The liquidation of Carillion will cost UK taxpayers an estimated £148m, the National Audit Office (NAO) has concluded, although it may take several years to ascertain the final cost
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.
But 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. The scale of the profit warning came as a surprise to the government, as it contradicted market expectations and information and commentary that had been provided 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.
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.
In the months following Carillion’s first profit warning, the company announced £1.9bn of new government 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 were 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.
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.”
The full investigation into Carillion is available at www.nao.org.uk.