[Relevant Documents: Second Joint Report of the Business, Energy and Industrial Strategy and Work and Pensions Committees, Carillion, HC 769;
Second Special Joint Report of the Business, Energy and Industrial Strategy Committee and Work and Pensions Committee, Carillion: Responses from Interested Parties to the Second Joint Report of the Business, Energy and Industrial Strategy Committee and the Work and Pensions Committee, HC 1392;
Forty-first Report of the Committee of Public Accounts, Government risk assessments relating to Carillion, HC 1045;
Seventh Report of the Public Administration and Constitutional Affairs Committee, After Carillion: Public sector outsourcing and contracting, HC 748;
Oral evidence taken before the Liaison Committee on 7 February 2018, on Cross-government response to the collapse of Carillion, HC 770.]
I beg to move,
That this House has considered lessons from the collapse of Carillion.
I am grateful to the Backbench Business Committee for scheduling the debate for today, which is timely. This Sunday it will be six months since Carillion entered liquidation. When it collapsed, it employed 42,000 people, more than 19,000 of them working in the United Kingdom. It held liabilities of £7 billion, including a £2 billion liability to 30,000 suppliers and subcontractors, and it held just £29 million in cash to meet those liabilities. In the past six months, nearly 2,500 Carillion workers have been made redundant and more than 1,000 have voluntarily left what remains of the business. Projects have been mothballed and suppliers have faced ruin.
Since the collapse of Carillion, five Committees have looked into the issues surrounding its collapse. Along with the Work and Pensions Committee, my Committee—the Business, Energy and Industrial Strategy Committee—has considered the causes of the collapse. The debate is also timely because this morning our Committees published a special joint report containing 24 responses to our original report. It gave those criticised in the report, and those with a significant interest, a chance to respond ahead of the Government’s formal response to our findings. In the time that I have this afternoon, I shall set out what my Committee found, and what needs to change. I thank fellow members of the Joint Committee, some of whom are in the Chamber today, for their work to uncover the lessons from Carillion.
When it collapsed, Carillion had been in existence for 19 years. It was the second largest construction company in the UK, having grown through large and frequent acquisitions and Government outsourcing. Carillion’s directors, and those who know the construction industry, told us that it was a low-margin industry, and part of a highly competitive market with inherent risks. Businesses do collapse every day, and the process of business creation and failure is part of any well-functioning modern economy, but warning lights should have been flashing when such a big business was on the brink. We should demand the highest standards of corporate governance to help to ensure that British businesses are well run, but that did not happen with Carillion.
Despite its catastrophic failure, the Carillion directors, when they sat in front of our Committee, continually claimed that the business was sound, even after it had gone into liquidation, and that only a handful of contracts had brought it down. They even said that everything was fine until just a few months before the collapse. As late as the day before Carillion went into liquidation, the directors thought that they could avert the collapse. They seemed to have a sense of entitlement, and a belief that the Government would step in and bail out their failed business. In their evidence to us, they blamed everyone but themselves. They blamed the Bank of England, the Canadian construction market, Carillion’s suppliers, and professional designers of concrete beams.
However, the collapse of Carillion has meant that our Committees have been able to see the board papers and minutes from company meetings, many of which we have published. Looking inside the company, we have seen a business that acquired other businesses, and relied on unrecoverable “goodwill” to prop up its balance sheet; a company that kept increasing senior salaries and bonuses, and ensured that a dividend was paid regardless of its own health; a company that was paying suppliers late, and bidding for contracts that it could not afford to deliver on time or on budget.
Carillion’s largest acquisitions—of companies such as Mowlem, Alfred McAlpine and Eaga—allowed it to put “goodwill” on its balance sheet. Those notional values of each acquisition, totalling almost £1.5 billion, were allowed to sit on the balance sheet for year after year, without any link to reality and the real value. When the company collapsed, the goodwill was wiped out, too, showing its true value—a value of zero. Carillion’s board needed healthy balance sheets to continue its dividend policy of increasing its payout to shareholders, but the truth is that it paid those dividends regardless of whether it had the cash flow required for them. Right up to the spring of 2017, it was promoting its growing payout with little challenge—no challenge—from directors as to whether the money might have been better spent supporting the pension fund, for example, or any part of the failing business.
Despite the growing pensions deficit, there is one area where directors felt able to spend money, and that was on growing salaries for the leaders of the business. Its remuneration committee increased payouts on the basis of industry averages, rather than the performance of the business Carillion. A responsible business would see payment by results, not payment by averages.
When Carillion’s directors needed to prop up their balance sheets, they did so by putting pressure on the suppliers. Carillion was, ironically, a signatory to the Government’s prompt payment code, promising suppliers they would be paid within 60 days. When the code was launched in 2013, Carillion was already known to Government as being poor payers, but the National Audit Office report into the company showed that in signing it up to support the policy the Government seemed to turn a blind-eye to Carillion’s failure to meet its duties to suppliers.
We heard on our Committee from the Federation of Small Businesses that some businesses were waiting more than 120 days for payment and Carillion had become notorious as late payers. Carillion managed to use this to its advantage, arranging an early payment facility with the banks, meaning suppliers could receive payments earlier than Carillion’s 120-day terms but they would have to face a cut in what they were owed in order to do so. Carillion was effectively borrowing from its suppliers, propping up its balance sheets again without a care for the state of the balance sheets of the thousands of businesses relying on it and doing its work.
The hon. Lady is making a powerful case for what we found in the inquiry. As evidence of this house of cards that she is describing, which it undoubtedly was, Richard Adam, the former finance director, told the inquiry that not only did he sell all his shares when he left the business, but he would not be prepared to put his own money at risk by being a shareholder.
I absolutely agree. The directors of the business were not invested in the business. They were not part of the pension fund that collapsed and, as the hon. Gentleman said, Richard Adam, the finance director who oversaw the accounting practices that helped to contribute to the collapse of the company, sold his shares as soon as he could because he knew what we all now know: this business was a failing business that would not be around for much longer.
What we found in Carillion was a board focused on short-term fixes and growing payouts, with no plan for what would happen when the illusion was shattered. Looking at the poor treatment of suppliers when the company was solvent and the trail of destruction the management of the company has caused, I cannot see how Carillion’s directors can make any claim that they had anything other than their own personal interests at heart. In the latest responses that we have published today, Carillion’s directors continue to refuse to demonstrate any culpability for the state the company was in. They have denied that our report is accurate, but have given no evidence whatsoever to support their case.
Let me be clear: the directors of Carillion are culpable for the company’s collapse. They should be ashamed of their performance and they should not be allowed to take the helm of a company ever again.
I thank my hon. Friend for that intervention. Bad behaviour was being rewarded at Carillion, but the people being rewarded were not the people investing in the business, or the people working for it and saving for their pensions with the business; the people being rewarded were those making the decisions about where the money went—making the decisions about whether to plug the pensions deficit or pay dividends to shareholders. Those are the people who should be paying the price, but under the system we have today, they walk away with their bonuses and their dividends intact. It is other people—the people who are not responsible and did not make the decisions but who did the work—who are paying the price, and that is what needs to be reformed.
When corporate governance is failing, there should be checks and balances, but our inquiry found a regime that was not up to the job of doing that. The first line of defence should have been those who were auditing and advising the company. KPMG, Carillion’s auditors for 19 years, continued to give a clean bill of health to the business, even just a few months before the July 2017 announcements that heralded its swift but painful decline. In the report we have published today, KPMG’s chairman, Bill Michael, denies any issues with the clean bill of health that his company gave to Carillion just months before it began to publicly collapse. Mr Michael is burying his head in the sand, which reflects badly on his understanding of the impact of Carillion on the reputation of his company, and of the future of audit as an industry. The status quo is simply not sustainable, and the big audit firms must understand that and respond to it.
Competition in industry is supposed to drive up quality and bring down costs. It is not working in the audit market, where a cosy club of four hoover up huge fees before, during and after any corporate failure, yet their audits and accounts, as one investor put it to our Committee, read like a mystery novel—a fiction, with the reader searching for scant clues on what is really happening. The big four firms audit all the FTSE 100 businesses and all but a handful of the FTSE 350 top businesses, as well as providing them with advice on a range of services. There are conflicts of interest at every turn, and it was left to the least conflicted, PwC, to clear up the mess during the liquidation process.
My hon. Friend is making an important point about the audit companies. Is it not a major problem that they are ostensibly there to represent the shareholders’ interests against those of the managers but that they are actually employed by the managers, and that if they do not give the managers what they want, they will not get the next contract?
My hon. Friend makes an important point. The people who rely on audit are the shareholders, and also the small businesses that supply the company, the people who work there and the pensioners who have saved for their pensions with that business. But they are not the people who employ the auditor, and they are not the people the auditors are accountable to. The auditor is accountable to the audit committee of the business, and it is often appointed by that committee on the advice of the chief financial officer. So, as my hon. Friend says, the incentives are all wrong.
I am pleased to see that our report has prompted some long-overdue soul searching in parts of the audit profession. While the written reactions of the big four accountancy firms to our report differed, they all seem to recognise that there were issues to be addressed. The Institute of Chartered Accountants in England and Wales has recognised this as a watershed moment, and it is leading a review of the audit profession. I hope that that review will propose some radical solutions. We have now referred the audit market for investigation by the Competition and Markets Authority. The new chair of the CMA, Lord Tyrie, was endorsed in his role by the Business, Energy and Industrial Strategy Committee, and he should now demonstrate the same determination he showed in this place leading the Parliamentary Commission on Banking Standards when he looks at the future of the audit market. I am convinced that we have to find a way of making the audit market more competitive and audits themselves more trusted, and of ending the conflicts of interest that can damage the reputation of some of our economy’s major firms.
Behind the company and its auditors and advisers, there are statutory regulators who should have been expected to step in when the business and the audits were seen to be failing. Carillion’s finance directors and auditors were subject to scrutiny by the Financial Reporting Council. Now that the company has collapsed, two former CFOs are under investigation for the preparation of financial statements, and Carillion’s auditors are subject to further scrutiny. During our inquiry, we heard that the FRC had already taken an interest in the situation at Carillion, and that it had concerns about the quality of previous audits by KPMG. However, the regulator had been far too passive. It accepted extra disclosures being made by KPMG and Carillion the following year without any further follow-up action and, although it found repeat issues with KPMG’s wider audit work across other companies, it seemingly took no firm action there either.
Carillion’s huge pension debt was a matter of concern to its pension trustees and the Pensions Regulator, the other regulator involved, but the regulator’s response, again, was feeble. It threatened to impose a contributions schedule and then left the power unused. It sought to negotiate a payment agreement and then agreed precisely with what the company wanted. It launched action only once the company collapsed and then it was too late. Again and again, the Pensions Regulator barked but did not bite. While plugging the £2.6 billion hole in the pension fund would not have saved the company, it could have reduced the largest ever burden on the Pension Protection Fund, which will see pension holders receive less than they have been promised by their company’s scheme. It is telling that none of Carillion’s directors was in the collapsed scheme.
The Committees found serious concerns about the performance of both regulators, including their powers, remit and leadership. If regulators are not working well, employees, investors, suppliers and customers can have little confidence in the businesses in which they are invested. Statutory regulators need to be doing more. Across the work of the Business, Energy and Industrial Strategy Committee, we rarely find ourselves criticising regulators for being too bold. Instead, we keep hearing timid bodies apologising for letting consumers down. That needs to change, and the change should be led from the top.
The hon. Lady is making an excellent speech so far. Does she agree that one of the Committee’s concern was that the companies that were being taken over all had sick pension schemes and that the Pensions Regulator should have been asking serious questions at that point?
The hon. Gentleman, who sits on the Work and Pensions Committee, is absolutely right. When Carillion took over companies such as Mowlem, McAlpine and Eaga, it was taking on businesses, yes, but it was also taking on huge pension deficits, which contributed to the problems. However, the business could have decided to address that pension deficit. It was not that nothing could be done. It could have decided to pay money into the pension fund instead of paying out to shareholders and to directors in the form of bonuses, but it decided to do the exact opposite. It made the wrong choices and prioritised the wrong people. It prioritised itself.
The announcement of the Kingman review into the FRC is a welcome start, but the Government must confirm that they are willing to see radical change, including giving regulators more powers if needed and holding them better to account for not using the powers they already have.
The Government, the audit profession and the regulators need to take urgent action. They owe it to the tens of thousands of people affected by Carillion’s collapse and to the untold number of people who could be affected if this is ever allowed to happen again. There are some clear lessons. In contracts, best value is not the same as the lowest price. Outsourcing is not always better than doing things in-house. Privatisation does not mean that the risk or the cost of failure when things go catastrophically wrong are contracted out.
We would all like to think that this is a case of one horrendously badly run company—Carillion was horrendously badly run—but with Interserve, Capita and Mitie all facing difficulties, we would have to be pretty brave to conclude that this is a one-off. We need to restore integrity to British business and the firms that audit them. Six months on, we have regulators reviewing and reviews of the regulators, but we need firmer action on corporate governance, on breaking up cosy cartels and on toughening up sanctions for misconduct. To secure our public services, for jobs, for small business, for contractors and for pensioners, that action is needed and it is needed now.
It is a pleasure to follow the hon. Member for Leeds West (Rachel Reeves). I commend her and the right hon. Member for Birkenhead (Frank Field) for their joint inquiry, which has shed a great deal of light on the situation. It was obvious when Carillion collapsed earlier this year that there was more than just one issue with the company. In general, companies do not go under for simple reasons, and there is no doubt that Carillion was mismanaged. The firm was paying ever increasing dividends, eventually reaching an annual figure of £80 million, while experiencing declining financial performance and an ever more rickety balance sheet. It took some time for that situation to arise.
The reason for Carillion’s importance to the Government and the intense public interest is that its failure was not just due to the spectacular nature of its bankruptcy; before its collapse, Carillion built hospitals, maintained schools, constructed bridges and roads and electrified railways. When it failed, it had approximately 420 public contracts with the Government accounting for 33% of its total global revenue. It was a shattering blow to public confidence in the Government’s ability to deliver public services via private contractors and providers. That was reflected in my right hon. Friend the Chancellor of the Duchy of Lancaster’s recent speech at Reform.
The Committee I chair, the Public Administration and Constitutional Affairs Committee, scrutinises the work of the Cabinet Office and the whole civil service in a way that we hope will improve public confidence in government and public services. We have taken a long interest in public procurement and public contracting, and we saw this crisis as an opportunity to consider the main strategic issues around outsourcing. In fact, we had already—prophetically perhaps—embarked on this inquiry before Carillion collapsed. Its terms of reference included whether the Government made effective decisions on outsourcing the delivery of public services, what lessons could be learned from the collapse and, given that the Government depend on so few public service providers, whether the rules on oversight and accountability of contracts needed to be changed.
PACAC’s findings were published this week, and they are stark. We uncover that sometimes the Government have little or no data on the services they wish to outsource or on the facilities they ask companies to manage. In some instances, what Government data there was was actually incorrect. My understanding—we could not put this in the report because we could not get it in evidence—of the Carillion prisons contract is that the Government originally thought they were transferring about 800 assets, but it turned out that the company was taking over the management of some 8,000 assets. How can such vast errors be made? I am afraid that it underlines how badly public services are run by Departments, but the lesson is not simply to pass that ignorance on as a risk to a private contractor and expect it to cope. We know that the Government are aware of that and have demanded that contractors accept in the contract the risks of their giving them incorrect information. There is no excuse for this carrying on.
We uncover a culture focused relentlessly on cost—by which I mean price—whereby companies are pushed beyond the limits of commercial viability and where procedures on transparency are not regularly followed. Most staggeringly of all, the Government cannot accurately assess the capacity of companies to which they are outsourcing to deliver a quality service. During the inquiry, PACAC found several instances where the Government had contracted with the private sector without knowing key data about the services they were asking companies to bid for. For example, in 2014, the NAO reported that the outsourcing company Compass believed that the information provided to it by the relevant Department was inadequate. It was managing facilities for asylum seekers.
Only two months ago, the NAO found that NHS England
“did not know enough about the services it inherited to set achievable…specifications and performance standards”
for a primary care support contract. Asylum seekers, primary care patients—these are the people who, for one reason or another, find themselves utterly reliant on the state to provide their accommodation food and for their basic human needs, and when outsourcing goes wrong, these people are on the frontline and they are the ones who suffer. The Cabinet Office did a brilliant job of rescuing the situation after the collapse and of keeping public services going, but it should never have come to that—the Government should not have to bail out private contracts with hundreds of millions of pounds of public money.
Given what the hon. Gentleman has just said, was he surprised as I was that, despite three profit warnings, despite hedge funds betting against its success and despite spiralling pension debt, the Government still handed out contracts to Carillion, including one to the tune of £1.4 billion for HS2?
By that stage, the Government were in a Catch-22 situation. If they denied Carillion access to any public contracts, it would have been a further signal to the market that this company was going down and it would have put at risk all the other public sector contracts it held. Also, in that case, the risk was shared by two partner companies, which signed in blood that they would take over any risk of each or any of the companies going bust. The Government have not suffered any loss as a result of that contract.
What the hon. Gentleman is saying is typical of the attitude that Carillion was too big to fail—and not just with HS2; there was £158 million for Hestia with the Ministry of Defence and £62 million for electrification of the rail line from London to Corby. While the Government continued to give Carillion all those contracts, its suppliers must have been thinking, “Well, my money is safe here, too. If the Government believe in these big companies, I’m okay.” There is a knock-on effect, a domino effect, right the way through the process, and ultimately smaller companies suffered and failed.
I totally agree with the concept that these contracts become too big to fail, and therefore, as I will explain, it becomes an illusion that the Government have transferred risk to these companies. These companies are a private sector extension of the public sector, and the public sector still carries the risk.
My hon. Friend spoke earlier of contracts basically being awarded on price, rather than on any kind of value. Does he agree with the CBI’s response to the Carillion report that suppliers to the public sector need to “bid responsibly” for contracts and need to be “prepared to challenge” bad deals and to “walk away” from opportunities that will not yield long-term value? The reality is we have a group of companies in this country that seem to be addicted to bidding on price, and this becomes a self-fulfilling prophecy, à la Carillion.
I agree, but unfortunately I think that the Government have fed that addiction. The pressures of austerity and the hunt for savings have encouraged the Government to try to get prices down and to be blind to the risks they are transferring to the private sector, resulting in the sickness of the sector. As I will explain, there is a misappreciation of the risks that private shareholders are prepared to bear, compared with the risks that we should be taking with public services and public money.
As I have said, the Government sometimes write into contracts that companies must accept the risk that the Government have got their own data wrong. An analysis disclosed by Serco found that this practice had taken place in 12 of the company’s recent procurements. That is in part driven by the decision to use contractual models such as payment by results that involve risk transfer on a huge scale. If the Government cannot assess the services they are trying to outsource, they simply cannot make an accurate calculation of a fair cost for the outsourcers, yet they tend to pretend to do so. In those circumstances, passing the risk on to contractors is unacceptable and, as we have seen, proves counterproductive, particularly if the Government are unable or unwilling to make a serious assessment of what is at risk when a company delivers public services.
PACAC found that the relentless drive to bring down costs has been among the most damaging factors. We received evidence from organisations and businesses in the sector that the Government have been “driven by price exclusively”, leading to a reduction in fees paid by up to 25% to 30%. Some people put it more bluntly. Rupert Soames, the chief executive officer of Serco, told us that
“in the four and half years that I have been running Serco I know one occasion”
when Serco had won a contract despite not being the lowest bidder. A survey conducted by the CBI revealed that 98% of businesses responding said that something other than “service quality” was the main reason why Government contracts are awarded. There are obvious problems with an undue reliance on price in the contracting process; industry leaders were concerned that “fudges” would
“allow technically poor but cheap bidders to continue... simply because the customer is desperate for the saving.”
Such bidders would then seek to renegotiate the price afterwards.
There are examples of all this going badly wrong. The Government, who are frequently the dominant purchaser in these markets, have great power to dictate prices to contractors. Professor Gary Sturgess, of the Australia and New Zealand School of Government—and why did we abolish our National School of Government and so have no equivalent institution?—told PACAC that companies were
“stupid to have gone ahead and entered into contracts... but this is a Government supply chain. ”
Representatives from the National Council for Voluntary Organisations said that, on average,
“large charities lose 11% on each contract they have with the government.”
There is something rather unpleasant about Government milking charities to subsidise public services, but that is, in effect, what is happening.
Instead of recognising that the focus on cost damages the ability of companies to meet the terms of their contracts and discourages innovation, the Government have taken a different approach. In some instances, they forgo performance penalties available to them, in essence declining to enforce the parts of the outsourcing contract that are designed to maintain the high standards of the service being provided, at the agreed price. In others, the Government have renegotiated the terms of some contracts. We received evidence from the Cabinet Office that just since 2016 the Government have renegotiated at least £120 million-worth of contracts in that way, including the Ministry of Justice’s flagship “Transforming Rehabilitation” scheme. The cost to the Government of the work necessary for the renegotiation itself is yet unknown.
PACAC found that the Government do not have a strong evidence base about when and whether to use the private sector, or whether such use will be more successful than using the public sector. This is what we call the decision to make or buy. The Treasury Green Book sets out a process that should be gone through when deciding whether to make or buy a service—whether to do it in house or put it out to contract—but we found no evidence that that was well understood or indeed followed. There is also a lack of a central database for outsourcing contracts, meaning that systematic analysis of outsourcing throughout the whole of Government is difficult at best, if not impossible. Nowhere is there an understanding of how much public service risk is being carried by each company, across all of its contracts and across all Departments. Without that kind of understanding, the Government are unable to prove the basic premise behind all forms of Government outsourcing: that the private sector is capable of providing a better service for better value. The basis for the claims made by the Minister who wrote the article in The Times earlier this week is data that is now some 20 years out of date. All this data should be published, as public confidence will not be strengthened without far more openness and transparency about how public contracts are let and managed. Nowhere is that more apparent than with private finance initiatives.
The ostensible purpose of PFIs was to take advantage of the expertise of the private sector in providing privately-financed infrastructure projects and buildings. However, despite having more than 20 years to research and form an evidence base, the Government were unable to justify their claims about the efficacy of PFI. In fact, in their testimony to PACAC, the Government claimed that PFI brought “discipline and rigour” to projects. But, while giving evidence, the chief executive of the civil service revealed that the real purpose is to make the public balance sheet look better. That motive can also be seen in the refinancing provisions for PFI, which allow the balance sheet to look better at the expense of the public finances.
It gets even worse than that. With private finance 2, it was decided that the proceeds of refinancing PFIs should be split between the contractors and the Government. After a school has been built and it is in the process of being managed, a lot of the risk has been carried, so the scheme can be refinanced at a lower rate of interest. It was decided that the benefits of that lower interest rate should be split 50:50 between the Government and the private sector. That was not the case with the original PFI scheme. It subsequently became apparent that, under the rather arcane public accounting rules, if such a change is made, the whole of the debt becomes public sector debt and is shown in the public sector borrowing requirement, so the Government said, “Oh, well, we’ll split it 70:30”. Therefore the Government now collect only 30% of the proceeds from refinancing a PFI contract. That is daft. It is the Government giving away public money just to satisfy silly public accounting rules. It should stop.
There are also issues concerning churn among civil service staff that make the management of public contracts difficult. Reports have highlighted the “insufficient continuity of staff” over the lifetime of a contract. On this front, the situation has been improving, but there is a great deal to do.
PACAC remains concerned that the Government are still taking a much too transactional approach to contracting and the management of contracts. It is vital not only that staff with commercial skills work alongside those within Government with other skills such as costing, IT and project management, but that those in the Government who manage the contract feel that those in the private sector are partners and collaborators. There should be trust and co-operation; it should not be an adversarial competition. When the Government make the decision to outsource a service, and when they accept bids from companies seeking to win the contracts for those services, it is crucial that the process of doing so is evidence-based and transparent.
It was to ensure that there was public trust in outsourcing, and in the Government’s capacity to do so, that Carillion was awarded contracts after it published a profit warning and after it had made other worrying sounds to the Government. That a company in the process of going bust should be awarded yet more contracts, giving it access to yet more taxpayer money, does raises the questions brought up by the hon. Member for Inverclyde (Ronnie Cowan) earlier. PACAC calls for the Government to re-examine how they assess contractors’ viability. Shareholders are prepared to take a far higher risk than the risk the Government should be prepared to take with public services and public money. The Government should publish their rationale for their decisions. Public service procurement cannot be done in the dark, cannot be done without evidence and cannot be done without the Government knowing what they are trying to outsource. It cannot be done on the cheap, and the public must be able to see that.
In conclusion, unless the right steps are taken and the right lessons are learned, a company very similar to Carillion, holding contracts of enormous public worth, could collapse again and all this will happen again. The public want companies that deliver public services better to reflect public-service values. Such companies are part of the public service, and if they do not demonstrate those values, they should not get the money.
I shall endeavour to be brief, Madam Deputy Speaker, as many of the points about the collapse of Carillion have already been made by my hon. Friend the Member for Leeds West (Rachel Reeves) and the hon. Member for Harwich and North Essex (Sir Bernard Jenkin).
Carillion’s headquarters was in Wolverhampton. Of its 18,000 or so UK employees, some 450 were employed in the headquarters, so the city that I represent has a particular interest in the story of the company’s collapse. Six months after the collapse, there are still major questions about corporate governance, audit, ongoing costs, and, perhaps most fundamentally, the policy implications raised by the collapse. I thank both the Work and Pensions Committee and the Business, Energy and Industrial Strategy Committee for their joint report, which paints a very stark picture, describing a story of “recklessness, hubris and greed”. On the accounts of the company, it describes them as having
“misrepresented the reality of the business.”
The report sets out how the company collapsed, how the internal checks and balances failed and it makes damning indictments of the company’s leadership and the system of auditing, culminating in the recommendation that the whole audit system be referred to the Competition and Markets Authority.
Others will focus on particular parts of this story, but the part on which I wish to focus is the role of Government and the decisions before Government when a company of this nature is in danger of collapse. I have written to the Minister before about these questions. Carillion is a specific type of company. It was a private company, but it was engaged for much of its activity in the delivery of public services. Therefore, the responsibilities cross both the public and the private sectors. The National Audit Office report on this issue, published last month, says that the company, in its dying days, asked for a loan of £160 million from Government and a deferment in tax payments of £63 million. That is a difficult decision for Government. What do Ministers or officials do when a company comes and asks for such substantial funds? In those circumstances, Ministers and the government machine have to make an assessment between loaning that kind of money and letting the company go under.
My right hon. Friend will know that the National Audit Office report has outlined that, in 2017, Carillion projected a loss of £83 million on the Royal Liverpool University Hospital. Does he know where that projected loss now sits?
That is a very good question and is exactly the kind of thing that Ministers had to look at when considering this request. In letting the company go under, the Cabinet Office realised that the taxpayer was still on the hook, because at the moment that it decided to say no to the company’s request for the loan, it gave the official receiver £150 million of taxpayers’ money to process the liquidation. Therefore, the taxpayer being on the hook does not stop when the decision is made to allow the company to go under. The taxpayer has been on the hook for the six months of this story, and it does not stop with the money for the official receiver. Public sector bodies are facing a 20% premium for some of the post-liquidation service delivery costs. As my hon. Friend just said, there are three major projects that lie unfinished. There is the Midland Metropolitan Hospital, the Royal Liverpool University Hospital, which he raised earlier this week in Parliament, and the Aberdeen bypass.
One question that I hope the Minister addresses is the one raised by my hon. Friend a moment ago. What will it cost to finish these projects and where will the money come from? The National Audit Office says that these projects face losses respectively of £91 million for the Aberdeen bypass, £83 million for the Royal Liverpool University Hospital, and £48 million for the Midland Metropolitan Hospital. In his winding up, will the Minister confirm how these projects will be finished and how they will be paid for? It was a public policy decision to build a new hospital in Liverpool; it was a public policy decision to build a new hospital in Sandwell; and it was a public policy decision to build a new road in Aberdeen, so whoever is carrying out the project, the public policy responsibility, in the end, still lies with Government. Can the Minister confirm that at the moment of collapse, the Government thought that the cost might not be the £150 million that they set aside, but more than £300 million, as paragraph 13 of the National Audit Office summary suggests?
This not just a story of corporate mismanagement; it raises major public policy questions. What does the Minister think are the lessons for Government decision making about: how procurement happens; whether a contract is to be tendered and how that tendering process is managed; and how they balance the risk of rescue and the cost to the taxpayer when a company engaged in the delivery of public services is in danger of collapse? Those are the fundamental public policy questions raised by this story.
I cannot possibly deliver my speech in three minutes, but I will do my best.
I am pleased to be able to speak in this significant debate on an issue that marks a turning point in Britain’s politics and economics. The collapse of Carillion should see the end of a huge policy mistake—the dogma-driven tragedy of the privatising, outsourcing and marketising of our public services. It is now time to accept that mistake, and to begin the process of rebuilding the public utilities and public services established in the early post-war decades that underpinned the enormous social advances achieved in those times.
The neoliberal economic model has brought political and economic instability, slower and erratic growth rates, and greater inequality—a world where the mega-wealthy and unconstrained private banking and corporate power have prospered at the expense of the rest of us. The death knell for neoliberalism was sounded by the 2008 crisis, when a catastrophic financial collapse was prevented only by spending billions of taxpayers’ cash to prop up the corrupt and out-of-control banking system. But the Frankenstein’s monster did not quite die then, and has limped along for another decade despite financial scandals and failures, with the public purse being ripped off time and again. The collapse of Carillion is one more nail in the coffin of the monster, but it is still not dead. It is time to ensure that it finally dies, and soon.
I am a member of the Select Committee on Public Administration and Constitutional Affairs, which is an excellent Committee with a first-class Chair and brilliant staff. As we have heard, the Committee has just produced its own report, which is very well written and contains much good material, but I was unable to support it because it did not draw the obvious conclusion that the drive to outsource and privatise—to hand vast sums of public money to grasping private companies through PFI schemes and outsourcing—has been an enormous and costly mistake, driven by ideology and not the public interest. We should have said in the report that PFI should be abandoned forthwith, and that the process of insourcing should be supported and accelerated.
The report says:
“PFI financing costs more than government financing because the state can borrow at a cheaper rate than the private sector. While we are confident that PFI costs more than conventional procurement, neither…the National Audit Office nor the Public Accounts Committee can find any evidence of the benefits the Government claims”.
This is pretty damning, but the report stops short of saying that PFI should be stopped now and for good and confined to the dustbin of history.
We have been here before—long before Carillion—with the collapse of Jarvis 14 years ago. At that time, I put a question to the then Prime Minister in the following terms:
“My right hon. Friend will be aware that the private finance initiative contractor, Jarvis, has been teetering on the brink of bankruptcy for weeks now. This is putting at risk a large number of school repair schemes and other public sector works. Would he not think it sensible, given that Jarvis’s share price has now collapsed to junk levels, to buy out all those public sector schemes, get them done in the public sector, and save billions of pounds of public money?”—[Official Report, 14 July 2004; Vol. 423, c. 1408.]
As hon. Members may have guessed, I received no sensible answer. Now, 14 years on, we have Carillion, and the present Government are still persisting with the failed models of privatisation, including the appalling PFI.
Some public authorities are beginning to insource, with significant financial and service benefits, but the drive to privatise continues, especially in the national health service. The failures of the model are legion, from prisons to probation, and from long-term care to smaller issues such as building control. But perhaps the greatest—
I want to take this opportunity to draw attention to the Royal Liverpool Hospital in the centre of Liverpool, which, given the all the important issues that have been raised in this debate, stands as a monument to the corporate greed that led to the collapse of Carillion. It is a tragic sight and eventuality for the people of Liverpool, who are now kept completely in the dark about what will happen in the future.
The £335 million hospital is 90% complete, but as the NHS searches for a new contractor to take over, we have no timescale for the completion of the site. Building work has stopped altogether, state-of-the-art medical equipment goes to waste in empty wards, and there are questions over whether the building is structurally sound. In recent evidence to a parliamentary joint inquiry, it emerged that there were serious structural issues. Two cracks were discovered in concrete beams at the hospital, and following a review by Carillion, further cracks were discovered in six other beams. Now the private company Arup has been hired to conduct a structural review.
I say to Ministers that we must have transparency about what happens now, in the aftermath of the collapse of Carillion, to such capital projects. It is not good enough to have private meetings from which the public are simply excluded. Yesterday, the Minister told me that public ownership would mean that the taxpayer would shoulder the risk, but surely that is nonsense when we know that the risk is always shouldered by the taxpayer in these cases anyway.
The collapse of Carillion is a watershed moment. In order to truly learn the lessons, we must recognise that it is not good enough to tinker around the edges of a broken system: the task is to replace it altogether. I am delighted that my right hon. Friend the shadow Chancellor has said that the Royal Liverpool Hospital is
“just another scandalous example of the Government wasting money on failing PFI schemes…The Government should take responsibility and commit to delivering the Royal Liverpool in the public sector.”
Let me finish by pushing the Minister and the Government to show some urgency. Will he tell us publicly what meetings he is holding? Is he meeting the hospital company that is delivering this project? Are Ministers meeting the investors, Legal & General and the European Investment Bank? What do Ministers know about the structural state of the building overall? Are the Government seeking legal advice? For the people of Liverpool, the question is, “Will this hospital ever open?”, and I think they need an answer.
I should start by putting on the record a mistake that I made in my speech in the previous debate, when I said that it was my 100th contribution to the House. It was actually my 99th contribution, so this is my 100th contribution to the House. I made a slight miscalculation.
As my hon. Friend and neighbour the Member for Leeds West (Rachel Reeves) said, the collapse of Carillion happened six months ago. I was here in the House on that day, six months on from my maiden speech. It is quite apt that a year on, we are back here to review the collapse of Carillion.
Let us make no mistake: the collapse of Carillion as a company was a complete disaster, putting at risk 420 public sector contracts, more than 1,400 jobs and tens of thousands of subcontractor jobs. It had contracts with Network Rail, the Ministry of Defence, the Ministry of Justice, HS2 and more. The Local Government Association counted 30 councils as being directly affected, and 220 schools. The ripple effects could be seen in every town, city and county in this country, and in such diverse areas as construction, maintenance, the armed forces and the NHS.
How can we restore public values in public procurement? We must use public money not only wisely but strategically, in the interest of communities and regions. UK plc commissions over £250 billion of goods and services, and we can use that to get the best deal for the country. There are lessons and recommendations for the future from the collapse. We should insist on in-house options being considered alongside outsourcing and commissioning, particularly within local government. When a service cannot feasibly be provided in-house, we should look at working together with local authorities. In Leeds, we set up Civic Enterprise Leeds, which uses municipal staff in areas like catering, cleaning and plant nurseries. We can use our £250 billion of buying power to ensure that every worker who is employed with a company using a Government contract receives the real living wage—as independently calculated by the Living Wage Foundation, not the supposed living wage brought forward by the Government.
Speaking as chair of the all-party parliamentary group on social enterprise, I know that there is some unfinished business on the Public Sector (Social Value) Act 2012. That is an Act without teeth. It asks for public bodies only to consider social value in commissioning. Instead, it should compel social value in commissioning. If we had that compulsion, then perhaps instances of commissioning risky businesses such as Carillion would never have happened. We can also look at how we score contracts and measure their social value so that we have the same standards across the piece. We cannot allow the risky behaviour that led to the collapse of Carillion to happen again.
First, I thank the hon. Member for Leeds West (Rachel Reeves) for securing this debate. It was a pleasure to be on the joint inquiry, chaired by the hon. Lady and the right hon. Member for Birkenhead (Frank Field). All I can say, having sat on that inquiry, is that the evidence revealed at every session was a real eye-opener. The report stands as one of the most damning indictments of the total failure of a political ideology that assumes that privatisation and outsourcing are always value for money and better than the public sector. The report does not, to use that Glaswegian phrase, miss and hit the wall. If there is one sentence that sums up the entire fiasco, it is this:
“Carillion’s business model was an unsustainable dash for cash. The mystery is not that it collapsed, but how it kept going for so long.”
I have often wondered what quality in someone’s character enables them to collect the eye-watering salaries and bonuses that typify the worst excesses of the corporate world. I can only come to the conclusion that the answer is shamelessness, because it certainly was not competence or caution with public money. However, as the evidence sessions went on, I was clear that it was not just an organisational failure in one company, but a systematic multi-organisational failure.
The key themes revealed were corporate greed, lack of regulation, the big four auditing companies creaming money from struggling companies and pensions scheme stability sacrificed for dividends to shareholders. It was quite astonishing evidence. I asked Carillion’s chief executive, Keith Cochrane, whether dividends to share- holders were a higher priority than employees in the pension scheme. His answer was that he would not look at it that way. The hon. Member for Leeds West went on to say that if parents had two children and the younger child was getting paid less pocket money than the eldest child, and the youngest child said to the mother, “I think I’m a lower priority,” the mother would not necessarily reply, “That is not the way to look at it, dear.” That was some of the astonishing evidence we got from the company.
It was quite clear that the company was ready to dump the pension fund into the Pension Protection Fund; it was very clear on that. Its business model relied on even more acquisitions, rising debt, expansion into new markets and exploitation of suppliers, with a side order of creative accounting and an out-of-control bonus culture. The company was gambling with public assets and finances, always seeking to eliminate any competitors, squeezing subcontractors and suppliers through delayed payments as a matter of course and ignoring its pensions liabilities. Those tactics are straight out of the Robert Maxwell school of risky business. The only element of risk that was carefully managed was ensuring that bonuses could not be recovered in the event of problems arising with the company. Boardroom lifebelts were well and truly secured on this corporate version of the Titanic, with the auditors signing off on their assurances as the SS Carillion steered full speed ahead to the icebergs.
The practice of illustrious advisory firms telling clients exactly what they want to hear in order to secure future business was a feature of the 2008 crash and has continued despite everything. As the report states:
“Advisory firms are not incentivised to act as a check on recklessly run businesses. A long and lucrative relationship is not secured by unduly rocking the boat.”
The culture of corporate back-scratching and covering for one another has flourished in the absence of any firm regulatory regime. The frustration for those of us with a public sector background is seeing the chickens come home to roost when all along trade unions have been making the case against privatisation, based on well-founded fears of what happens when profit becomes a central feature of public sector delivery. What price public services when those in charge of delivering them operate in an environment of chaos, with contempt for the concept and ethos of public service delivery? The key question is this: how many more wake-up calls do there have to be before people intervene?
I congratulate the three Select Committees on the fine work they have carried out in investigating and coming up with conclusions on the Carillion fiasco. I thank my hon. and right hon. Friends—my hon. Friend the Member for Leeds West (Rachel Reeves), who introduced the debate so expertly, my right hon. Friend the Member for Wolverhampton South East (Mr McFadden) and my hon. Friends the Members for Luton North (Kelvin Hopkins) and for Liverpool, Walton (Dan Carden)—for their excellent speeches.
The collapse of Carillion was indeed a fiasco—a fiasco for the 30,000 employees and the 20,000 sub- contractors; for the 27,000 members of its defined pension schemes, who will now have to rely on the Pension Protection Fund for a reduced pension; for the 30,000 suppliers who are owed £2 billion in unpaid invoices; for the children who depended on school meals; for our armed forces personnel whose housing was mismanaged; and for the taxpayer who is picking up the tab for the colossal failure of the Government to safeguard large sums of public money and the delivery of outsourced services and construction contracts.
In Liverpool, the obvious example of the fiasco, as my hon. Friend, and constituency neighbour, the Member for Liverpool, Walton said, is the failure to complete the Royal Liverpool Hospital. Construction came to a grinding halt when Carillion collapsed. It is completely unacceptable that the Government have not taken over the contracts to make sure that, in the interests of patients, the Royal is finished. As my right hon. Friend the Member for Wolverhampton South East said, the same applies to the hospital in Birmingham and the road in Aberdeen. Those are all examples of the fundamental flaws and costs of PFI and, too often, the way in which public contracts are delivered in the private sector.
Last August, Carillion extended payment terms to an outrageous 120 days and charged suppliers a fee for early payment. Such behaviour is indefensible, yet Carillion was a signatory of the prompt payment code. Will the Minister tell us why the Government were not policing their own payment terms and their own code? That prompts the question whether such payment terms are being enforced now. Why were new contracts worth £2 billion awarded after the change of payment terms, after the profit warnings and after the changes in senior management? Why did Government officials accept assurances from Carillion management about the viability of the company, even as it headed towards the cliff edge, and why did Ministers not challenge their own officials? Will the Government support the proposal of the Institute of Directors for a body to be created to police the directors of major companies?
The company continued to pay out executive bonuses and dividends, while reforming its pay policy to protect management from the possibility of having to repay their bonuses. The arrogance and corporate greed that have been described at Carillion simply will not be tolerated any more either by industry or by the wider public. The CBI wants performance in the payment of suppliers to be a consideration in tendering for public contracts. It is also calling for the publication of payment data. Labour Members agree with it and we will be including payment of suppliers as an essential criterion in our procurement policy in government. The next Labour Government will take the action needed to stop the late payment culture that cost our economy £2.5 billion last year and forced 50,000 small businesses to close. This Government have failed to do so. We will guard against insolvency by mandating the use of project bank accounts and retention deposit schemes in public construction contracts.
The chair of KPMG accepts the need for reform, but it is frustrating to learn that he “respectfully disagrees” with Select Committee members who described the firm’s audit of Carillion as complacent. I am afraid that his comments reinforce that very sense of complacency and it is fair to say that many people will respectfully disagree with him. The time has come for an overhaul of our audit system and of the cosy relationships that have come to characterise the way in which the big four accountancy firms operate, so will the Minister tell us whether the Government support the calls for a break-up of the big four accountancy practices? Whether it is the Public Administration and Constitutional Affairs Committee saying that they do not follow Treasury process, the abandoned construction site at the Royal Liverpool Hospital, the failure to enforce their own much trumpeted prompt payment code, or ignoring publicly available information about profit warnings, changes of senior management and excessive bonus payments, this Government have been found wanting, all at the cost of public services and the public finances.
The Government have appointed a senior partner at Slaughter and May as an adviser, despite the £8 million in fees paid to the firm by Carillion, which included £1 million on the day before it collapsed. I had hoped that the Government would have learned from the Carillion fiasco, but the Slaughter and May appointment suggests that they have learned nothing. The mismanagement of Carillion’s contracts was a massive failure by the Government, and the worst of rent seeking and wealth extraction by the few at the expense of the many. However, that culture is coming to an end. The public are appalled by the excesses of Carillion, and the consequences of that for suppliers, workers and public services, and so, too, are the vast majority of decent, hard-working, responsible business people.
The next Labour Government will be a strong partner for businesses that want to put the public good first—businesses that want to work with trade unions, recognise that decent pay and conditions are good for business as well as for workers, and want to treat suppliers fairly and pay them well and promptly. Labour will be the party of responsible business and responsible contracting —the party of business for the many, not the few.
I congratulate the hon. Member for Leeds West (Rachel Reeves) not just on securing this debate, but on her brilliant work in leading the Business, Energy and Industrial Strategy Committee. It has done exactly what a Select Committee should do, which is hold business to account, question the Government, find answers, and bring transparency and openness to this issue. I commend her work and that of the Chair of the Work and Pensions Committee for their joint efforts. They have produced a good document, and we will respond to it shortly. I also congratulate the Chair of the Public Administration and Constitutional Affairs Committee on that Committee’s diligent work in examining this issue in great detail, and on providing a huge amount of important information. The Government are considering the Committee’s detailed report, and we will respond to it in the near future.
None of us underestimates the huge impact of the collapse of Carillion. It was a huge shock, not just for the 18,000 people who worked for it, but for all the innocent contractors and small businesses that supplied it. The Government tried to respond to that collapse because the insolvency of Carillion had an impact on the lives of too many people. Our job was to put in place a response that was as swift, co-ordinated and comprehensive as possible, to ensure not just that we maintained the vital public services that Carillion was delivering to hospitals, schools, prisons and the Ministry of Defence up and down the country, but that we did all we could to protect those innocent contractors who were caught up in the Carillion collapse.
I believe we have been successful in mitigating the very serious impacts of the liquidation, and 12,345 jobs have been safeguarded so far—some 68% of the pre-liquidation workforce—compared with 2,404 redundancies. I recognise that 2,404 redundancies is a very serious matter for all those concerned but there can be no doubt that it is an unprecedented result for such a small number of people to have been made redundant, in comparison with the size of that business. That is testament to the efforts not just of Government, but of industry more widely, which ensured a speedy and positive response.
A total of 876 apprenticeships have been transferred to new employers so that those young people can continue to embark on their careers. At the request of the Secretary of State for Business, Energy and Industrial Strategy, the banks put together nearly £1 billion of support for those affected, including £100 million of enterprise finance guarantee from the taxpayer-owned British Business Bank.
However, it is also important that we learn the lessons of Carillion’s insolvency and ensure that we do everything in our power to avoid such an event happening again. The Government have taken steps to ensure that the causes of the insolvency will be fully investigated, and of course we are taking into account all the work that has been done by the Select Committees. I remind hon. Members that the investigations that have already commenced include those by the official receiver, the Financial Reporting Council, as requested by the Secretary of State for Business, Energy and Industrial Strategy, and the Financial Conduct Authority.
The official receiver has powers to obtain information and, if misconduct is proven, can recover assets, pursue disqualification proceedings or refer the case for prosecution if criminality is discovered. The Financial Reporting Council has also commenced an investigation into the actions of two finance directors of Carillion and the conduct of KPMG as Carillion’s auditors. We are determined to get to the bottom of this. The Secretary of State has also recruited the eminent Sir John Kingman to undertake a thorough review of the FRC to ensure that it is doing exactly what it should be in order to be a robust and effective regulator. We are giving Sir John all the support he needs to conduct that thorough investigation. The Financial Conduct Authority is investigating whether Carillion manipulated financial statements prior to July 2017 and it is also considering allegations of insider trading.
I reassure the House that the Government are committed to ensuring that the insolvency is thoroughly investigated. Tens of thousands of documents are being considered and we will ensure that we get to the truth. The Government are also committed to ensuring that we learn the lessons. First, we are tackling the problem of late payments. It is clear that payment terms beyond 60 days are unacceptable in the vast majority of cases. Last year, we introduced the payment reporting regulations, which require the UK’s largest firms to report on their payment policies and payment performance every six months. The hon. Member for Sefton Central (Bill Esterson) said that, under a future Labour Government, everyone would be paid on time—my concern is that nobody would be paid if there were a Labour Government.
We want to provide transparency in payment practices, ensuring that small and medium-sized enterprises have more information about large firms that they are considering doing business with. My hon. Friend the Minister for Implementation has overseen a consultation on how we can take the payment performance of Government suppliers into account when awarding major contracts, which is one of the things the hon. Member for Leeds West was concerned about. We have issued a call for evidence on how we can end the scourge of late payments.
Secondly, in relation to how the Government manage their key suppliers, my right hon. Friend the Chancellor of the Duchy of Lancaster set out in his speech on 25 June how we would do that, including introducing effective contingency plans; introducing a playbook of guidelines, rules and principles; and requiring suppliers to publish key performance indicators on our more important contractors.
Thirdly, in relation to corporate governance, my Department is implementing new regulations relating to executive pay—that was mentioned in the debate—and bringing in extra transparency and accountability in the way executive pay at listed companies is handled. We are consulting on reform of the insolvency and corporate governance regime, including on important areas such as the framework within which companies determine dividend payments and strengthening shareholder stewardship.
The hon. Member for Leeds West raised the issue of what she called the Government’s prompt payment code. I just remind her that that code is a voluntary, industry-led code of practice that enables businesses to demonstrate to suppliers that they are committed to prompt payment. Of course it needs reform and improvement, but it is industry-led.
I can assure the House that the Government are determined to learn the lessons of the insolvency of Carillion and put in place a regime that protects shareholders, workers and all those businesses connected in the supply chain.
It has been a real privilege to have this debate in the Chamber today, and I welcome the contributions from all hon. Members, including the Front-Bench spokespeople and the Minister. As Chair of the Business, Energy and Industrial Strategy Committee, I get to see the best of British business, but sadly also the worst, and Carillion was the very worst of business. We now need to learn the lessons, because we saw the impact on small businesses, pensioners, workers and investors. I urge the Government, when they respond to the Committee’s report—the response is due on Monday 16 July—to respond in detail to the points on corporate governance, regulation, audit market reform and outsourcing. We need those changes, and we need them urgently, if we are to ensure that we learn the lessons of the collapse of Carillion, get justice for those affected and ensure that we see more of the best of British business and less of the worst.
Question put and agreed to.
That this House has considered lessons from the collapse of Carillion.