‘A new Carillion would shock the world. We are seen as the gold standard’
Britain’s longest-serving auditor general tells Liam Halligan why the outsourcer’s collapse should offer a warning to ministers
Sir John Bourn is not the type to seek the limelight. But this summer, aged 84, the former auditor general decided to give his first ever television interview. I ask him why. “The reason,” he said, “is that I’m angry and disappointed about Carillion.”
Bourn is nothing less than a Whitehall legend. He was auditor general, the most senior public spending watchdog, for 20 years – longer than anyone else in history. The National Audit Office, which he ran from 1998 to 2008, independently scrutinises all government spending.
So how would Bourn describe the Government’s oversight of Carillion, the construction giant that chaotically imploded back in January?
“Inadequate – because the Government failed to recognise a major supplier was taking on more work than it could handle and continued to give work when it didn’t have to,” says Bourn, talking to me on camera for a Channel 4 Dispatches investigation. “Inadequate – because ministers didn’t pay attention to the range of Carillion’s business and the weaknesses in its financial position, and should have looked to other contractors who could have better contributed to public service.”
The collapse of the UK’S secondlargest construction company cost at least 3,000 people their jobs. It left behind a £1.2bn pile of unpaid bills – many of them owed to small suppliers and sub-contractors – and a record £800m pension deficit.
Carillion’s demise exposed a vast firm that mistreated sub-contractors, neglected its pension schemes and systemically cooked the books – and this was an outfit with 480 government contracts, in receipt of billions of pounds of public money.
Along with building hospitals, roads and other infrastructure for the state, Carillion delivered numerous “outsourced” public services – from providing school meals to managing prisons and collecting rubbish.
Forced into “compulsory liquidation”, the firm went under with total liabilities, according to the Official Receiver, of £7bn. Any hope of resale, administration or restructuring was deemed futile. After years of ever-rising shareholder dividends and director bonuses, Carillion’s debtsoaked foundations collapsed as it ran out of cash.
Bourn is deeply concerned that Carillion was awarded eight sizeable public contracts, worth almost £2bn, after July 2017. That was the month the firm issued an £845m profit warning, the biggest the City had seen in a generation, which instantly knocked 70pc off its share price.
“You couldn’t have had a better warning to be careful,” says Bourn. “It was obvious Carillion was in big trouble – it was all rather like a Ponzi scheme because it was taking small contracts as a way of keeping the bigger contracts going.”
Bourn was “astonished” Carillion kept getting big government orders. “Weren’t ministers and civil servants worried about what was in the newspapers? So many hedge funds were betting Carillion would collapse – and that was clear for all to see.”
Carillion was “an especially disappointing outcome”, says Bourn, because “sound procurement guidance principles, built up over decades” were ignored. “If you’re going to give a contract to a strategic supplier, you need to look at the whole business – how much cash it has, whether it’s paying its suppliers,” says Bourn. “On these very simple tests, despite all the talk of Carillion being all right, there was clearly something very wrong.”
The Government insists contracts awarded during the autumn of 2017 involved other firms too in case Carillion ceased trading – but Bourn isn’t impressed. “That doesn’t get away from the fact that it wasn’t a good idea to give even partial contracts to Carillion.”
With the Government spending a total of around £30bn a year with private contractors, the NAO issues countless reports into individual procurement contracts. “Procurement issues, the nuts and bolts of spending public money, can sometimes get neglected – so we need a culture change,” says Bourn.
He notes there is “a bit of a temptation sometimes” to keep giving contracts to the same few firms “if you’ve given them dozens of contracts already and the sky hasn’t fallen in”.
He also talks about individual government departments and private suppliers “colluding” to under-bid to the Treasury. And he complains NAO reports and audits are often “dismissed or pushed to one side” by ministers and other civil servants.
Bourn is keen to stress, though, that “we are capable [of ] good procurement”, and there are “many examples of excellent work”. To put Carillion in context, he talks about the UK’S preparations for the 2012 Olympics. “We did that well,” he says proudly. “That’s because we had a fixed and immovable delivery date, a declared budget that was adequate, and the work and decision-making were entrusted to people who’d made their careers in infrastructure.”
Official inquiries into Carillion’s collapse have also focused on “aggressive accounting” and the role of auditors – not least KPMG, which audited Carillion’s accounts for the entire 19 years of the company’s existence. “My view is that if you look at the rules for the preparation and auditing of financial statements, you are overwhelmed by their size and complexity,” says Bourn. “This complexity is really getting in the way of proper accountancy and audit, and genuine transparency.”
As the structure of the audit industry comes under scrutiny, Bourn says “it is crazy there are just four top-bracket auditors – this system simply doesn’t work and hasn’t for a very long time”. The former auditor general refers to the dominance of just four auditors across the FTSE 250 as “an issue of oligopoly, that needs to be investigated by the Competition and Markets Authority”.
Bourn calls the collapse of Carillion “a watershed moment” – the phrase used by Jeremy Corbyn back in January, when he seized on it to attack the Government. Citing Carillion’s failure, the Labour leader called for a widespread programme of nationalisation, along with a muchreduced role for private contractors in the provision of public services. Bourn has no such ideological agenda, but does want to see improvements in state procurement practices and far less public sector waste.
“Carillion was a watershed moment because it was such a big company, working across such an important range of areas, involving so many people,” he says. “It’s a watershed because it brings together under one heading so many of the things that are wrong – and we must learn from it and undertake to bring in change.”
Conscious of upsetting former colleagues, Bourn qualifies his concerns. “If you look across all government contracts, many of them are awarded and managed properly, so I’m not suggesting there is utter chaos,” he says. “But it could be so much better, and this Carillion case is especially disappointing – not least given the small contractors involved.”
Could there be another Carillion style collapse, I ask Bourn, and what would that mean? “There could – and I think it would be extremely damaging if we had another Carillion any time soon,” he says. “Other countries, which for so long have looked to us to learn about public procurement, as the kind of gold standard, would be shocked,” Bourn adds. “The world at large would think, ‘can the UK really manage these things, like it always used to? I mean, are these people any good? Is Britain losing its touch?’” “How to Lose Seven Billion Pounds”, Channel Four Dispatches, is available on Channel 4 Catch-up
‘You couldn’t have had a better warning to be careful – it was all rather like a Ponzi scheme’
‘So many hedge funds were betting that Carillion would collapse – and that was clear for all to see’
Sir John Bourn, the former auditor general, has warned that another Carillion-style collapse may be possible