NAO Investigation Into UK Government Handling of Carillion Collapse – First Thoughts

The National Audit Office today published  its “Investigation into the government’s handling of the collapse of Carillion”.

It’s worth noting the “investigation” word – as NAO says, “We conduct investigations to establish the underlying facts in circumstances where concerns have been raised with us, or in response to intelligence that we have gathered through our wider work”.

So this is not a report that makes recommendations, rather it is a statement of facts – what, when, and how much, rather than getting into underlying causes or how to stop it happening again. NAO may well at some stage look at those issues, but for now, this is a look at the hard facts.

The good news is that so far the collapse has cost the government less than the Cabinet Office feared it would – “just” some £148 million. The bad news is … pretty much everything else.  Many other stakeholders have lost out though; from staff, to suppliers who won’t get back all the money they are owed, customers who are having to pay premiums to have work continued and so on.

Failings identified by NAO include the lack of a central register of Carillion contracts with the public sector, and unfortunately there was no “crown representative” looking at Carillion for a critical few months last year. But we’re not convinced anything very different would have happened if one had been in place, we should say. Crown reps don’t have magical powers of profitability!

Cabinet Office had raised issues around Carillion paying suppliers late, but it looks like that was pretty ineffectual, and certainly government needs to think about how it could take a tougher and more effective line with big contractors on issues like that.  And the profit warning in July 2017 “was a surprise to the government” – as it was to many, to be fair.

The risk rating for Carillion was raised to “red” by Cabinet Office in September but didn’t hit the highest level before the firm collapsed. There is also the issue around £1.9 billion of new government work that was announced after the profit warning – although again, there are arguments on both sides here in terms of whether that those awards should have happened. “None of the contracting authorities believed they had grounds for disqualifying the bids under procurement rules and in all but one case joint venture partners were obliged to finish the contracts if Carillion failed”.

It does become clear that it was a few large and very unprofitable contracts that brought the firm down. The NAO assessment is interesting here.

“Carillion’s business unit which provided facilities management services to central government was only just profitable (1% operating margin projected in 2017). However, its local government contracts were generally more profitable (13% to 15% operating margin). Set against these were several high-profile PFI projects expected to incur significant losses. In 2017 Carillion faced estimated annual losses of £91 million on its joint venture project to build the Aberdeen bypass, £83 million on building the Royal Liverpool University Hospital and £48 million on building the Midland Metropolitan Hospital…”

You can read the whole report here and we may well come back to it next week and look in more detail at some of the issues raised.


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