Carillion was ‘akin to a Ponzi scheme’
Government was wrong to give outsourcer more work after profit warning, says former auditor general
CARILLION was “like a Ponzi scheme” and subject to “inadequate” government scrutiny, according to the UK’S longest-ever serving auditor general.
Sir John Bourn said he was “angry and disappointed” when the troubled construction and outsourcing giant collapsed in January, leaving almost 500 public contracts in limbo and tens of thousands of suppliers and sub-contractors unpaid.
“The Government should not in my view have given Carillion so much work,” said Sir John, auditor general from 1998 to 2008, interviewed for a Dispatches investigation to be broadcast on Channel Four this evening.
“You could see that Carillion was in trouble – it was all rather like a Ponzi scheme because it was taking small contracts as a way of keeping the bigger contracts going.”
Sir John is particularly critical of the decision to award Carillion eight public sector contracts, worth almost £2bn, after it issued an £845m profits warning in July 2017, among the biggest the City had ever seen.
“I was surprised the Government went on giving it contracts – you couldn’t have had a better warning to be careful,” said Sir John. “It wasn’t a good idea to give [this work] to a company in such a dicey position.”
Carillion – which held government contracts to build hospitals and other infrastructure, as well as delivering vital services from school meals to refuse collection – collapsed with liabilities of up to £7bn, according to the Official Receiver. Nine months before, the company had issued a record £80m shareholder dividend.
Last month, a Commons select committee said the dramatic collapse of a large outsourcing company like Carillion “could happen again” unless “lessons are learnt about risk and contract management and the strengths and weaknesses” of the outsourcing sector.
“Public services are deteriorating as the Government prioritises costs above all else in outsourcing decisions,” said a damning report from the public administration and constitutional affairs committee, one of three Parliamentary investigations since Carillion’s collapse seven months ago.
“At the same time, the public sector has become too reliant on a small handful of big businesses which are effectively ‘too big to fail’ as they run vast swathes of public services with little effective competition.” Sir John said public oversight of Carillion was “inadequate” because ministers and civil servants “did not pay attention to the range of Carillion’s business and the weaknesses in its financial position – they should have abridged the programme of putting work there, and looked to other competitors who could have contributed to public service”.
Sir Bernard Jenkin, chairman of the public administration and constitutional affairs select committee, said: “The Government must use this
moment as an opportunity to learn how to effectively manage its contracts and relationship with the market.”
Along with £1.2bn in unpaid bills to sub-contractors, many of them small and medium-sized firms, Carillion also left an £800m pension deficit – the largest ever shortfall to be absorbed by the Pension Protection Fund.
Robin Ellison, chairman of Carillion Pension Trustees, told Dispatches he tried to convince Carillion to tackle the deficit in its pension schemes, which have 27,000 members.
“We thought they could pay more without affecting the value of the company, and they weren’t prepared to pay,” he said. “Were we worried for members? Yes we were. Did we do our best to try and recover it? Yes we did. The difference in this case was that they were in a non-negotiating mode.” Recounting discussions with Carillion finance director Richard Adam, Mr Ellison says: “He signs the cheque and I don’t – so there was not much more we could do to force him to sign, apart from embarrass him, and they weren’t embarrassed.”
Mr Ellison’s comments echo a report by MPS which found that Mr Adam “was the architect of Carillion’s aggressive accounting policies and resolutely refused to make adequate contributions to the company’s pension schemes”.
Mr Adam denies any wrongdoing. The Pensions Regulator, which can compel companies to make enhanced pension contributions, took no action.
Lesley Titcomb, chief executive of the Pensions Regulator at the time of the collapse, has since been criticised, with MPS on the joint pensions and business select committee concluding “substantial cultural change” is needed.
The committee was “far from convinced” the regulator’s “current leadership is equipped to effect that change”. Ms Titcomb denies wrongdoing but has said she will not reapply when her term expires in February.
Paul Lester, the former chairman of JD Laing, told Dispatches it was “no surprise” that Carillion collapsed.
He said: “I don’t think anybody was surprised in the industry because of all the questions that were being asked over the last few years by the hedge funds in particular. In the end, it all came down to cash.”
How to Lose Seven Billion Pounds, Dispatches, Channel 4, tonight, 10.30pm