Carillion’s ex-bosses to face MPs: questions they could answer

Former executives of collapsed government contractor Carillion will face questions on Tuesday from MPs on the work and pension select committee and their counterparts on the business, energy and industrial strategy committee.

The opening evidence session of their joint inquiry will be the first chance to hear former directors answer for their disastrous stewardship of a company that was responsible for providing an array of public services, from serving school dinners to prison maintenance.

Among the witnesses are former chief executive Richard Howson, who stepped down after a profit warning last July and chairman Philip Green – also an adviser to Theresa May on corporate responsibility – as well as three of the company’s former finance chiefs and the chair of the committee that set its pay policy.

The grilling starts at 9.15am at Portcullis House in Westminster. Among the questions that Carillion’s former bosses could face are:

Why did directors not take steps sooner to increase payments to the company’s pension scheme despite the trustees’ pleas?

In a letter to the work and pensions committee, Robin Ellison – who chaired the board of Carillion pension trustees – said he and his colleagues had pushed the company as hard as they could to increase payments to the retirement scheme.

Yet when the firm collapsed, it left behind a £381m scheme deficit that is ultimately expected to saddle the Pensions Protection Fund with a liability of up to £990m, with pensioners likely to see their future payments cut by around 15%. Why were trustees’ warnings not heeded? MPs are also likely to ask about the role of the Pensions Regulator.

Why did Carillion raise its dividend every year including last year when problems must have been building?

As the trustees’ pleas fell on deaf ears, directors were steadily increasing payouts to shareholders right up until the point that the company’s demise was a realistic prospect.

Between 2012 and 2016, Carillion doled out £376m to investors in the form of dividends, yet by the time it collapsed it had just £29m in the bank. Why was action to conserve cash, including trimming dividends or cutting them altogether, not taken sooner and what did KPMG, under investigation by the accountancy watchdog for its auditing of Carillion, have to say about it?

Why did the remuneration committee alter the bonus scheme in 2016 in order to make it more difficult to claw back payments?

There are subtle differences between the company’s 2015 pay rules and the ones published the following year.

In 2015, bonuses were subject to “malus” or “clawback” rules allowing the firm’s remuneration committee to take back payments in a broad range of circumstances. The following year, the rules were changed so that clawback could only be applied if the results were misstated or directors were guilty of gross misconduct.

Did this allow directors to scoop £4m of bonuses that the government’s official receiver could now struggle to reclaim, even if it tries?

What efforts did Carillion make to raise funds from shareholders in the wake of last year’s surprise profit warning?

Rival outsourcer Capita announced a profit warning last month and said it would slash its dividend and tap investors for £700m to shore up its finances. According to the Cabinet Office minister, Oliver Dowden, the company was taking the necessary measures in a timely fashion to avoid becoming the next Carillion.

Why did Carillion’s directors not take similar emergency measures prior to its huge profit warning in July last year that marked the start of the firm’s downward spiral. Did directors not realise that something was seriously wrong before that?

When did the company first receive indications that the its Aberdeen bypass and Royal Liverpool/Midland Met hospital projects were in serious trouble?

Along with contracts in the Middle East, these three major projects were a big part of what went wrong for Carillion. Rising labour and raw material costs on contracts with wafer-thin profit margins make for a potent cocktail, but that didn’t happen overnight.

The company wrote down the value of contracts by more than £1bn over less than six months last year but were there really no early warning signs?

Did Carillion use its dominant market position to force small businesses in its supply chain to wait for months to be paid?

The Federation of Small Businesses has said Carillion was a notorious late payer, often leaving small firms in desperate need of income hanging for more than 120 days.

MPs will want to know whether it did this deliberately to prop up an ailing balance sheet and what that now means for those companies who were still waiting for their bills to be settled when the company went under. Expect questions too about government regulation of prompt payment.

How much contact did directors have with government officials in the aftermath of the July profit warning?

It will be all too tempting for MPs to seek to extract information about a lack of government oversight of Carillion. It might also be tempting for those directors to latch on that narrative to ensure the role of government gets at least as much attention as they do.

The Cabinet Office has admitted that the role of crown representative – appointed to oversee struggling state contractors – was left empty for three months. The committees will want to know how closely Carillion was being watched as it continued to receive government contracts.

Was the company in the habit of underbidding for contracts in order to win them, ultimately rendering those contracts unprofitable?

Many outsourcing experts have expressed frustration with the economics of the industry since Carillion’s collapse.

When companies bid for public sector work, they aim as low as possible to ensure they get the gig. In one example, the Midland Metropolitan hospital, the terms were so unattractive that Carillion ended up as the only bidder.

Another rival has told the Guardian that Carillion was known for making unrealistically low bids to get ahead of its rivals. Why did directors allow this risky strategy?

Is the private finance initiative (PFI) model broken and what could be done to improve it or replace it?

The collapse of Carillion has raised broader questions, from opposition MPs, small businesses and members of the public, about the way public services are farmed out to private companies.

The aim of outsourcing is to reduce the cost to the state by exploiting competition in the private sector to drive down prices. But is there enough competition and are low prices always desirable when they encourage companies to load up on debt and make optimistic assumptions? Is the PFI model beyond repair?

Should the Carillion board take sole blame for the company’s collapse?

Ultimately, the inquiry is about finding out why Carillion collapsed and who is to blame. Directors will shoulder most of the responsibility but they may not want to take it all.

There are certainly questions to be answered about whether banks pulled the plug too soon, whether the government could have provided support to keep the company going and the impact of factors beyond Carillion’s control, such as rising labour and raw material costs, fuelled partly by the national living wage and inflation in the wake of the EU referendum.