5The Collapse of Carillion
115.On 15 January 2018, the facilities management and construction company, Carillion, declared insolvency and the Official Receiver started to liquidate its assets and contracts. The unprecedented collapse of a British public limited company sparked several investigations from select committees and outside regulators and bodies, not least because at the time of its collapse the company employed 18,200 directly in the UK; provided services to the public sector through around 470 contracts and joint ventures; and owed around £2 billion to subcontractors and suppliers.
116.The NAO published its investigation into the collapse of Carillion on 7 June. That Report examined the company’s relationship with Government and the crucial contingency planning and managed liquidation of the company. The Liaison Committee took evidence from the Comptroller and Auditor General (C&AG), the Minister for the Cabinet Office and officials on 7 February 2018.118 The Public Administration and Constitutional Affairs Committee (PACAC) reported into lessons learned from the collapse of Carillion for Cabinet Office, publishing their report on 9 July 2018.119 The joint inquiry into Carillion by the Business, Enterprise and Industrial Strategy and Work and Pensions select committees reported on 16 May 2018.120 That Joint Report provides a detailed description and analysis of Carillion’s decline and eventual failure.121
117.The Cabinet Office was surprised by the scale of the company’s July 2017 profit warning and decided not to escalate Carillion to High Risk after the further profit warning in November 2017.122 In early January 2018, Carillion asked the government for £223 million and additional support with its financial restructuring. The Cabinet Office decided not to support Carillion, leading to the company’s collapse in January.123
118.The Joint Report from the Business, Enterprise and Industrial Strategy and Work and Pensions select committees sets out the key facts about Carillion’s business approach, corporate governance and financial performance and reporting. The Committees’ conclusions and recommendations are a damning litany of incompetence and self-delusion at the top of the company. Several aspects of the company’s, and its advisers’, activities continue to be investigated by outside regulators, including The Pensions Regulator and the Financial Reporting Council.
119.The net loss to Government of carrying out the liquidation is currently estimated at £148m, but the final sum is uncertain. The wider costs to former Carillion workers, pensioners, investors, the supply chain, and other creditors remain unclear. Carillion’s shareholders and lenders bore the brunt of much of financial penalty for the company’s failure. Many of Carillion’s subcontractors and suppliers took a very large penalty as Carillion had accrued significant credit through late payments which, even if the contract had been taken over, were unlikely to be paid.
Role of the Cabinet Office when things go wrong
120.The Cabinet Office consider that most contracts, particularly those for run-of-the-mill services, perform satisfactorily, while around 20 percent or more of complex or innovative contracts fail or run into serious difficulties.124 In July 2017, the Cabinet Office began continency planning in the event of Carillion failing, but was hampered by the lack of a complete list of Carillion’s government contracts. The Cabinet Office was still seeking information from across the public sector when the company entered liquidation. When Carillion collapsed, Carillion staff generally continued to provide public services uninterrupted, despite a lack of management information.125
121.Rupert Soames suggested that all suppliers to Government should maintain ‘Living Wills’—contingency measures produced and maintained by a supplier in the event of corporate failure.126 The information in the Living Will would enable Government to transfer delivery of the contract to another supplier, or take it back in-house.127 The Cabinet Office has announced that it will adopt the approach.128 We welcome the Government’s intention to introduce a requirement for suppliers to produce ‘Living Will’ contingency documents.
122.Recommendation: In response to this report, we expect the Government to provide more detail about how the policy will be implemented; what the documents would contain; and how their contents would be scrutinised, assured and kept up to date.
123.Recommendation: More complex contracts are more likely to go wrong. We would expect the Cabinet Office to consider the burden of creating and maintaining the living wills and balancing that burden with the complexity of the project and the risk and impact of contract failure.
118 Oral evidence taken before the Liaison Committee on 7 February 2018, HC (2017–19) 770
119 Public Administration and Constitutional Affairs Committee, Seventh Report of session 2017–19, After Carillion: Public sector outsourcing and contracting, HC 748
120 Business, Energy and Industrial Strategy and Work and Pensions Committees, Second Joint report of Session 2017–19, being the Tenth Report of the Business, Energy and Industrial Strategy Committee of Session 2017–19 and Twelfth Report of the Work and Pensions Committee of Session 2017–19, Carillion, HC 679
121 Business, Energy and Industrial Strategy and Work and Pensions Committees, Second Joint report of Session 2017–19, being the Tenth Report of the Business, Energy and Industrial Strategy Committee of Session 2017–19 and Twelfth Report of the Work and Pensions Committee of Session 2017–19, Carillion, HC 679
122 Report by the Comptroller and Auditor General, Investigation into the government’s handling of the collapse of Carillion, Session 2017–19, HC 1002; Oral evidence taken before the Liaison Committee on 7 February 2018, HC (2017–19) 770, Q 35
123 Report by the Comptroller and Auditor General, Investigation into the government’s handling of the collapse of Carillion, Session 2017–19, HC 1002
124 Qq 731–7
125 Oral evidence taken before the Liaison Committee on 7 February 2018, HC (2017–19) 770, Q 35
126 Serco, Lecture Rupert Soames to Business Services Association 18 June 2018, accessed 12 July 2018
127 Serco, Lecture Rupert Soames to Business Services Association 18 June 2018, accessed 12 July 2018
128 Cabinet Office, Chancellor of the Duchy of Lancaster speech to Reform, 25 June 2018, accessed 12 July 2018
Published: 24 July 2018