to a halt and be stuck, so my guess is that they’re going to be underwriting a lot of payments in them.”
As cash is often paid upfront in big contracts, it is likely some payments already made will have sunk with Carillion and the government will end up paying again for work, he added. “Subcontractors are generally paid later anyway, so I think [the government] are just going to have to underwrite the contracts all the way down the line.”
The government will draw the line at underwriting Carillion’s private sector contracts, he added.
Another prediction from Colley is the government is unlikely to bring contracts back in-house – it lacks the expertise to run the big capital contracts and needs the contractors, he said. Even the smaller facilities contracts are still likely to be better value for money tendered out than brought back into government control.
But the government will probably have to pay more when it does go back out to tender. Colley said Carillion’s margins on its contracts were very slim – contributing to its downfall – and other firms were unlikely to offer similarly preferential rates.
Ian Makgill, founder of Spend Network, said more simply that the government’s negotiation position looks weak. “It doesn't matter if they've got the best commercial negotiators, they're just in a bad situation. They also have to worry about future risks, which companies are going to patch the holes? Are they any more resilient than Carillion?
“There needs to be more analysis on that,” he told SM.
Whether Carillion is an outlier is an important question to ask. The government has been attacked for giving the firm more contracts after it released profit warnings, but Carillion is also being investigated by the Financial Conduct Authority over the timeliness and content of its financial statements between December 2016 and its first profit warning in July 2017.
"While many details have yet to emerge it appears that Carillion’s fall has resulted largely from substantial cost overruns on merely three very large contracts," said Kerry Hallard, CEO of Global Sourcing Association UK.
“There are of course countless potential causes of failure in outsourcing, but correct relationship management, constant review and a decent level of transparency go a long way towards safeguarding against such breakdowns.” Any autopsy into the firm’s collapse should examine all three, she said.
While unconvinced of the merits of bringing Carillion’s contracts back in-house, “allowing private sector organisations to cherry pick still-profitable contracts whilst leaving the state to pick up the tab for bedevilled ones would surely be insurmountably unpalatable to the public,” said Hallard.
“Finding a solution to this crisis which appeals to all parties involved may well be impossible.”
Colley, however, doubt’s Carillion’s dramatic downfall will bring any significant change to the way the government uses big contractors. “On major capital projects, I don’t think they have any choice because the expertise levels are all in the major contractors.” Facilities contracts are still just cheaper, he added.
Clearly there are risks in contracting, “but that’s just a fact of life. I’d be sceptical that this government will change the way it does business.”
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