The story of the Greensill affair

28 July 2021

From sugar cane farmer to billionaire banker to business insolvency, Lex Greensill’s career would make great material for a film script. 

The story includes the humiliation of a former UK prime minister, the wrecked finances of a major investment bank, a Serious Fraud Office investigation of an associate’s global business and a scheme that could help save the National Health Service up to £480m a year. 

2021 has been former prime minister David Cameron’s ‘annus horribilis’. Spending several hours answering probing questions from the Treasury Select Committee will have been bad enough. Probably much worse is that at the start of 2020 he might have been expecting his fortune to increase by as much as £200m through his stake in Greensill Capital.

This prospect disappeared when Greensill Capital filed for insolvency on 9 March 2021 when its insurer refused to continue insuring its loans.   Cameron may have seen the writing on the wall a year earlier. In his appearance before the Treasury Select Committee in May 2021, it was revealed that he had sent 56 messages to government ministers and senior officials between 5 March and 26 June 2020 seeking government support for the business. 

Greensill Capital was the main lender to the Guptas Family Group (GFG), which owns Liberty Steel, an international company that has several steel making plants in the UK. Whilst Cameron’s lobbying may have been unsuccessful, Greensill Capital provided steel tycoon Sanjiv Gupta with eight government loans of £50m – £400m altogether – through the government’s Coronavirus Large Business Interruption Loan Scheme (CLBILS).

The government guaranteed 80% of the CLBILS loans. To learn how these loans were possible, given that there was only one loan allowed per recipient business, we will have to wait for the result of an investigation by the Serious Fraud Office.

On 1 March 2021 the British Business Bank, which managed the scheme on behalf of the government, removed the loan guarantee for Greensill,  though it is doubtful if much, if any, will be recouped.

Greensill Capital started out as a supply chain factoring organisation, i.e. buying invoices at a discounted price from companies that had issued them to customers and needed cash quickly. It would later receive payment in full from the customers that were due to pay the invoices. This relies on the companies that are due to pay the invoices being able to pay them, i.e. remaining solvent. It also relies on purchasing the invoices at a sufficient discount to mitigate the risk of very late or non-payment. Typically, the discount used to be 20%.

A higher risk approach is called reverse factoring. Greensill paid a business's debts to its suppliers promptly, but at a discounted price and would later be reimbursed by the business. The risk is obvious. If the business is in financial difficulties, it may not be able to reimburse.

The third type of supply chain finance in which Greensill was involved was Future Accounts Receivables Finance, which is lending money to a business on the basis of anticipated future sales. The risks are highlighted by a look at historical steel prices. They reached a peak in 2018 and have dropped by 25% since then. According to Robert Smith in the Financial Times (16 March 2021), GFG owed Greensill £5bn and was unable to make some repayments on time. Greensill had borrowed heavily to fund his activities, the main lender being Credit Suisse, which had $10billion of funds exposure to Greensill.

Greensill came up with two schemes for the NHS:

  • Paying pharmacies early for their drugs based on past usage, so they got paid an interim amount quickly rather than having to wait for usage to be calculated.
  • Enabling staff to obtain their pay early through an app owned by Greensill called EARND.

One potential benefit of the latter scheme is that agency staff often get paid more quickly than staff employed by the NHS and therefore prefer to work as agency staff. Greensill's scheme would provide an incentive for agency staff to join the NHS workforce – with a potential saving to the NHS of up to £480m annually.

According to a Sunday Times report, Greensill had planned to use future payments from the NHS as security against bond purchases, which it was hoped would increase in value and generate income. This would therefore be a win-win situation.

The NHS in England would have been an attractive market because it employs 1.1 million staff. Agreement was reached on 7 October 2020 with NHS Shared Business Services (NHS SBS), which is responsible for making NHS payments, to offer the service to NHS trusts. However, by the time Greensill Capital filed for insolvency, just eight trusts had signed up out of a total of 223 trusts in the UK. 

The Greensill case has exposed some serious issues and one gem of an opportunity for the NHS:

  • The inadequate due diligence by the public and private sectors, in particular the reckless lending by some finance and investment institutions.
  • Inadequate due diligence by the British Business Bank of the banking businesses that it authorised to provide COVID19 financial support backed by the government.
  • The value of competition by public sector organisations. The agreement between Greensill and NHS SBS was not a contract as there appears not to have been a consideration. Nor, as far as I am aware, was there any consideration in the implementation at NHS trusts. Hence, this is a supply chain finance, not a procurement issue. However, competition has been a requirement for government organisations at least since the 1980s. Had NHS SBS undertook a competitive exercise, even though this was not a procurement, it is likely that the necessary due diligence would have revealed the shakiness of Greensill Capital and it would not have been progressed.
  • The need to tighten up rules when senior public sector officials wish to join the private sector. Bill Crothers, former government chief procurement officer, worked part time for Greensill for two months whilst he was in his government post. This arrangement was approved by the head of the civil service. There is no evidence of a conflict of interest as he was trying to obtain business for Greensill from the private sector.  However, the National Audit Office identified the weakness in the rules as a serious issue in 2017. Nothing seems to have been done about it.
  • The need to control lobbying by former government ministers and officials.

Greensill ran a high-risk business. It relied on spotting winners, effective due diligence, accurate forecasting and rising prices of commodities. However, it is not all bad news. It has highlighted the factoring industry, which exists mainly because many companies take a long time to pay their bills. In effect, this is treating suppliers as free financial lenders. Governments should review this practice and the economic impact it may have. 

Greensill also showed the NHS how it can make a procurement saving of up to £480m annually on agency staffing. So, is it not time that the NHS introduced a similar app to that of Greensills? It might also encourage some former staff to return to the Service, thus easing the recruitment problem.

☛ Colin Cram is chief executive at consultancy Marc1.

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