Fears for SMEs in Carillion supply chain

17 January 2018

Concerns have been raised over the future of businesses in Carillion’s supply chain, particularly smaller firms.

Analysts say small firms are unlikely to be paid what they are owed, throwing their viability into doubt.

A spokesperson for the Insolvency Service told SM there were no plans for the government to underwrite any subcontractor payments on any of Carillion’s private sector contracts. He advised unpaid suppliers to register as a creditor and engage with the official receiver.

All work has stopped on Carillion construction sites until a decision has been reached about how the sites will be restarted.

Meanwhile, it has been reported that the Cabinet Office (CO) created a team to monitor the finances of Interserve, another major government contractor. The Financial Times said the team has been in place since the firm issued profit warnings last year.

A spokesperson for Interserve said: “Last week we announced that we expect our 2017 performance to be in line with expectations outlined in October… This remains the case and we expect our 2018 operating profit to be ahead of current market expectations.”

The CO said it monitors the financial health of all its strategic suppliers.

On a more positive note for Carillion's direct employees, the Insolvency Service said over 90% of Carillion’s private sector customers have indicated to the official receiver they would like to pay Carillion to continue providing services, while they considered longer term plans.

Carillion is said to have had just £29m in cash and – by some estimates – more than £1.3bn of debt when it filed for administration earlier this week.

One analyst has warned suppliers may receive less than 1p for every £1 they are owed. Peter Kubik, partner at accountancy firm UHY Hacker Young, said there would be a “huge knock-on effect amongst smaller firms”. He estimated trade creditors are owed more than £100m, but said under insolvency law only £600,000 would be set aside.

Carillion was also holding up to £800m in renention payments before it went under, the Building Engineering Services Association and the Electrical Contractors’ Association, both trade bodies, have estimated. Retention is the commonplace practice of holding back part of a contractor’s payment as security to ensure work is carried out and contractors return to fix defects.

Stephen Roper, professor of enterprise at Warwick Business School, also raised particular concerns for small businesses owed money by Carillion. “Carillion’s failure threatens the viability of many small business subcontractors which will either not get paid or, if they are lucky, will get late and partial payment.”

The firm’s collapse also poses a novel challenge for the newly-appointed small business commissioner Paul Uppal, said Roper, but created “an opportunity for him to cement his role as a champion of small businesses. 

Robert Colvile, director of the Centre for Policy Studies, a think tank, told BBC 5 Live’s Breakfast show that public sector contracts needed to be opened up to competition from small companies. “Some of this is really boring things about the plumbing of how the contracts work… how you can re-write the procurement rules so that SMEs get the money for the contracts more quickly,” he said.

“One of the things Carillion was doing, especially in the [private finance initiative] space, it was signing the contracts, getting a nice slug of money and then delaying its payments to subcontractors which allowed it to get the profits from holding that money.”

UK Finance, which represents lending firms, said banks would work with the government to support Carillion’s supply chain. Stephen Pegge, UK finance managing director, said: “Lenders are contacting customers and, where appropriate, are putting in place emergency measures, including overdraft extensions, payment holidays and fee waivers to ensure those facing short term issues can be helped to stay on track.”

Prime minister Theresa May defended the government’s decision to continue to Carillion contracts after the firm issued profit warnings, and said pulling out of contracts would have ensured the company’s failure. During Prime Minister’s Questions she said: “The government is actually a customer of Carillion and our focus has been on ensuring that we are providing the public services.” 

Labour leader Jeremy Corbyn said: “It looks like the government was handing Carillon public contracts either to keep the company afloat – which clearly hasn’t worked – or it was just deeply negligent of the crisis that was coming down the line.”

The collapse of Carillion coincides with the release of a shorter, more user-friendly public sector contract by the Crown Commercial Service that aims to make it easier for SMEs to bid for public sector contracts. The new standard contract is being rolled across government and hopes to encourage smaller companies to bid for £12m worth of contracts.

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