Comment and Analysis Masthead

What if? Reflections on Carillion's collapse

Outsource iStock 000007727531XSmall 146x219V. Charles Ward looks at the implications for public procurement of the collapse of Carillion.

Boiler plating is so called because it is intended to cover a situation which is not expected to happen. Such contractual clauses exist because it would be professionally negligent for a solicitor not to include them in a commercial agreement. It is to deal with the ‘what if?’ Even though insolvency is something which happens to other people. Not to a council ‘s carefully chosen development partner. Certainly not to monoliths like Carillion.

They are more often the guarantors of a project. They are the organisations which underwrite the liabilities of their smaller brethren, such as a special purpose joint venture company. Their collapse might previously have been thought unthinkable in terms of job losses, stalled projects, unpaid creditors and its effect on a council’s ability to deliver public services. An example might be the new school which is still under construction but which has to be completed and ready for its first intake of pupils at the beginning of the new school year. So what do we make of Carillion’s new year collapse?

It should not have been a surprise. Carillion had ready issued three profit warnings. The first was issued 10th July 2017 following a £845m write down of contract values, the most problematic being for the construction of the Royal Liverpool University Hospital following the discovery of extensive asbestos and cracks in concrete beams. The immediate consequence of that first profit warning was the stepping down of Richard Howson, Carillion’s Chief Executive. A second Carillion profit warning was issued in September 2017 and a third on November 2017. Since the second September 2017 profits warning and Carillion’s final collapse, its debts had soared 50% to £900m. It also had an estimated £580m pension deficit and its suppliers were waiting more than 120 days to be paid (double the 60 day maximum). Money was owed to more than 30,000 small businesses. What finally triggered its collapse was the banks’ unwillingness to fund a £300m cash-injection needed to keep it afloat and the Government’s refusal to underwrite its losses. But the issue of those profit warnings did not prevent the award of seven more public sector contracts.

Within a week of the 3rd July profit warning, Carillion was awarded two contracts for HS2 worth £1.4bn. Days later it obtained two defence contracts worth £158m for the electrification of the London to Corby rail route. In the wake of the November profits warning Carillion was selected as preferred contractor for two UK school building programmes worth £2.64bn. And these are just the ones we know about. It Is also likely that there were other prospective contracts going through the procurement process and which could have gone to Carillion in spite of its problems. So how could this be?

In trying to guarantee fairness and transparency across public sector procurement, successive European procurement directives have created a system which is as slow, cumbersome and inflexible as it is expensive. Even if the commissioning managers responsible for the award of those seven contracts had last-minute doubts about Carillion’s financial stability, could they have done anything about it? Like a steam train, once a major procurement exercise gathers speed, it may be impossible to stop. Abandoning the process may not even be an option. There may be other critical project deadlines.

The one thing at which Carillion and outsourcing giants have always excelled is in the winning of public sector contracts. It was key to their success. They are the companies with the track record. They are the companies who could demonstrate financial soundness, even if some of those figures later proved to be illusionary. They are also the organisations with the massive resource, experience and expertise required to compete for a major public contract.

Too much of modern public-sector outsourcing is about the simple exchange of an ‘in house’ monopoly for an outsourced monopoly in the belief that this will somehow make the delivery of a back-office service cheaper or better, when the bolder alternative might have been to address head-on those specific issues within the ‘in house’ service which were making it costly and inefficient. Whatever criticisms may be levelled at the private finance initiative, there is at least a tangible product at the end of it, whether that be a new school or hospital.

Although the Public Contracts Regulations 2015 allow a one-stop ‘Open Procedure’, almost all major procurement is a multi-stage process. Organisations expressing interest in a prospective contract must first of all demonstrate that they are financially sound and have the capability to carry out the work for they wish to bid. Bidders’ responses to those questions will be objectively scored against a matrix and a short-list prepared of those bidders invited to the next round. It is not until at least the second stage of the process that the commissioning authority will issue its ‘tender pack’ containing a formal invitation to tender and everything else which a prospective bidder requires to formulate their bid. The commissioning authority is then obliged to give fair and transparent consideration to each of the shortlisted bids and make its award to that considered most ‘economically advantageous’. Again this decision is made objectively by scoring each of the compliant tenders against a matrix. There is little room for discretion as once the commissioning authority has made its decision but before final contract award, each of the invited bidders must be formally notified of the reasons for the award and given an opportunity to challenge before the contract is confirmed. In short, it is a game played by each bidder against every other bidder and the commissioning authority.

The alternative to a full blown tender is for a commissioning authority to purchase off one of the many framework contracts. These are pre-tendered non-contract-specific contractor-panels which any contracting-authority with access to the framework can ‘call off’ for a particular piece of work. There is still a competitive process or ‘mini-tender’ in which any panel contractor deemed capable of carrying out the work must be given fair opportunity to bid. But it is a simplified process. When ‘calling off’ from a framework contract the commissioning authority is also entitled to assume that the relevant financial checks against each individual panel member had been carried out and satisfied at the time that contractor was admitted to the framework-panel up to four years earlier.

Scarcely has the dust settled on Carillion’s collapse, than another outsourcing company (Capita) has issued its own profits morning. It is not like-for-like as Capita and Carillion have always operated in different markets. Even so, this latest announcement does not inspire confidence. Perhaps it is now time to re-think the whole concept of public sector outsourcing.

V. Charles Ward is solicitor and freelance writer with extensive experience in housing regeneration. He can be contacted on 07854 449386.

Charles' latest book ‘Housing Regeneration: a Plan for Implementation’ published through Routledge is due for release February 2018. His earlier books include ‘Legal Profession: is it for you?’ (2017) and ‘Residential Leaseholders’ Handbook’ (2006). For more information, go to Amazon.






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