2018 02 – Editorial – What A Carry On, Carillion

What A Carry On, Carillion

Carillion, the second largest construction company in the UK, went into liquidation on 15 January, with debts of £900m and a pensions black hole of around £580m.

The giant conglomerate, which carries out government contracts in construction and crucial public services, employs around 20,000 workers, whose jobs are now under threat.  The first of three warnings that the company was in serious trouble occurred in July last year, and yet the government continued to award it multi-billion-pound contracts.  At no point did it deem Carillion to be “high risk” and appoint a “crown representative” to oversee improvements in its performance.  It was simply allowed to carry on as usual.

Carillion’s problem arose in the construction side of the business.  They solved it by not paying what they owed, something the rich can get away with, despite repeated Tory promises to fix this.  Consequently, small businesses and sub-contractors owed money by Carillion (believed to be as many as 30,000 in total) were under pressure from their banks.  Despite having done nothing wrong, they are being required to repay loans and were thus forced to delay payment of wages and in some cases to lay off workers.  In Tory Britain, banks come first and hard-working honest people can lose everything through trusting the wrong people.

Within a few days of the liquidation announcement HMRC and the banks promised to help affected firms by allowing extra time for tax and loan repayments.  This would enable firms to pay workers for an as yet unknown period.  Yet in spite of this promise to help, the future for many businesses remains uncertain.

With over 450 government contracts the Carillion crisis affects large parts of the economy.  When pressed on it by Jeremy Corbyn, Theresa May made the bizarre claim that “the government is not running Carillion; the government is a customer of Carillion”.  She compounded this by asserting that the “taxpayer could not be expected to bail out a private company.” Conveniently forgetting that the taxpayer bailed out the private sector banks.

Carillion’s demise is a sure sign that the company overreached itself, taking on a multitude of contracts that were not beneficial as margins were too tight and the degree of risk had not been priced in.  The government was aware of this and yet encouraged private companies to bid low for public service contracts.  In the case of Carillion, the contracts were outsourced which it was then unable to control.

Labour urged the government to be ready to bring crucial public service contracts, such as for hospitals, prisons and schools, back in-house.  Other public services that are potentially affected include train cleaning services and security at immigration centres.  In Parliament Jeremy Corbyn described the Carillion crisis as a “watershed” and said that it is time to show private contractors the door.

It is claimed that under these contracts risk is transferred to the private sector.  Yet when contracts fail there is no risk to the executives who keep their high salaries and bonuses.  For example, Richard Howson, Carillion’s former chief executive, was handed a payoff, including bonuses, of £1.5m in 2016, even after the first warning signs of a potential crisis began to show.  Yet he still continued to work for the company for a substantial part of 2017.  And Carillion continued to pay out shareholder dividends and bonuses to Executive Officers at the expense of pension contributions, which were delayed until 2019.  So no risk to them.

The risk is borne by the workers who lose their jobs and have their pensions reduced.  Ultimately it may be borne by the taxpayers who, through the government, step in with a rescue package.  This is because crucial services such as hospitals and schools cannot be allowed to fail.  It is time to stop the privatising of profits and the socialising of risks.  We should no longer tolerate situations where companies reap profits in good times and offload losses when they fail.

Labour has said that it will reverse the presumption in favour of outsourcing and carefully examine every contract to ascertain whether the public sector could provide a quality service more effectively and efficiently.  (It can do so at a lower cost to the taxpayer as the government can borrow more cheaply than any private company).  Specifically, in government, Labour will introduce tougher rules for PFI and outsourced contracts.  Private firms with public contracts would be designated “high risk” if they fail a number of tests.  These include prompt payment of suppliers, a lower pay ratio within the company, and tax compliance.  Where companies fall short of these standards, their contracts would either be brought back “in-house” or retendered to another company.

Labour’s opposition to the Private Finance Initiative (PFI) was given a boost by the revelations in a recent report by the National Audit Office.  The report found that taxpayers will fund private contractors to the tune of £200bn for the next 25 years under private finance deals.  It also showed that there was little evidence that government investment in more than 700 existing projects had delivered financial benefits.  And, alarmingly, it said that the government has no means of measuring whether PFIs are value for money.

At a Prime Minister’s Questions session Theresa May accused Labour of being ideologically opposed to the private sector per se and specifically its involvement in the provision of public services.  She reminded Corbyn that the previous Labour government entered into numerous PFI contracts.  Corbyn opposed the Blair/Brown government’s enthusiasm for PFI and outsourcing, but he failed to remind Theresa May of this.  The PFI was introduced by the Major government in 1992 and experience of it was limited.  Now, with a little over 25 years’ experience, we know it simply doesn’t provide value for money.

May is constantly looking for positive headline news to turn attention away from her weak leadership.  Last month she hit the headlines with a promise to deal with the problem of grossly unequal pay.  A popular policy adopted by Corbyn’s Labour party.  Writing in the Observer on 21 January she said, “by this time next year, all listed companies will have to reveal the pay ratio between bosses and workers.” Is that it?  Will it be voluntary or mandatory to do so?  And how will a mere revelation of pay ratios redress the problem of grossly unequal pay?

A report from the High Pay Centre, an independent non-party think tank, provides her with all the evidence she needs to follow up her fine words with firm action.  It revealed, for example, that in January 2018 FTSE100 Chief Executive Officers took home more in three days than an employee earns in a year.  As private sector business is a large donor to the Conservative party, May will have to show enormous determination and strength, greatly lacking in her so far, if she is serious about tackling this problem.

The problem of grossly unequal pay, the threat of job losses in private companies, and other related issues, could be challenged by a worker representative on the board of these companies.  Last year, in one of her inspired moments, Theresa May proposed such a policy, which she quickly backtracked on and then shelved altogether.  At the time Labour failed to attack May for reneging on her promise.

Labour and the unions have been silent for far too long on an issue that needs to be addressed urgently.  The TUC have shown the way on this, publishing firm proposals for worker representation on company boards.* It is time Labour and the unions followed suit, for as long they duck the question, business will continue to hold the upper hand.  Workers on the boards of large and medium size companies should be an integral part of Labour’s plans for the reform of corporate governance and the draconian employment laws.  At the very least they would have been able to scotch the pillaging of the pension fund at the expense of undeserved dividends for shareholders.  They might also have been able to question the role of the ‘big 4’ accountancy firms covering up dubious business practices by Carillion.


*ALL ABOARD Making worker representation on company boards a reality.  TUC.  September 2016.