Former Carillion bosses appeared in front of the public accounts committee to discuss lessons learned from the contractor’s collapse. Here are five things we learned.
Carillion’s ex-boss ‘perplexed’ it was allowed to fail
Former interim chief executive Keith Cochrane insisted he was “still perplexed” that the government would not offer financial support in Carillion’s final hours.
He said: “We managed to convince the banks to put £10m if government put £10m in… and if we were making good progress [on restructuring] then the same thing would happen. That proposal went in at 7pm on Saturday 13 January.”
MPs asked how surprised he was when government, which was responsible for 47 per cent of Carillion’s work at the time, didn’t support the plan.
“I was very, very disappointed,” Mr Cochrane replied. “I was surprised, yes, because for me it was not the rational, logical decision to make.”
He added: “We were not looking for a bailout. This was a short-term loan to help us facilitate further restructuring.”
The former interim CEO said he continued to believe the least costly outcome would have been if the government had been willing to support Carillion.
Philip Green Carillion select committee 180227 1
Government’s role in a construction crisis demands inquiry
Former chairman Philip Green did not get involved in discussions with government until the day before it entered liquidation.
Mr Green said as a non-executive director it was appropriate that management had led discussions with government over its perilous financial position.
He added that he was not asked to meet with government at any stage, but had also not asked to get involved with discussions.
Former CEO Richard Howson said he had held quarterly meetings with the government’s crown representative. He said: “We had a number of conversations on the level of indebtedness rising, pension deficit rising and the level of receivables we were finding difficult to turn into cashflow,” adding that some of these contracts were in the UK and some in the Middle East.
He added that Carillion had lobbied the international trade secretary and UK ambassadors based overseas in 2017 to try to secure cash from projects. “We asked for and got support from the secretary of state in 2017 to try to generate cash,” Mr Howson told MPs.
“We briefed the secretary of state for international trade in April / May 2017 on the increasingly difficult situation in Oman and Qatar asking him to help along with the ambassadors.”
MPs of different political parties continually queried Carillion’s former leaders over the government’s responsibility and role in the crisis. It is clear that government must answer for this, through a public inquiry.
Post-profit warning wins ‘encouraged banks’
Plenty has been made of the decision to award Carillion public sector deals following its profit warning in July 2017. Mr Cochrane admitted the contracts acted as a shot in the arm.
He said: “A business such as Carillion is underpinned by confidence of its employees and supply chain, so the fact that a major customer was continuing to award us new work, was certainly a sign of confidence and encouraging in terms of our discussion with banks because it demonstrated that the underlying work we were doing was well-regarded.”
Mr Howson said the contracts gave confidence to employees, other customers and the supply chain and were “helpful”, but former FD Emma Mercer argued that the contracts “gave us very little benefit financially in terms of cash into the business”.
Keith Cochrane Carillion select committee 180227 1
Government ‘sought to be’ a supportive customer
Keith Cochrane took a long pause when asked whether the government was a “good customer” by Labour MP Meg Hillier.
The Carillion directors were being offered the chance to shift blame onto the government for either a lack of expertise or a lack of support.
Government “sought to be a supportive customer”, Mr Cochrane replied, but became increasingly more demanding as it required greater detail, he added.
Philip Green said the conversations between Carillion and the government were not “cosy”, but that for the most part the relationship was a good one. He added that the relationship fell short at the end when Carillion was “surprised and disappointed” by the result.
“We certainly believe the business plan we presented in January was sustainable […] It needed changing to improve the probability of sustainability, but we believed it was sustainable.”
PPP and MoD deals under the spotlight
Mr Green said the actions taken by Mr Cochrane following the July 2017 profit warning increased the possibility of a successful restructuring.
Mr Cochrane said the projects they had identified as requiring substantial loss provisions were mostly in construction contracts for PPP projects.
“That is because they were fixed-price contracts without flex to accommodate changes in design or issues Carillion incurred,” he said.
According to board meeting minutes from May 2017, the company had already tried to identify ways to claw back money on PFI schemes, including a £77m saving to be found on the Aberdeen Western Peripheral Route job and £49m to found on the Royal Liverpool Hospital.
Asked about its Next Generation Estate contract wins for the Defence Infrastructure Organisation, Mr Howson admitted to productivity problems.
The national housing prime contract, valued at £626m, was awarded to a Carillion Amey joint venture in 2014 at a saving of nearly £200m on the previous deal, which Carillion had also worked on.
Richard Howson Carillion select committee 180227 1
Mr Howson defended the JV’s bid. “The NGEC contract was a second-generation outsourcing deal; it had been let as a prime contract,” he said.
“The prime contract was target cost and we beat it each year for the last three years of the prime contract, so we had confidence we could deliver NGEC at 20-30 per cent less than the target cost communicated to bidders. We had run it for nine years.
“We also took a view we could run multiple NGEC contracts with one set of overhead. We won the bid and made that saving for government.”
However, Mr Howson admitted the JV failed to meet performance targets on the deal due, he said, to two factors.
“In the South-east the asset register was inaccurate and took 12 months to resolve. We had also planned to deploy our engineers through a new hand-held computer system to give jobs to them dynamically to improve productivity.
“We invested many millions of pounds in this. It should have been up and running by March 2015; it wasn’t running until March 2016, which meant we worked on a paper-based system, our productivity performance was poor and we missed out performance targets for 12 months.”
The Public Accounts Committee was ongoing at the time of publication.