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21 April 2018

Carillion squillions (2)

Tag(s): Business
On Monday 15th January, 2018 UK construction Services Company Carillion filed for compulsory liquidation, despite having made a statement on Friday 12th January that they were in discussions with creditors and expected to reach agreement. In their filing with the High Court they revealed debts of £1.5bn including a pension deficit of £587m. That week I had planned to blog about a different subject but a number of regular readers asked me if I was going to blog about Carillion. As it was clearly of great interest, I decided to do so and spent some time researching the case, wrote my blog on Friday 19th and posted it on-line on Saturday 20th.[i] I needed to add a post script as even in that short time things had changed for the worse. Here is that post script.
“PS One of the reasons I wasn’t going to write about this is that I am not a journalist and prefer to work with hard and fast facts. I have done my best researching this blog which I finished writing on Friday 19th in the afternoon. On that evening’s news was a story saying the real debts were over £5bn versus £1.5bn announced to the High Court by Carillion representatives. Similarly the real pension deficit is now reported as £2.5bn versus £587m revealed to the High Court. It will probably take years to get all the facts but I hope my general conclusions remain valid.”
I think they still are but again the numbers were understated. It has now been reported that the Official Receiver, a civil servant appointed by the courts to handle bankruptcies, estimated that Carillion had liabilities of £6.9 billion when it entered liquidation three months ago.
It means the banks, pension funds and many thousand subcontractors owed money by Carillion are most unlikely to recoup much or even any of it. The assets that are due to be sold are expected to realise only a tiny fraction of the total liabilities. As I explained in my first blog, Carillion was primarily a service company, quite light in physical assets.
While accounts had previously revealed liabilities of £2bn at the end of 2016, a letter from the Official Receiver, detailing reports for the 27 UK-based Carillion Construction companies in liquidation, estimated that total liabilities stand at £6,905,532,000.
A spokesman for the Official Receiver is reported to have confirmed the figure, first reported by Construction News, but said that it was “expected to change significantly as assets and debts are fully identified”. [ii]Forgive me if it sounds cynical but I can only expect these revisions to be in the wrong direction.
My first blog on Carillion was the longest I have written. At over 3,000 words it was about double my customary length. But it also triggered the longest reply I have ever received from a long term friend and regular reader who told me of his experiences with the Department for Transport for which he worked for several years as a Non-Executive Director. Let me quote parts of that reply.
Good blog on Carillion, enjoyable read thanks.
There have obviously been failures of management here and mis -statements from the board by the look of it. As you say it will take a while to get to the bottom of it.  A couple of comments for you:
A fact not adequately promoted by the Govt. in the past few days is that in light of previous out-sourcing failures the DfT (see below for an example) has let the HS2 contracts on a JV basis with other contractors. Whilst this adds a degree of extra complexity it does mean that the other contractors have to pick up Carillion’s involvement - so in theory implementation (sic) should not be affected. For example, one section of the HS2 line was let to a JV consortium of three companies, Carillion being one. As early as last September I had a conversation with the project manager about what happens if Carillion goes under and he was pretty clear in his answer. Re implementation, the other contractors would pick up their involvement - ‘in theory' is probably easier to type than to achieve in practice.
Having been involved as a NED at DfT with the Govt. during the Blair / Brown days I had almost first hand experiences of some of the goings on. Brown was being tight with money for modernisation / capital projects and there is no doubt the ministers were keen to see depts. engaging with outside providers to get things moving without having to incur the upfront cost.
A good example is one I have not read about much in the press but was the arrangements for outsourcing improvements and running of computer systems. The one I was most close to was IBM’s involvement with the Driver and Vehicle Licensing Authority (DVLA) for road tax. It was all blissfully simple, contract with IBM for 10 years and they will rewrite all the software, implement improvements and THEY will operate the system, what could go wrong?? Well of course it did, every time there was even the slightest change in detail of the spec, once it came into being IBM whacked in a huge invoice for the changes.
Worse of course was that the new software was IBM’s property and was not open source as such for other DfT systems to latch into. The deal incidentally was done by the then DVLA Chief Executive without it even going anywhere near the DVLA audit & risk committee so was not subject to much vetting. (As the Principal Accounting Officer he had the authority to do this so he did not do anything wrong) . I have to say I felt at the time, having had a number of meetings myself with IBM, that they regarded it as taking candy from a baby.
In terms of linkage to other DfT systems, this is important as other parts of DfT were doing their own thing re computerisation - in a very un-joined up way. The Vehicle and Operator Services Agency (VOSA)[iii] (as it was then called) contracted to Siemens, who wrote the software their own way and had ownership of it and provided the hardware for garages to use. The contract was late and ran over cost like DVLA’s did. The scandal here is that when IBM on behalf of DVLA renewed road tax they had to electronically check with Siemens on behalf of VOSA to make sure the MoT is valid. As systems were different this caused complications but more importantly Siemens then charged IBM, who recharged DVLA 11p every time an ‘enquiry’ was made! So the Govt. ended up paying to check its own data.
All this never hit the headlines outside of Govt. and Civil Servants were happy it didn’t as it revealed management failings by them in allowing such things to happen. In reality the fundamental issue was that they did not have the commercial experience to deal with big corporations like IBM so they took a lot on trust - agency heads tended to be inbred not recruited from outside.
It was because of this that the Permanent Secretary at the time formed some of these Govt. agencies into a ‘group' to try to get some common sense about cooperation. There were some gains but real progress was eventually defeated by changes to the top Civil Servants, with newer ones lacking the will /had other priorities, and the Civil Service structure that made every agency MD reportable to the minister not the ‘Group’ or even the Permanent Secretary. So historical tribalism ruled and the group was frustrated by a lack of will from the agency heads who saw it a threat to their independence. Compounded by the lack of profit motive there was every incentive for each agency to plough its own furrow so to speak.
So, it all adds up to a lack of skills in the govt. to manage outsourcing, perhaps they were as culpable as Carillion managers!”
In my first blog I had said “if the Government is going to award contracts to private firms it needs to improve its procurement function.” My correspondent has provided ample evidence for that need.
This latest news about the vast discrepancies in the levels of debt proves beyond all reasonable doubt that Carillion’s management and its auditors signed off on accounts and statements that were highly misleading at best.  Another correspondent expressed his frustration with their lack of accountability in these matters. I’ll sign off by quoting him:
David, thanks for these insights and reflections - we are so bemused by the politicking that Carillion's downfall has made possible, it's good to read something sensible that pulls some loose ends together and reveals how even more chilling it is than at first sight. My question is always, what can we do (we as ordinary people) to make sure that the perpetrators are properly brought to book? It's not enough, in my mind, to go through a typical DTI-type fitness –to- serve investigation. If we were French, and particularly if we were shareholders, I expect we would be posting rotten fish through their doors..... Best wishes”.

[ii]Collapsed Carillion owed £7bn” James Titcomb. Sunday Telegraph Business News 15th April, 2018
[iii] The Agency that manages the MoT testing.

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