Carillion chief sent ‘ransom note’ to Cabinet Office two days before collapse
Two select committees back the government’s decision not to bail out outsourcing firm and let it fall into liquidation
The chair of collapsed outsourcing giant Carillion sent a “ransom note” to Cabinet Office just days before the company collapsed seeking £160m of government support to save the firm, MPs have revealed.
In a scathing report where they say that directors of the company were “too busy stuffing their mouths with gold to show any concern for the welfare of their workforce or their pensioners”, the Work and Pensions and Business, Energy and Industrial Strategy select committees backed the government’s decision to turn down Carillion's request for support.
However, the MPs also concluded that successive governments have nurtured a business environment and pursued a model of service delivery that made a collapse like Carillion’s “almost inevitable”, while it has also criticised the Crown Representative system – which assigns civil servants to monitor companies in order to provide updates on their performance – as “semi-professional and part-time” and called for an immediate review.
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Carillion collapsed on 15 January after months of speculation that it was unable to service its debts, and today’s report sets out the timeline of the company’s demise, leading to its liquidation.
According to MPs, Carillion formally approached the government to ask for financial assistance on 31 December 2017, when it became clear that it was a prerequisite of discussions with existing lenders about further support.
Although the government was by that stage involved in discussions with Carillion about its future, the only relief they had granted the company was a deferral of tax liabilities under an HMRC “time to pay arrangement” worth £22m from October.
'Too big to fail'
Discussions between the firm and government continued over the first two weeks of 2018 before the company’s chair Philip Green wrote a final letter to the Cabinet Office on 13 Janaury claiming that Carillion’s closure would “come with enormous cost to HM Government, far exceeding the costs of continued funding for the business”.
He claimed there would be “no real ability to manage the widespread loss of employment, operational continuity, the impact on our customers and suppliers, or (in the extreme) the physical safety of Carillion employees and the members of the public they serve”.
However, this request for up to £160m in guarantees for four months to April was turned down by government, and the committee concluded that ministers were right in arguing that “taxpayers should not, and will not, bail out a private company for private sector losses or allow rewards for failure”.
Following the collapse of the firm, £150m was made available by the government to support the insolvency in 2017-18, as well as an unquantified contingent liability to indemnify the Official Receiver, and public services have been largely unaffected by the firm’s closure, with some provision, such as construction of the HS2 rail lines, moving to partner firms in joint ventures and other aspects, such as prison maintenance, being taken in house by government.
The committee said Green’s “last-minute ransom note” was intended to make government feel Carillion was too big to fail. “But the government was correct not to bail out Carillion,” the report concluded. “Taxpayer money should not be used to prop up companies run by such negligent directors. When a company holds contracts with the government, however, its collapse will inevitably have significant knock-on effects for the public purse. It is simply not possible to transfer all the risk from the public to the private sector.”
MPs noted that there is little chance that the £150m of taxpayer money made available to support the insolvency will be fully recovered.
Audit market review call
BEIS committee chair Rachel Reeves said Carillion’s “delusional directors drove Carillion off a cliff and then tried to blame everyone but themselves”.
However, the committee also highlighted that the firm’s auditors should also be in the dock for failing to insist the company paint a true picture of its crippling financial problems.
“The sorry saga of Carillion is further evidence that the Big Four accountancy firms [KMPG, PwC, Deloitte and EY] are prioritising their own profits ahead of good governance at the companies they are supposed to be putting under the microscope,” Reeves said.
The report highlighted that KPMG was Carillion’s external auditor, Deloitte was its internal auditor, while EY had provided turnaround advice. Although PwC had variously advised the company, its pension schemes and government on Carillion contracts, it was the least conflicted and was named special managers to the insolvency process.
Reeves said this showed that the Official Receiver was seeking to resource a liquidation of exceptional size and complexity as quickly and effectively as possible from an extremely limited pool and called on the Competition and Markets Authority to look at the break-up of these big firms to increase competition and deal with conflicts of interest.
Work and Pensions Select Committee chair Frank Field added that the government urgently needs to come to Parliament with radical reforms to our creaking system of corporate accountability. “British industry is too important to be left in the hands of the likes of the shysters at the top of Carillion,” he added.
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