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17 January 2018

Leader: private gain, public loss

The government’s carelessness has deepened the consequences of Carillion’s collapse.

By New Statesman

Until recently, few outside the opaque world of procurement had heard of Carillion. But the construction company, which was placed into liquidation on 15 January, is profoundly immersed in the public realm. As well as providing 11,500 hospital beds and 32,000 school meals, the firm – which employs 20,000 UK workers – was responsible for constructing the High Speed 2 rail link, the Royal Liverpool and Midland Metropolitan hospitals and the Birmingham library. It maintained 50,000 army homes and half of Britain’s prisons and young offenders’ institutions. At the time of its demise, having absorbed other firms including Alfred McAlpine, Mowlem and part of Tarmac, Carillion was responsible for 450 taxpayer-funded contracts.

Though the company’s collapse appeared sudden, it was not. The firm’s market value last year fell from almost £1bn to just £73m, it issued three profit warnings and went through three chief executives in six months. As long ago as 2015, its shares were shorted by investors who exploited its anaemic growth and excessive debt.

In view of this, the government now appears not merely complacent but reckless in continuing to award contracts to the troubled company. On 10 July 2017, Carillion issued its first profit warning, an act which reduced its share price by 39 per cent and led to the resignation of its then chief executive, Richard Howson. A week later, with almost comic timing, the unfailingly inept Transport Secretary, Chris Grayling, awarded Carillion a £1.4bn HS2 contract as part of a joint venture.

The government’s largesse did not end there. On 18 July, Carillion was awarded a £158m contract by the Ministry of Defence to provide “catering, retail and leisure, together with hotel and mess services” at 233 military sites. After its second profit warning in September (which revealed a first-half loss of £1.15bn), the company won a Network Rail contract to electrify the London to Corby line. Finally, three days after Carillion’s third profit warning (and a 48 per cent fall in its share price), the company was handed a £12m schools building contract.

Company failures are an inevitable – and painful – feature of a market economy. But the government’s carelessness has deepened the consequences of Carillion’s collapse. The Business Secretary, Greg Clark, has rightly announced that a statutory investigation into the conduct of the company’s present and past directors will be “fast-tracked”. It would be unacceptable for executives such as Mr Howson (who is still entitled to a £660,000 salary) to privatise the profits and socialise the losses.

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The government’s own conduct must also be probed. The justified suspicion is that, having helped create the Carillion behemoth, ministers awarded contracts to prop up a company that had grown too big to fail (the firm’s chairman, Philip Green, served as an adviser to the government on corporate responsibility).

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Carillion’s fate is a salutary demonstration of the limits of the market. Too often, as in the case of Britain’s railways, the government’s ideological presumption in favour of outsourcing and the private sector leads to avoidable costs and failures. The demise of Carillion should also herald the demise of this ruinous dogma. 

This article appears in the 17 Jan 2018 issue of the New Statesman, Churchill and the hinge of history