Government let slip chance to retrieve £364m from Carillion

The government knew of a plan that could have retrieved more than £360m from Carillion, limiting the cost of its collapse to taxpayers and sparing pension scheme members from cuts to their retirement payouts, but did not encourage directors to pursue it.

Multiple sources told the Guardian that the Cabinet Office, responsible for oversight of government contractors, did not apply any pressure on Carillion’s directors to adopt the proposals, presented by accounting firm EY in mid-December last year.

EY’s plan would have involved breaking up the company, selling the profitable parts and placing the rest into liquidation, avoiding an involuntary collapse.

The accounting firm believed this would generate £364m, of which £218m could be injected into the firm’s 13 pension schemes, estimated to have a deficit of close to £1bn.

One source familiar with the company’s final weeks said this could have prevented some of the schemes entering the Pension Protection Fund (PPF), an outcome that will reduce the amount that many of its 27,500 members receive in retirement.

A spokesperson for the former directors admitted last week that they rejected EY’s plan, believing they could still engineer a turnaround by convincing banks to swap some of their debt for stakes in the company.

Several sources have confirmed to the Guardian that the Cabinet Office also saw EY’s calculations but did not put any pressure on Carillion directors to pursue it.

EY drew up two scenarios, an involuntary insolvency that would leave little cash to pay creditors, pensioners and the administrators, or the break-up plan that could have raised £364m.

“Both options were communicated to government, the company’s lenders and pension trustees at the time,” said the former directors’ spokesperson.

The Cabinet Office confirmed it had seen the options presented by EY but declined to comment on how it responded.

But the Guardian understands that government officials, who were holding weekly meetings to monitor Carillion’s health, did not believe it appropriate to offer business advice to directors.

A source who was present at discussions between the company, government and the pension trustees said: “I think they [the government] thought that if they could get to the end of January, they could find new finance and the company would survive, maybe in a different structure.

“I don’t think they thought it would go bang.”

Q&A

What went wrong for Carillion?

Carillion relied on major contracts, some of which proved much less lucrative than it thought.

Earlier this year it slashed the value of them by £845m, of which £375m related to major public-private partnerships (PPPs) such as Royal Liverpool University hospital.

As its contracts underperformed, its debts soared to £900m.

The company needed a £300m cash injection, but the banks that lent it money refused to put more in.

The government also refused to step in and bail the firm out.

That left the company unable to continue trading and forced it to go into liquidation.

Photograph: Tolga Akmen/AFP

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The source added that there was no certainty that EY’s plan would have worked but admitted that if it had, some pension schemes could have stayed out of the PPF, which would have incurred a lower liability.

He added that it could also have lowered the expense borne by taxpayers, who have so far spent £50m out of £150m set aside by the government to pay for Carillion’s liquidation process.

Jon Trickett, the shadow minister for business and the Cabinet Office, said: “This is astonishing. They [the government] were asleep on the job, the question is why.

“The first explanation is a blind ideological commitment to outsourcing, that private is always better than public even when it’s blindingly obvious that the public sector needs to intervene. The second is that they’re preoccupied with infighting over Brexit.

“The public purse, the staff, recipients of Carillion’s services and the pension fund are all suffering as a consequence of public failure.”

Quick guide

All you need to know about Carillion

What was Carillion?

The Wolverhampton-based firm was second only to Balfour Beatty in size.

It was spun out of the Tarmac construction business in 1999 and steadily took over rivals, such as Mowlem and Alfred McAlpine. It expanded into Canada and built a construction arm in the Middle East.

Carillion then diversified into outsourcing, taking on contracts such as running the mailroom at the Nationwide building society to helping upgrade UK broadband for BT Openreach. It took over running public service projects, ranging from prison and hospital maintenance to cooking school meals. In 2017 a third of its revenue – £1.7bn – came from state contracts. It employs 43,000 people, with more than 19,000 in the UK.

Notable construction projects

• GCHQ government communications centre in Cheltenham (2003)

• Beetham Tower, Manchester (2006)

• HS1 (2007)

• London Olympics Media Centre – now BT Sport HQ (2011)

• Heathrow terminal 5 (2011)

• The Library of Birmingham (2013)

• Liverpool FC Anfield stadium expansion (2016)~

• Midland Metropolitan Hospital in Smethwick (due 2019)

• Aberdeen bypass (due 2018)

• Royal Liverpool University Hospital (due 2018, behind schedule)

Government contracts

• NHS – managed 200 operating theatres; 11,800 beds; made 18,500 patient meals a day

• Transport – “smart motorways” to monitor traffic and ease congestion; work on HS2; track renewal for Network Rail; Crossrail contractor

• Defence – maintained 50,000 armed forces’ houses; a £680m contract to provide 130 new buildings in Aldershot and Salisbury plain for troops returning from Germany

• Education – cleaning and meals for 875 schools

• Prisons – maintained 50% of UK prisons.

Photograph: Christopher Furlong/Getty Images Europe

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Gail Cartmail, the assistant general secretary at trade union Unite, said: “The government’s catalogue of failures with regards to Carillion is growing by the day. By failing to ensure an orderly break up of Carillion they have cost the taxpayer millions of pounds in insolvency costs and redundancy payments.

“It also meant that sub-contractors continued to provide goods and services to Carillion which they will never be paid for which has resulted in workers losing their jobs and companies going to the wall.

“This is yet another reason why we need a full public inquiry into Carillion’s collapse so that all the relevant information is placed in the open and those responsible for this terrible mess are named and shamed.”

Fresh revelations about the government’s failure to act come a day after MPs conducting an inquiry into Carillion’s demise released evidence they said indicated “gross failings of corporate governance and accounting”.

MPs on the business committee and their counterparts on the work and pensions committee published a report that was commissioned in September by banks that were considering lending the company more money.

The report warned that Carillion was facing a financial crisis after suffering major losses on key projects in the UK, Canada and the Middle East, accusing it of “overstatement” of profits on the contracts. Less than four months later, Carillion collapsed into liquidation, a process that has cost taxpayers £50m, triggered 1,400 redundancies and threatened the survival of thousands of firms in the company’s supply chain.

Written by business advisory group FTI, the report highlighted accounting practices designed to “enhance the reported profitability and net debt position” of Carillion, rather than dealing with its underlying practices. These included deferring payments, bringing forward receipts from contracts and accepting short-term loans from joint-ventures.

“The group has been poorly managed for a considerable period during which time significant underperformance and contract issues have been masked by aggressive accounting,” FTI said.

It accused the company of accepting large contracts too quickly and on “inappropriate” terms, in order to secure upfront payments and report large contract wins. It said Carillion compensated for its failure to convert its reported profits into genuine cash by racking up ever higher debts.

When confronted with FTI’s findings, the company’s management said they believed the assessment was too harsh, according to the report. But FTI insisted its report was balanced and did not even represent a “worst case” scenario, adding that lending Carillion any more money would be “extremely high risk”.