Network Rail must carry out “more intrusive” financial checks on its main contractors to protect suppliers from collapses such as Carillion’s, one the client’s former directors has said.
David McLoughlin, a former finance and commercial director of Network Rail’s Infrastructure Projects division, called for the organisation to carry out more stringent tests on the financial health of its major suppliers, and to make these available to the supply chain.
A number of Network Rail suppliers lost millions following Carillion’s collapse due to work carried out for the contractor in the months leading up to its liquidation.
Mr McLoughlin told Construction News: “There is no doubt that at some point there will be another Carillion, so now is the time to look at how to ensure the fallout is minimised as much as possible. Client organisations have a duty to lead this.”
He added: “The intent is there and I think that is great, but Network Rail now needs to be bolder and if their duty is to protect taxpayers’ money, then they need to be more intrusive.”
Mr McLoughlin, who served as commercial director from 2010 to 2014, currently sits on the board of Quattro Plant as a non-executive director. He is also interim managing director of Amey’s utilities arm.
Quattro Plant was a subcontractor of Carillion and was owed money by the UK’s second-biggest contractor when it went into liquidation.
“We were blinkered about the Carillion situation,” Mr McLoughlin said.
“We had no idea what was coming, you hear rumours but your main client is still letting contracts to the company, so you kind of go, ‘It will be alright’.”
Several firms in Carillion’s supply chain have told CN that the awarding of large contracts by clients such as HS2 and Network Rail sent the wrong signals about Carillion’s financial state.
Mr McLoughlin said Quattro Plant had weathered the worst of the Carillion fallout, and earlier this month acquired Glasgow-based plant firm AB 2000.
However, he said Network Rail now had to now “step up to the plate” and put in place changes to protect SMEs.
“We can’t go on the same way working like we are working, we can’t just let the same thing happen again,” Mr McLoughlin said.
He called for more “regular and transparent stress tests” similar to those used by the Bank of England to test the UK’s major banks and building societies.
These annual banking tests examine the potential impact of hypothetical adverse scenarios, assessing banks’ capital position and their resilience to withstand shocks.
Mr McLoughlin said: “The bank system is the most high-profile stress test; they put each bank through a series of scenarios and then make the results very visible. I see that and I think it is really good.”
He said this could be measured through a traffic light system which could monitor a firm’s capacity, level of work being carried out, and payment performance.
The results could then be used by Network Rail to make decisions on contracts, he said.
They could also be made available to suppliers, which could make more informed decisions about companies they work with and what actions to take to protect themselves.
Mr McLoughlin said: “I know some might see this as self-fulfilling prophecy, and that by doing this you could contribute to a company’s failure.
“But that isn’t what happens with banks; banks just have to pull their socks up.”
Mr McLoughlin praised Network Rail’s response in the aftermath of the Carillion situation, but said it should now adopt more innovative contracting solutions to limit the impact of any future contractor collapses on suppliers.
He suggested using project bank accounts for rail work, but also for Network Rail to underwrite certain works and alliances to ensure SMEs are not forced into administration themselves by tier one’s in financial difficulties.
A Network Rail spokesman said: “Network Rail takes the financial health of the entire supply chain extremely seriously.
“Prior to the Carillion collapse we have been operating the Fair Payment Charter, which includes a number of requirements such as the payment of sub-suppliers within 28 days of certification.
“The Carillion insolvency was a significant challenge for the whole industry and our immediate priority was the continuity of payment for the supply chain and the employees of Carillion to minimise the impact of this event as far as possible.
“As you would expect we have learnt some valuable lessons and have reviewed a number of our processes as a consequence.
“Improvements going forward include contracting the fair payment charter requirements, implementing project bank accounts, regular and independent financial health checks and supply chain mapping.
“We continue to engage with our supply chain at all levels to ensure that the measures we take are effective and to the benefit of the industry as a whole.”