The firm won government contracts worth £1.9bn between its first profit warning and collapse ©Reuters/Phil Noble/Adobe Stock
The firm won government contracts worth £1.9bn between its first profit warning and collapse ©Reuters/Phil Noble/Adobe Stock

Public sector 'did not believe it had grounds' to exclude Carillion from tenders

Public sector bodies did not feel they were in a position to exclude Carillion from procurements despite the firm’s profit warnings, the UK’s public spending watchdog has said.

In a report into the government’s handling of the contractor’s collapse, the National Audit Office (NAO) said none of the contracting authorities that awarded new or additional contracts to Carillion after it issued its first profit warning believed procurement rules gave them grounds to disqualify the firm.

Between its first profit warning in July 2017 and its collapse, Carillion announced new central government contracts worth more than £1.9bn, including a £1.3bn HS2 contract as part of a joint venture (JV). The report said the HS2 contract had been approved before but signed after the warning.

There were also two JV defence contracts that had been signed prior to the warning and Network Rail confirmed phase two of the £63m contract to electrify two lines – between London and Corby and Glasgow and Edinburgh – after Carillion’s second profit warning in September.

“None of the contracting authorities believed they had grounds for disqualifying the bids under procurement rules,” the report said, however under all but one of the joint ventures, the other parties were contractually liable to cover the gap in the event one of the partners collapsed.

Network Rail also told NAO cancelling its contract with Carillion would have lead to additional costs and delays from re-procuring the project, the report said.

The collapse of Carillion is likely to cost the Cabinet Office (CO) £148m, the report said, however the exact cost to CO would take a long time to establish, but said it would be covered by the £150m CO has already provided for pay of the company’s liquidation.

The total cost to the taxpayer is likely to be much higher because the special receiver is charging public sector bodies a 20% premium on services it has provided since the liquidation (although some larger commissioning bodies are contesting this) and some bodies are expected to incur costs in replacing Carillion as a contractor.

It said non-government creditors were unlikely to recover investments.

“The government has not measured the impact on the supply chain, but there has been limited take-up of lending facilities by affected small and medium sized enterprises,” the report said, referring to the £1bn of credit the Department for Business, Energy and Industrial Strategy coordinated to help keep suppliers solvent.

In response to the report, a CO spokesperson said: “Throughout this process, the government has been clear that its priority is to ensure that public services continue to run smoothly and safely. The plans we put in place have ensured this, and we continue to work hard to minimise the impacts of the insolvency, having safeguarded over 11,700 jobs to date.

“We are grateful to the NAO for their report, and will consider their findings.”

The NAO report passes little judgement on the way government handled the collapse of Carillion but provides a detailed accounts of its relationship with the firm and the decisions made from the point where Carillion issued its first profit warning in July 2017 onwards.

It said Carillion’s first profit warning and “the scale of losses… came as a surprise” to CO as they contradicted both previous discussions with the firm and market expectations.

CO increased Carillion’s risk rating to red after the July profit warning, and threatened to increase it again to the most severe “high risk” rating after the second profit warning in November, but agreed not to after accepting the company’s argument that doing so could cause the company to financially collapse.

The report also noted CO did not have a crown representative in place for the company between the first and second profit warning (July to October).

Last month the Public Accounts Committee criticised government’s risk assessment of strategic suppliers, calling the traffic light system “slow and clunky” in its response to Carillion’s economic situation.

The NAO report also raised some issues with the contingency planning CO carried out from the first profit warning. Not only did CO need to “carry out additional work” to establish a full list of government contracts with Carillion before it could start, but some departments failed to respond to CO’s request for contingency plans until December. CO was also still seeking information from schools and local authorities when the firm went into liquidation.

Before its collapse, NAO said Carillion held around 420 contracts the the public sector, ranging from facilities management and catering to road maintenance and construction, accounting for 33% of the company’s revenue, however margins varied from contract to contract.

Local government was generally more profitable for the firm, with operating margins around 13-15%, while high profile private finance initiative (PFI) projects, including the construction of two hospitals, were expected to make significant losses.

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