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Carillion liquidation will cost tax-payers £148m

7 June 2018 | By Neil Gerrard

The cost of the liquidation of Carillion to the UK taxpayer has totalled an estimated £148m although it may take years to establish the final cost, according to an investigation by the National Audit Office (NAO).

The NAO warned that in addition to the cost of the liquidation itself, there will also be wider costs to the economy, Carillion's customers, staff, the supply chain and creditors.

Its investigation described how, in early January, Carillion asked the government for a £223m bail-out to help it through to April 2018 and additional support with its financial restructuring.

 Timeline of government actions:

 

  • 10 July 2017: Carillion’s first profit warning.
  • 20 July: Government contingency planning began.
  • 14 September: Government gained access to internal financial information in Carillion.
  • 29 September: Advance warning of the second profit warning prompted the Cabinet Office to express forcefully to Carillion its view that the business has not been open in the past about the seriousness of its position.
  • 29 November: Cabinet Office wrote to Carillion to say it would raise the firm’s rating from red to ‘high risk’.
  • 15 December: Cabinet Office decided not to rate Carillion as ‘high risk’.
  • 31 December: First formal request by Carillion for government financial support.
  • 11 January 2018: Civil service chief executive, Cabinet Office and Chancellor approved the option of a trading insolvency.
  • 14 January: Cabinet Office informed Carillion it would not provide support.
  • 15 January: Carillion’s directors applied to the High Court for liquidation.

Instead, the Cabinet Office decided it was better that the firm enter liquidation because it had "serious concerns" about Carillion's business plans, the legal implications, potentially open-ended funding commitments, the precedent it would set, and the concern that Carillion would return with further requests.

The NAO said the Cabinet Office began contingency planning for the possible failure of Carillion shortly after the company posted its first profit warning on 10 July 2017.

It said the scale of those profit warnings came as a "surprise" to government as it contradicted market expectations and information by Carillion.

Contingency planning accelerated in October 2017 and was completed across central government by 15 January 2018 when the business collapsed, the NAO found.

It described how the Cabinet Office raised Carillion's risk rating from amber to red in response to the July 2017 profit warning but did not put Carillion to the highest rating of "high risk" as it accepted Carillion's argument that it had already received the sensitive financial information such a rating would require and did not wish to risk precipitating Carillion's demise.

Despite the fact that following Carillion's first profit warning, the company announced £1.9bn of new work, including £1.3bn of HS2 contracts. Many of them had been won before the profit warning, although in some cases they were signed or variations agreed afterwards, the NAO found.

It added that none of the contracting authorities believed they had grounds for disqualifying Carillion's contracts under procurement rules, while Carillion's joint venture partners were liable to take over and finish the contracts if Carillion failed.

In the case of Network Rail, the NAO said, not awarding contracts would push costs up and delay work because it would mean re-procuring and redesigning the projects.

At the point of liquidation, Carillion had around 420 contracts with the UK public sector.

The Cabinet Office will pay an estimated £148m on the insolvency, although this is subject to a range of uncertainties, such as the timing and extent of asset sales.

The £148m would be covered by the £150m the Cabinet Office has already provided to help finance the costs of liquidation.

The Cabinet Office said it believes almost all services have continued uninterrupted following liquidation, although work on some construction contracts stopped, including two PFI hospitals.

Meanwhile, 31 of Carillion’s 198 companies are in liquidation. So far, around 64% (11,638) of the Carillion UK workforce have found new work, 13% (2,332) were made redundant, and the remainder (3,000) are still employed by Carillion.

Carillion’s non-government creditors are unlikely to recover much of their investments, and the company’s pension liabilities, totalling £2.6bn as of 30 June 2017, will need to be compensated through the Pension Protection Fund.

Amyas Morse, the head of the NAO, said: "When a company becomes a strategic supplier, dependencies are created beyond the scope of specific contracts. Doing a thorough job of protecting the public interest means that government needs to understand the financial health and sustainability of its major suppliers, and avoid creating relationships with those which are already weakened. Government has further to go in developing in this direction."

Comments

I see from the 2016 annual report it says:

Performance in line with expectations
– Total revenue growth of 14 per cent,
– Underlying operating margin lower as expected at 4.9 per cent
- High-quality order book and strong pipeline of contract opportunities
– £4.8 billion of new orders and probable orders in 2016
– High-quality order book plus probable orders worth £16.0 billion
– Revenue visibility for 2017 of 74 per cent

Actually the profit margin was 2.5% and the accounts are riddled with words like 'underlying' and 'probable' - I wonder if HMG will scrutinise the auditors and ask why they didn't step forward with an alarm...

Peter Dallaway, 7 June 2018

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