An official recommendation that failed outsourcing giant Carillion should be placed in government’s highest risk category for suppliers was not implemented before it collapsed after the company made representations to the Cabinet Office, a committee of MPs has revealed.
The Public Accounts Committee has today published government risk assessments into Carillion following the firm's first profit warning issued in July through to its collapse on 15 January this year.
The committee reveals that its rating, on the Cabinet Office’s red-amber-green traffic light ratings system used to monitor suppliers, was moved from green to amber in March 2016 due to poor performance on the facilities management contracts the firm undertook for the Ministry of Justice. The next generation estate contracts saw Carillion maintain the department’s housing across the country as well as maintenance of the department’s sites in Scotland and Northern Ireland. Both of these were undertaken in a joint venture with fellow infrastructure services firm Amey.
However, it was not until Carillion’s profit warning in July last year that the firm was further downgraded to a red rating, and the committee said “it appears the government was not aware of Carillion’s financial distress until this point”.
The move to red status was due to “potential financial distress under the SSRM [Strategic Supplier Risk Management] policy”, the strategic supplier performance report from the firm’s then crown representative Julie Scattergood, who subsequently left the post in September, stated.
Further reports maintained the company’s red status until a 28 November meeting which proposed marking the firm as a ‘high risk strategic supplier’ under the SSRM framework – a designation known as black status. Just weeks before this on 6 November, Carillion had been awarded £320m-worth of contracts with Network Rail for rail upgrades.
The main grounds for designation as high risk are serious and persistent underperformance on a contract or contracts, and financial distress.
A supplier designated as high risk on grounds of financial distress, must meet with Cabinet Office to discuss “plans to address the relevant issues”, and although it doesn’t mean the firm cannot bid for government contracts, departments are advised by the Cabinet Office to “reduce where possible the extent to which the Strategic Supplier is given additional work under the terms of an existing contract”.
The November report from an unnamed official said that “serious and persistent underperformance by suppliers must be proactively managed and financial distress triggers identified and monitored”.
The designation of Carillion was to be made due to the financial distress indicated by the profit warning in July, and subsequent further warnings in September and November last year.
The report stated that “Carillion will then be invited to make representations to this provisional decision”, following which a final decision would be made by the Commercial Relationships Board in the Cabinet Office on whether to recommend the downgrading for ministerial approval, which is required for the black rating.
In an update published in January just before the firm announced it was to enter liquidation, it was revealed that it was decided on 15 December not to downgrade the company to a black rating. “After considering Carillion’s representations on the matter we considered that it would not be beneficial to HM Government to allocate a high-risk rating at this time,” it stated.
Publishing the documents, PAC chair Meg Hillier said that the risk assessments “provide an insight into the relationship between Government and Suppliers and give rise to many questions we want to pursue”.
She added: “We recognise there are commercial sensitivities around that relationship. We are also alert to the potential impact on jobs and small businesses should certain information be made public. We have been mindful of the workers and businesses who could lose out through no fault of their own if certain information is in the public domain.
The Carillion papers identify “clear and compelling problems with the business in the months leading to its collapse” that government had the opportunity to deal with, she said.
“The fall-out from Carillion’s collapse and the resulting burden on the public purse is still not clear. We will be seeking clarity on these critical matters and probing Suppliers and Government about what they are doing to ensure such a catastrophic failure is not repeated.”
PAC deputy chair Sir Geoffrey Clifton Brown said that the red-amber-green ratings “appear to be too slow and clunky”.
He added: “Profit warnings for Carillion were issued in July and September 2017 and yet a high-risk [black] recommendation to ministers was not made until 29 November 2017. The City, in contrast, knew well before July 2017 that Carillion was in trouble.”
Responding to the report, a Cabinet Office spokeswoman said: “Our priority has been the continued, safe running of public services and to minimise the impact of Carillion’s insolvency. The plans we put in place have ensured this.
"We engaged closely with Carillion's board members for a number of years and this remained the case after the profits warning in July 2017. But it is not right for taxpayers to bail out a private sector company.”
The Cabinet Office will study the reports to see what lessons can be learnt and said profit warnings are not in themselves indications that a company will collapse.