tag:theconversation.com,2011:/au/topics/carillion-48724/articlesCarillion – The Conversation2023-07-03T16:13:44Ztag:theconversation.com,2011:article/2089692023-07-03T16:13:44Z2023-07-03T16:13:44ZCarillion ex-director gets banned for 11 years – here’s what it means for people whose companies get wrecked<figure><img src="https://images.theconversation.com/files/535342/original/file-20230703-252214-v5vyxp.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Zafar Khan, the former finance director, has been disqualified. </span> </figcaption></figure><p>Zafar Khan, the former finance director of collapsed mega-contractor Carillion, <a href="https://news.sky.com/story/former-carillion-finance-chief-khan-handed-11-year-boardroom-ban-12913891">has been banned</a> from being a company director for 11 years. It is the longest ban imposed on an executive of a listed company by the Insolvency Service (IS) in <a href="https://find-and-update.company-information.service.gov.uk/disqualified-officers/natural/WxN6yHxmmFemS948HJJaHj5EIG0">60 years</a>, raising the prospect of lengthy bans for <a href="https://theconversation.com/carillion-move-to-disqualify-directors-signals-uk-authorities-getting-tougher-on-corporate-wrongdoing-153390">seven other former directors</a> being pursued in relation to the collapse. </p>
<p>Khan, 54, is a former Ernst & Young accountant who joined Carillion’s senior finance team in 2011. He was promoted to chief financial officer in August 2016, replacing the long-serving Richard Adam, though he <a href="https://www.reuters.com/article/carillion-cfo-idUSL5N1LS0QD">only remained</a> in post for nine months as the company’s financial troubles prompted a boardroom clear-out.</p>
<p>Carillion then collapsed in 2018, putting thousands of staff out of work and leaving debts of <a href="https://www.ft.com/content/94c89c70-f8fb-4867-a283-4a8a151060ad">around £7 billion</a>, including a pension deficit in excess of <a href="https://www.thepensionsregulator.gov.uk/en/document-library/enforcement-activity/regulatory-intervention-reports/carillion-group-regulatory-intervention-report">£1 billion</a>. </p>
<p>The <a href="https://www.gov.uk/government/news/former-director-of-carillion-banned-for-11-years">government said</a> that Khan’s disqualification was for several reasons, including causing the company to rely on “false and misleading information” that led to a material misstatement of profits in various projects to the tune of at least £209 million. He also sanctioned a £54 million dividend payment that couldn’t be justified because it was based on financial statements that did not give a fair view of the company’s position. </p>
<p>Khan has yet to respond to the announcement. The fact that only his disqualification has been announced suggests that he may have reached an agreement with the IS, perhaps in exchange for a lighter punishment. The remaining directors, including former chief executives Richard Howson and Keith Cochrane, as well as Richard Adam, are due at the high court later this year to defend the IS’s disqualification actions against them. </p>
<p>Khan, Howson and Adam have <a href="https://www.fca.org.uk/news/press-releases/fca-publishes-decision-notices-carillion-plc-liquidation-and-three-its-former-executive-directors#:%7E:text=In%20the%20three%20individuals'%20Decision,former%20finance%20director)%20%C2%A3154%2C400.">also been fined</a> a total of almost £1 million by the Financial Conduct Authority for issuing misleading statements to investors about Carillion’s finances. They are <a href="https://news.sky.com/story/former-carillion-finance-chief-khan-handed-11-year-boardroom-ban-12913891">reportedly appealing</a> – again, it will be interesting to see whether this still includes Khan. </p>
<h2>The scale of the wreckage</h2>
<p>Carillion was created in 1999 after being spun off from construction group Tarmac. It mainly built and operated government buildings and infrastructure, and appeared to be in good health for much of its corporate life. </p>
<p>It was hard to see how the company could suffer from liquidity issues, particularly when it reported a record annual dividend of <a href="https://publications.parliament.uk/pa/cm201719/cmselect/cmworpen/769/76903.htm">£79 million</a> as recently as 2017. </p>
<p>However, Carillion’s fall from grace was swift and dramatic. On January 15 2018 it was placed into compulsory liquidation by the high court, the biggest of its kind in UK legal history. </p>
<p>As well as the loss of jobs, this had huge ramifications for Carillion’s many ongoing building projects, including schools, hospitals and roads – not to mention a facilities management business providing, amongst other things, school meals to children.</p>
<p>The government’s Official Receiver was put in charge of the liquidation, but <a href="https://www.pwc.co.uk/services/business-restructuring/administrations/carillion.html">appointed PricewaterhouseCoopers</a> (PwC) to help oversee the process. This has involved things like completing schools and motorways, transferring hospital jobs and numerous contracts. PwC has earned <a href="https://www.accountancyage.com/2018/06/07/pwc-to-net-50m-from-carillion-insolvency/">more than £50 million</a> in fees as a result. </p>
<p><a href="https://www.thepensionsregulator.gov.uk/en/document-library/enforcement-activity/regulatory-intervention-reports/carillion-group-regulatory-intervention-report">Meanwhile</a>, the 27,000 members of Carillion’s defined benefit pension scheme have seen their pensions reduced, and roughly 30,000 suppliers are likely to have lost most of the billions of pounds owed to them by the company. </p>
<p>The collapse initially triggered <a href="https://www.independent.co.uk/news/business/news/carillion-collapse-cost-taxpayers-148m-national-audit-office-report-a8386486.html">investigations</a> by the <a href="https://www.nao.org.uk/report/investigation-into-the-governments-handling-of-the-collapse-of-carillion/">National Audit Office</a> and by several <a href="https://publications.parliament.uk/pa/cm201719/cmselect/cmworpen/769/769.pdf">parliamentary committees</a>. The parliamentary findings did not mince their words, finding that the directors “misrepresented the reality of the business”. </p>
<p>The report described the company’s collapse as, “a story of recklessness, hubris and greed … its business model was a relentless dash for cash”.</p>
<h2>The state of play</h2>
<p>There have been previous high-profile actions against directors. The directors of the <a href="https://www.gov.uk/government/news/mg-rover-s-phoenix-four-disqualified-as-directors">failed MG Rover group</a> were disqualified for between three and six years in 2011, while the IS brought an unsuccessful case against the trustee directors of the <a href="https://theconversation.com/kids-company-why-the-insolvency-watchdog-wants-former-childrens-charity-directors-disqualified-89203">Kids Company</a> charity <a href="https://www.civilsociety.co.uk/news/kids-company-directors-win-high-court-case.html">in 2021</a>.</p>
<p>The difference with Carillion is that the directors face longer bans, and now the former finance director of all people has accepted the punishment instead of waiting for the court hearings. It may indicate that he agrees that the evidence is sufficient to show that he behaved in an unfit manner as a director. </p>
<p>It looks as though the IS has stuck to its guns over Carillion and is potentially heading for a significant success in its efforts to ensure that directors of listed companies do not see themselves as immune from the consequences of poor management decisions. </p>
<p>It hopefully sends a signal that the government is serious about punishing corporate wrongdoing. The big question now is what happens with the rest of the directors.</p><img src="https://counter.theconversation.com/content/208969/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Tribe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Former finance director Zafar Khan is the first of the Carillion directors to receive a punishment for his part in the collapse.John Tribe, Senior Lecturer in Law, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1954002022-11-29T13:58:13Z2022-11-29T13:58:13ZPFI at 30: it’s hard to say anything positive about this deeply flawed financing model<p>It was Norman Lamont who first announced a new way of paying for public buildings and infrastructure in November 1992. In a <a href="https://api.parliament.uk/historic-hansard/commons/1992/nov/12/autumn-statement">speech to the House of Commons</a>, the then chancellor of the exchequer said he was looking to encourage more private financing for such projects. </p>
<p>Speaking only a few weeks after the government had been rocked by <a href="https://theconversation.com/why-black-wednesday-still-matters-it-was-the-start-of-markets-telling-politicians-what-to-do-190471">Black Wednesday</a>, he reassured the house he would “ensure that sensible investment decisions are taken whenever the opportunity arises”.</p>
<p>So began the era of private finance initiatives (PFIs), which saw more than 700 contracts signed off in the UK until the <a href="https://commonslibrary.parliament.uk/goodbye-pfi/">government stopped</a> doing them in 2018. They <a href="https://www.gov.uk/government/publications/private-finance-initiative-and-private-finance-2-projects-018-summary-data">produced projects</a> with assets worth approximately £60 billion, which are costing the taxpayer £170 billion – that’s a gap of £110 billion between what the assets are worth and what the taxpayer is paying for them. </p>
<p>So now that PFI has reached its 30th anniversary, how should it be remembered?</p>
<h2>What they are</h2>
<p>PFIs have paid for everything from roads to bridges to schools to hospitals, not to mention military training facilities, water and waste projects, sports facilities and prisons. Transport projects came first, such as the <a href="https://nation.cymru/news/a-u-turn-on-tolls-the-severn-bridge-pledge/">Severn River crossings</a> and the <a href="https://clok.uclan.ac.uk/22711/7/22711%20AAM.pdf">M6 Toll Road</a>. A refurbishment of some <a href="https://www.nao.org.uk/reports/innovation-in-pfi-financing-the-treasury-building-project/">HM Treasury buildings</a> was another early project, and was often cited by Conservative ministers as evidence of the Treasury’s belief in these schemes. </p>
<p>Generally PFIs – or public-private partnerships (PPPs), as they are sometimes known – involve a consortium of private companies financing, building, maintaining and operating assets for 25 to 30 years. Once operational, the public body effectively makes leasing payments to the lead contractor – subject to the assets being available and meeting key performance indicators. </p>
<p>The Treasury persistently claimed, at least initially, that this link between payments and performance would ensure the private sector bore most of the risks. By putting these experts in charge, it was argued that project management would improve. This was going to lead to more and better infrastructure, delivering value for money for taxpayers. </p>
<h2>Rhetoric vs reality</h2>
<p>PFI has certainly seen many infrastructure projects completed and facilities modernised which would not have been possible under traditional public procurement. But as far as the supposed benefits are concerned, the evidence suggests a disconnect between political rhetoric and reality. </p>
<p>Borrowing costs are one unavoidable problem, since contractors will most likely have a lower credit rating than the government. These costs get passed on to the taxpayer, which has constrained what authorities <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/j.1468-0408.2010.00508.x?casa_token=67XC3f19J0IAAAAA%3A52iVpXX-HAZygSfwWE7LXdHdKHFkEMXnMYgBi3wNMpahaeMetcMgSgKCreHZN_anN355yLgs7w-slxtI">such as the NHS</a> can spend on essential services, forcing them to reduce budgets accordingly. It also created <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/1467-923X.12990?casa_token=X17PTYGqWeUAAAAA%3AqMfhidbEmqwkcgTRc3sNCFDlZy4eiitOzQodVVPur-cM9hY4bFrd3N4Wt1naWqAFwE3xc9h0DiPl8hY4">pressure to reduce</a> project costs, leading to poorer infrastructure. </p>
<p>There’s evidence from PFIs in <a href="https://www.researchgate.net/profile/Jane-Broadbent/publication/238789662_Nature_Emergence_and_the_Role_of_Management_Accounting_in_Decision_Making_and_Post-Decision_Project_Evaluation/links/00b49528dcb0c11e93000000/Nature-Emergence-and-the-Role-of-Management-Accounting-in-Decision-Making-and-Post-Decision-Project-Evaluation.pdf">health</a> and <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/padm.12401?casa_token=tBI96iHYGo0AAAAA%3APAeIf5nkMMUdLgpKmnarEQQHgEJPesRcpEPccK86i0o0K-aOhrlQOd8Ju_2v5ux6f5gFSmDWCE29_2QH">roads</a> that performance-based payments don’t incentivise contractors. The financial incentives are often inadequate, since they form only a small portion of leasing payments, and it’s difficult to develop key performance indicators for long projects anyway. </p>
<p>There are also endless issues around asset risks. With schools, for example, <a href="https://www.sciencedirect.com/science/article/pii/S0890838914000031?casa_token=Uw2ZBlOFgD0AAAAA:WJG1mGN9MhTWZSToEfuhX66bzc3BG7TWjV9x6CXiBRPbFDlKs6aesAeg4vongNYgflyY3OFsfTU">empirical studies</a> highlight inherent complexities and subjectivity in how risks were allocated. According to this research, public authorities and their financial advisers could “manipulate” accounting numbers to make it look as though more risk was being transferred than was necessarily the case.</p>
<p>High returns earned by private investors also suggest departments were overpaying for transferring project risks. For example, equity returns in the M25 motorway project <a href="https://publications.parliament.uk/pa/cm201719/cmselect/cmpubacc/894/89405.htm">were approximately 30%</a> – mkore than double the expected annual returns in PFIs.</p>
<p>Another issue is the difficulty in foreseeing and estimating all risks over a project’s lifetime. For example, the mid-1990s PFI contract for modernising the National Insurance Recording System (NIRS-2) experienced multiple delays and renegotiations during the pre-contract stage on account of uncertainties around future IT requirements. The Inland Revenue <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1468-0408.00139?casa_token=ApoSFT6hNYsAAAAA:hiYpSdNpN8zS4PE8eG0HjmaqCCYARWjOvMlIzwgZ-ZvIKSngxf9ryNvAfX5E21PQizv0U-EkXStxik4">reportedly received</a> only limited compensation from the contractors for these delays, yet did not take further action to avoid prejudicing “the partnership relationship”. </p>
<p>Sometimes failures to estimate risks helped to push contractors into bankruptcy. The classic example is <a href="https://eprints.keele.ac.uk/4909/1/I%20Demirag%20-%20Sourcing%20public%20services.pdf">Carillion in 2018</a>, whose collapse was partly due to problems with <a href="https://www.theguardian.com/business/2020/jan/15/carillion-collapse-two-years-on-government-has-learned-nothing">PFI hospital contracts</a> in Birmingham and Liverpool. Similarly with the <a href="https://www.nao.org.uk/wp-content/uploads/2009/06/0809512es.pdf">London Underground</a> modernisation in the early 2000s, poorly foreseen costs caused contractor collapses. The incomplete project reverted to the government, costing taxpayers <a href="https://www.centreforpublicimpact.org/case-study/london-undergrounds-failed-ppp">billions of pounds</a>.</p>
<h2>Future concerns</h2>
<p>These difficulties help show why the UK government ultimately scrapped PFI. It had also found it more difficult to make austerity savings in the 2010s because of PFI payments, while unfinished projects such as the <a href="https://www.cityam.com/carillion-two-years-on-misery-as-major-hospitals-in-liverpool-and-birmingham-still-unfinished/">Birmingham and Liverpool</a> hospitals involved in the Carillion collapse produced waves of negative publicity. </p>
<p>Meanwhile, existing contracts remain a concern. Leaving aside leasing costs, <a href="https://www.nao.org.uk/report/managing-pfi-assets-and-services-as-contracts-end/">one critical issue</a> is contracts expiring at the end of their lifetimes. PFI holding companies aren’t required by law to to disclose much financial information, so there are unknowns around the state of <a href="https://committees.parliament.uk/publications/5144/documents/50775/default/">many assets</a>. Some could be passed on to the public in poor condition, and services could be disrupted as a result. </p>
<p>A <a href="https://committees.parliament.uk/work/921/managing-the-expiry-of-pfi-contracts">recent parliamentary review</a> pointed to uncertainties around funding to help better manage the expiry of contracts. The review also found an absence of clear guidelines for contract expiry in some of the oldest contracts (meaning the ones due to expire soonest), and limited trust between procuring authorities and their contractors. </p>
<p>The government’s Infrastructure and Projects Authority <a href="https://www.gov.uk/government/publications/preparing-for-pfi-contract-expiry">recently published guidance</a> for procuring authorities around contract expiries, but said nothing about making available technical, commercial, financial or legal expertise. Authorities will need to organise this in-house, raising the prospect of hiring expensive private consultants with taxpayers’ money. </p>
<p>Three decades after PFI launched as a “sensible” form of infrastructure investment, it’s <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752173/PF2_web_.pdf">now seen</a> by the government’s Office for Budget Responsibility as a fiscal risk. This is both because PFIs have been allowed to remain off the government’s balance sheet and because the risks often revert to the government if a contract fails. </p>
<p>PFI may have seemed sensible on paper, but successive governments <a href="https://link.springer.com/chapter/10.1007/978-3-030-72128-2_11">appear to have</a> implemented it to make projects happen faster, often to score political points. To make the best of a bad situation, changing the rules around the financial reporting of PFI holding companies and making sufficient resources available to manage asset handovers to public authorities would be a step in the right direction</p><img src="https://counter.theconversation.com/content/195400/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Yes it got many things built, but the legacy is fairly disastrous.Salman Ahmad, Lecturer in Accounting, Aston UniversityCiaran Connolly, Professsor of Accounting, Queen's University Belfastistemi demirag, Professor of Accounting, Tallinn University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1646082021-07-21T15:04:29Z2021-07-21T15:04:29ZThe future of auditing: why plans to sharpen up the industry could actually make it worse<p>Following the collapses of <a href="https://www.bbc.co.uk/news/business-46965761">Patisserie Valerie</a>, <a href="https://www.theguardian.com/business/2020/jan/15/carillion-collapse-two-years-on-government-has-learned-nothing#:%7E:text=The%20demise%20of%20Carillion%20was,sales%20of%20%C2%A35.2bn.">Carillion</a> and <a href="https://www.bbc.co.uk/news/business-36175250">BHS</a>, the auditors were heavily criticised in the media for signing off on the financial accounts published by each of these companies ahead of their demise. </p>
<p>PricewaterhouseCoopers <a href="https://www.accountancyage.com/2018/06/13/pwc-fined-a-record-10m-over-bhs-audit-while-senior-partner-faces-15-year-ban/">was fined</a> a record £10 million by the Financial Reporting Council (FRC) over BHS, and accepted there had been “serious shortcomings with this audit work”. KPMG is <a href="https://news.sky.com/story/kpmg-inches-towards-settlement-with-audit-regulator-over-carillion-collapse-12249933">reportedly heading</a> for a considerably bigger fine over Carillion, and is being sued by the receivers for a <a href="https://news.sky.com/story/carillion-liquidator-advances-250m-claim-against-auditor-kpmg-12339979">reported £250 million</a> over alleged auditing failures. Meanwhile Grant Thornton is being sued <a href="https://www.thetimes.co.uk/article/grant-thornton-fights-back-on-patisserie-valerie-5z2xxqtfh">for £225 million</a> by the liquidators of Patisserie Valerie for alleged auditing negligence, though it will “continue to rigorously defend the claim” on the basis that they contend in court documents that the auditors were deceived by allegedly fraudulent directors. </p>
<p>Far from being isolated cases, the FRC <a href="https://www.frc.org.uk/news/july-2020/results-of-frc-audit-inspections">found in 2020</a> that one-third of audits inspected were sub-standard. The industry watchdog <a href="https://www.cityam.com/audit-watchdog-admits-it-was-not-up-to-the-job-amid-major-company-collapse/">also concedes</a> that in the 2010s, it was “asleep at the wheel” over auditing. </p>
<p>To rebuild trust, the UK government is proposing 150 reforms in <a href="https://www.gov.uk/government/consultations/restoring-trust-in-audit-and-corporate-governance-proposals-on-reforms">a weighty consultation</a> that closed recently. Building on <a href="https://www.mondaq.com/uk/audit/776422/kingman-review-the-future-regulation-of-financial-reporting#:%7E:text=The%20Kingman%20Review,-The%20Review%20recommends&text=Introduce%20a%20regime%20for%20the,by%20a%20range%20of%20sanctions%3B&text=Work%20towards%20publishing%20all%20individual,Audit%20Quality%20Reviews%20(AQRs)%3B">three recent</a> independent <a href="https://www.cgi.org.uk/knowledge/the-brydon-review-published#:%7E:text=The%20Brydon%20Review%20goes%20further,%2C%20including%20the%20financial%20statements.%E2%80%9D">reviews into</a> the <a href="https://www.gov.uk/government/news/cma-recommends-shake-up-of-uk-audit-market">profession</a>, the FRC <a href="https://www.accountancydaily.co/more-powers-audit-regulator-arga-plans-take-shape">is to be replaced</a> by a new body called the Audit, Reporting and Governance Authority (Arga). For the first time, Arga will be able to seek damages and even jail terms for directors who break the rules. </p>
<p>At the heart of the consultation is the idea of “public-interest entities” or PIEs, meaning organisations where the public has a particular interest in them being run properly. Originally introduced <a href="https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32006L0043">by the EU</a> in 2006, PIEs must follow the most stringent standards for financial reporting, including an annual audit.</p>
<p>Until now in the UK, only lenders, insurers and large listed companies have been in this category. But the consultation would extend PIEs to include smaller listed companies, charities, universities, NHS trusts, housing associations and even some local authorities.</p>
<p>This is a major wrong turn. Subjecting these groups to the toughest financial reporting standards and full scrutiny from Arga is going to have a very negative impact on the UK economy. It will potentially hurt everyone from employees to suppliers to customers to investors. </p>
<h2>PIEs and perverse consequences</h2>
<p>The new proposed scope of PIEs is listed companies with more than 2,000 employees or annual turnover greater than £200 million and a balance sheet of greater than £2 billion, and any companies (listed or non-listed) with more than 500 employees and a annual turnover over £500 million. <a href="https://www.cityam.com/beis-urged-to-set-out-implementation-timetable-for-sarbanes-oxley-style-audit-reform/">Up to 2,000</a> more organisations will qualify <a href="https://www.accountancyage.com/2021/06/30/beis-audit-reforms-could-bear-huge-unintended-consequences-market-warns/">than before</a>. </p>
<p>For one thing, the audit market is likely to see exponential growth to meet this demand. The <a href="https://www.accountancyage.com/rankings/top-5050-top-15-audit-firms/">big four firms</a> are too powerful already and arguably need to be broken up: this windfall will only make things worse. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/412170/original/file-20210720-25-1i1jqbk.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Three auditors at a desk" src="https://images.theconversation.com/files/412170/original/file-20210720-25-1i1jqbk.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/412170/original/file-20210720-25-1i1jqbk.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/412170/original/file-20210720-25-1i1jqbk.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/412170/original/file-20210720-25-1i1jqbk.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/412170/original/file-20210720-25-1i1jqbk.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/412170/original/file-20210720-25-1i1jqbk.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/412170/original/file-20210720-25-1i1jqbk.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Proposals to rein in auditors will actually boost them.</span>
<span class="attribution"><a class="source" href="https://www.icaew.com/insights/viewpoints-on-the-news/2021/may-2021/potential-pie-extension-casts-the-regulatory-net-wide">fizkes</a></span>
</figcaption>
</figure>
<p>Among BHC, Carillion and Patisserie Valerie, only Carillion would have been a PIE under the old system, whereas now they would all qualify. But to take Patisserie Valerie as an example, the problem <a href="https://www.bbc.co.uk/news/business-48736447">was allegedly</a> one of fraud, including reportedly a £94 million “black hole” in the accounts. Notwithstanding the upcoming Grant Thornton case, it is hard to see how tougher reporting standards can help in a situation where directors are allegedly misleading auditors. </p>
<p>As for Carillion, the auditing failures occurred <em>despite</em> everyone following the rules. The <a href="https://www.theconstructionindex.co.uk/news/view/carillion-report-conclusions-and-recommendations">problems included</a> an ineffective business model, poorly managed risks, and a board that didn’t challenge the management. The proposals won’t address failings like these. And in truth, the existing UK regime is very tough already. </p>
<p>Then there are questions about the idea of public interest. Many of the new qualifying organisations don’t have shareholders, and will be unheard of. Are they really of overriding public interest? </p>
<p>The UK’s smaller listed companies on the Aim (Alternative Investments Market) have intentionally been more lightly regulated until now. Many are growth companies, and it has been considered important to let them focus on opportunity and not just risk management. </p>
<p>Now, approximately 105 of them <a href="https://www.icaew.com/insights/viewpoints-on-the-news/2021/may-2021/potential-pie-extension-casts-the-regulatory-net-wide">will qualify</a> as PIEs. The greater costs could threaten their cashflow and stretch their capacity. Their boards will become more controlling and directing, not guiding and mentoring. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/412171/original/file-20210720-27-1hzwa6s.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Wooden blocks representing big companies and small companies" src="https://images.theconversation.com/files/412171/original/file-20210720-27-1hzwa6s.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/412171/original/file-20210720-27-1hzwa6s.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/412171/original/file-20210720-27-1hzwa6s.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/412171/original/file-20210720-27-1hzwa6s.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/412171/original/file-20210720-27-1hzwa6s.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/412171/original/file-20210720-27-1hzwa6s.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/412171/original/file-20210720-27-1hzwa6s.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">It had been intentional that the little guys get off lightly.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/few-big-clients-vs-many-small-1151550203">Fotogestoeber</a></span>
</figcaption>
</figure>
<p>FTSE companies will be threatened too, since agile Aim-listed companies often feed the success of these bigger players through their supply chains. The changes may eventually also shrink the Aim market by deterring IPOs. This will all be detrimental to the UK economy. </p>
<p>Qualifying charities will face twice the regulation, since they are already governed by the Charity Commission. This will potentially take money away from good causes. With universities and housing associations, the same goes for education and housing. And defining local authorities as PIEs makes no sense, because central government never allows them to go bust. </p>
<h2>An alternative definition</h2>
<p>There is an argument for extending the highest reporting standards to a few more organisations, but a better option than PIEs would be to focus on companies with significant social or environmental impact, and those where investors, consumers or employees need particular protection. </p>
<p>Given the UK targets for net zero carbon production, the environmental aspect should certainly feature. Under the banner of protecting investors, you would automatically include financial services companies, since so many people put their money into them. For consumers, you might include insurance and holiday companies for similar reasons. </p>
<p>For employee protection, the test might be to what extent company failure would irretrievably damage a skill set, such as making microchips, along with other important social benefits such as diversity or fair pay. </p>
<p>If, on the other hand, we are determined to use size as a test for applying the highest standards, the numbers proposed are arguably too limited to truly encapsulate a company of public interest. Instead, we could apply the UK test for which companies are considered a <a href="https://www.valuethemarkets.com/2018/02/26/aim-listing-vs-standard-listing-main-market-whats-difference/">premium-listed equity</a>, which looks at turnover, number of employees, market capitalisation and number of investors.</p>
<p>The government proposals are punitive at best and only address the tip of the iceberg of reasons for corporate failure. The aim is to make UK equities more investable, but they may instead make the UK markets less attractive to investors and companies. The Financial Conduct Authority can also already investigate listed companies, so the proposals are arguably unnecessary. The UK does not have a perfect system, but it doesn’t need a straitjacket.</p>
<hr>
<p><em>The Conversation invited KPMG and Grant Thornton to comment on their respective auditing roles with Carillion and Patisserie Valerie, and they both said they had nothing to add to what they have said in the past.</em> </p>
<p><em>KPMG has not commented on the lawsuit being brought by the Official Receiver. Of the FRC investigation, it has said:</em> </p>
<blockquote>
<p>We are co-operating fully with the FRC’s investigation. We have and will continue to respond appropriately to the initial investigation report._</p>
</blockquote>
<p><em>Grant Thornton has said:</em> </p>
<blockquote>
<p>As set out in our defence, Patisserie Valerie is a case that involves sustained and collusive fraud, including widespread deception of the auditors and ignores the failings of the board and management who were primarily responsible for the group’s accounts and the running of the business._</p>
</blockquote><img src="https://counter.theconversation.com/content/164608/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Following collapses like cake shop chain Patisserie Valerie, the UK government is trying to toughen up the rules around financial reporting.Jennifer Simnett, Doctoral Researcher in Corporate Governance, University of ReadingFilipe Manuel Morais, Lecturer in Governance, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1533902021-01-15T16:15:55Z2021-01-15T16:15:55ZCarillion: move to disqualify directors signals UK authorities getting tougher on ‘corporate wrongdoing’<figure><img src="https://images.theconversation.com/files/379032/original/file-20210115-17-v78upl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Dead and buried. </span> <span class="attribution"><a class="source" href="https://www.paimages.co.uk/search-results/fluid/?q=carillion&category=A,S,E&fields_0=all&fields_1=all&imagesonly=1&orientation=both&text=carillion&words_0=all&words_1=all">Joe Giddens/PA Archive</a></span></figcaption></figure><p>It was a dramatic end for government super-contractor Carillion when <a href="https://theconversation.com/carillion-qanda-the-consequences-of-collapse-and-what-the-government-should-do-next-90252">it crashed</a> into insolvent liquidation in January 2018. Part-completed road projects, unfinished hospital buildings and disruption to hospital cleaning and catering heralded the end of this self-styled “integrated support services business”. </p>
<p>Carillion owed its creditors over £1.5 billion, and when matters came to a head on the back of asset write-downs and a plummeting share price, the government refused to mount a rescue. In the end over 3,000 employees lost their jobs and many supplier firms lost contracts, with domino insolvencies spreading from the rotten core of Carillion.</p>
<p>Now comes the possibility of a regulatory reckoning, at least for eight directors of the public limited company. The government’s Insolvency Service <a href="https://www.gov.uk/government/news/carillion-directors-disqualification-proceedings">has announced</a> that it is bringing <a href="https://www.bbc.co.uk/news/business-55659196">directors’ disqualification proceedings</a> against these former directors <a href="https://theconversation.com/carillion-qanda-the-consequences-of-collapse-and-what-the-government-should-do-next-90252">for their alleged role</a> in running the construction and infrastructure contractor into the ground. They include former chairman Philip Green and former chief executives Richard Howson and Keith Cochrane. </p>
<p>The case will be heard in the coming months. If the court holds them unfit to run a company, they will be banned from holding directorships for up to 15 years. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/UWT51mv61w8?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
</figure>
<p>The move is the second high-profile disqualification action by the Insolvency Service in a short period, coming hot on the heels of its <a href="https://theconversation.com/kids-company-why-the-insolvency-watchdog-wants-former-childrens-charity-directors-disqualified-89203">case against</a> the directors of collapsed charity Kids Company, which is still with the high court. </p>
<p>It also comes at a time when the Financial Reporting Council <a href="https://www.theguardian.com/business/2019/jul/31/accountancy-fines-double-to-record-32m-as-regulator-gets-tough">has increased fines</a> for accountants who have been involved in auditing troubled companies, which could <a href="https://www.thisismoney.co.uk/money/markets/article-8756753/KPMG-comes-fire-Carillion-audit-probe.html">include Carillion</a>. So should we read the new case as a sign that the UK authorities are getting tough on corporate wrongdoers more generally? </p>
<h2>Tougher approach?</h2>
<p>It is certainly relatively unusual to see directors of a public limited company – as opposed to small private companies – being pursued by the Insolvency Service for disqualification. This may be in part because plc directors tend to use professional advisers on whose advice they rely. This has in the past been <a href="https://www.oxbridgenotes.co.uk/law_cases/re-d-jan-of-london">treated by the courts</a> as a reason for exonerating those in charge, and indeed the Carillion directors may seek to point to that delegation of responsibility as part of their defence. Whether or not that is a credible response will come out in the wash. </p>
<p>This tougher stance from the UK authorities follows similar patterns across the globe. For example, Australian company law authorities have taken an increasingly pro-active approach to dealing with director behaviour, <a href="https://www.theguardian.com/australia-news/2020/jul/31/harold-mitchell-found-to-have-breached-duties-as-tennis-australia-director-but-most-of-asics-claims-thrown-out">including imposing</a> greater personal liability on directors. </p>
<p>But at the same time, the Carillion collapse <a href="https://www.mirror.co.uk/news/politics/fury-fatcat-carillion-boss-trousers-11855183">resonated with the public</a> in a way that bears few comparisons. Perhaps this was because it <a href="https://www.theguardian.com/business/2018/jan/19/carillion-collapse-expected-to-further-delay-building-at-two-major-hospitals">left at least</a> two unfinished hospitals in Liverpool and Birmingham, or because so much of the company’s work came from the UK government and therefore taxpayer’s money. </p>
<p>Equally, the <a href="https://www.theguardian.com/business/2017/nov/17/hs2-carillion-profit-warning-debt-shares">government awarded</a> Carillion over £2 billion in contracts in the year before the collapse despite three warnings to shareholders that profits would be below expectations. The directors were paid very generously, signed off on handsome shareholder dividends and despite this, left a pension deficit of nearly £600 million. And the taxpayer had to pick up an additional bill of £150 million to cover redundancy payments and the fees of the lawyers and accountants who helped deal with the collapse. Perhaps all this added up to a sense that this was an exceptional case.</p>
<p>Another possible explanation is that the Insolvency Service tends to prioritise high-profile failures. The watchdog has limited resources, and pursuing newsworthy cases can send out a deterrent message both to directors and the wider public. Besides Kids Company, previous high-profile cases that it has pursued include Christmas hamper savings club <a href="https://www.ft.com/content/d30756c2-bae6-11e1-b445-00144feabdc0">Farepak</a> and the “<a href="https://www.gov.uk/government/news/mg-rover-s-phoenix-four-disqualified-as-directors">Phoenix Four</a>” former directors of MG Rover. </p>
<h2>Personal fines</h2>
<p>Disqualification is not necessarily the only threat to the eight Carillion directors. The Insolvency Service may also push for a <a href="https://www.legislation.gov.uk/uksi/2016/890/pdfs/uksiem_20160890_en.pdf">compensation order</a>, a relatively new option that was introduced in 2015 and first used in 2019, against the directors of wine broker <a href="https://www.bailii.org/ew/cases/EWHC/Ch/2019/2806.html">Noble Vintners</a>. Such a move could see the directors forced to pay compensation to the creditors directly from their own pockets. </p>
<p>This latest set of directors’ disqualification proceedings marks a ramping up by UK regulators in their efforts to hold directors accountable for their management failures. This signals that higher standards are now expected from those who use companies to do business in the UK. It will be interesting to see if this makes any difference in the coming years.</p><img src="https://counter.theconversation.com/content/153390/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Tribe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Eight former directors of the collapsed super-contractor face being banned for up to 15 years if they are found to be unfit to run a company.John Tribe, Senior Lecturer in Law, University of LiverpoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/910302018-02-02T11:07:44Z2018-02-02T11:07:44ZCarillion, Capita and the costly contradictions of outsourcing public services<p>When major construction company Carillion <a href="https://www.ft.com/content/5ea57733-0c7c-3ccd-9108-6380250c71fc">collapsed</a>, much of the attention was focused on issues specific to <a href="https://www.ft.com/content/27e7153e-fd25-11e7-9b32-d7d59aace167">its business model</a> and <a href="https://www.ft.com/content/2095beca-fb8b-11e7-a492-2c9be7f3120a">corporate governance</a>, or on the <a href="https://theconversation.com/pfi-has-been-a-failure-and-carillion-is-the-tip-of-the-iceberg-90487">UK’s PFI model</a> of funding large infrastructure projects. Yet such explanations miss the broader lessons of this tragedy. With other outsourcing firms <a href="https://www.ft.com/content/022a7814-0657-11e8-9650-9c0ad2d7c5b5">such as Capita</a> <a href="https://www.ft.com/content/022a7814-0657-11e8-9650-9c0ad2d7c5b5">now facing similar woes</a>, it is becoming clear that there is a deeper and more fundamental problem with modern public sector outsourcing.</p>
<p>The key here lies in the qualifier “modern”. Delivery of public services by private providers is nothing new. In the 17th and 18th centuries, “privateers” conducted naval operations on behalf of the British state. In the early 1800s, Jeremy Bentham argued that what <a href="http://oll.libertyfund.org/titles/1925#lf0872-04_label_1091">he called</a> “patriotic auction” – granting official positions to the person willing to undertake the role for the least salary – would provide the <a href="http://www.ucl.ac.uk/bentham-project/publications/collected-works/official_aptitude">best result for the least cost</a>.</p>
<p>But the logic of modern outsourcing is fundamentally different. Bentham thought patriotic auction would produce better public services because it would select people driven by a liking for the work, <a href="http://oll.libertyfund.org/titles/1925#Bentham_0872-04_3132">rather than a desire for money</a>. The idea of companies making a profit through exercising powers on behalf of the Crown was <a href="https://archive.org/details/in.ernet.dli.2015.111991">deeply controversial in his day</a>. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/204577/original/file-20180202-162087-grdi6r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/204577/original/file-20180202-162087-grdi6r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=815&fit=crop&dpr=1 600w, https://images.theconversation.com/files/204577/original/file-20180202-162087-grdi6r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=815&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/204577/original/file-20180202-162087-grdi6r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=815&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/204577/original/file-20180202-162087-grdi6r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1024&fit=crop&dpr=1 754w, https://images.theconversation.com/files/204577/original/file-20180202-162087-grdi6r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1024&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/204577/original/file-20180202-162087-grdi6r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1024&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Jeremy Bentham.</span>
<span class="attribution"><span class="source">Henry William Pickersgill via Wikimedia Commons</span></span>
</figcaption>
</figure>
<p>Modern public sector economics, however, places its faith in the very thing Bentham rejected: the desire for money. It subscribes to <a href="https://web.stanford.edu/%7Ejdlevin/Econ%20286/Auctions.pdf">auction theory</a>, which suggests that providers, driven by the profit motive, will compete fiercely for contracts, driving up quality and driving down costs. The same thinking has been reflected in official UK policy since the <a href="https://www.legislation.gov.uk/ukpga/1994/40/contents">Deregulation and Contracting Out Act of 1994</a>.</p>
<h2>Reality bites</h2>
<p>In reality, the power of the market has always been limited, as Carillion’s collapse and Capita’s difficulties go to show. Some services were outsourced to great effect: a 2013 National Audit Office report <a href="https://www.nao.org.uk/wp-content/uploads/2013/11/10296-001-Delivery-of-public-services-HC-8101.pdf">cites examples</a> such as appointment booking call centres. But as the scale and complexity of outsourced services increased so did the complexity of the tendering process.</p>
<p>Firms which proved adept at coping with this complexity invested further in acquiring expertise and in <a href="https://www.ft.com/content/a28a2b96-0671-11e8-9650-9c0ad2d7c5b5">consolidating with other firms</a>. This was exacerbated by government policies seeking to <a href="https://www.gov.uk/government/news/plans-to-open-up-government-to-small-businesses">boost the participation of smaller companies</a> in outsourcing. The intention behind these policies was to open up outsourcing to small business. But their main effect was to further stratify the market into two tiers of firms. </p>
<p>The first was the firms operating at the coal face of public services – serving school meals, cleaning hospital wards, maintaining computers, laying railway track, and so on. The second was specialist outsourcing firms operating as a second bureaucracy: preparing bids, managing contracts, and coordinating the actual delivery of public services by smaller, private providers. Meanwhile, they provided very few services in-house.</p>
<p>The result was a relationship of mutual dependence between the government and specialist outsourcing firms. The government <a href="https://www.nao.org.uk/wp-content/uploads/2013/11/10296-001-Delivery-of-public-services-HC-8101.pdf">became reliant</a> on a small number of firms for a growing number of tasks, as its own capacity to perform them atrophied. But, equally, specialist outsourcing firms became dependent on the government. Their business could only be sustained through a pipeline of large projects, which only the government regularly provides. </p>
<p>Both sides thus became vulnerable to the predation of the other. Contractors might be tempted to inflate their prices – the example of one hospital PFI contract that <a href="https://www.newstatesman.com/2011/03/enterprise-government-party">resulted in light-bulbs costing £333 to change</a> springs to mind. Government, meanwhile, might be tempted to use its buyer power to force down prices, or to mandate higher service standards.</p>
<h2>Struggling to do more with less</h2>
<p>Under normal circumstances, each of these tendencies checks the other. But this delicate balance was upset by the austerity policies of the 2010s. Revenues to spend on public services were depleted as <a href="https://www.ifs.org.uk/publications/9178">money was diverted</a> towards <a href="https://tradingeconomics.com/united-kingdom/government-debt-to-gdp">servicing the debts</a> of failed financial institutions. Government bodies were pressured to do more with less, and negative press coverage of fat margins meant that this was also transferred to contractors.</p>
<p>A reduction in the costs of privately provided public services can only be achieved through <a href="http://www.bbc.co.uk/news/business-24909883">aggressive negotiation practices</a>, making the conclusion of a contract conditional on accepting a lower price. This was precisely the strategy pursued by the government in recent years. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/204581/original/file-20180202-162066-18if5bp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/204581/original/file-20180202-162066-18if5bp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/204581/original/file-20180202-162066-18if5bp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/204581/original/file-20180202-162066-18if5bp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/204581/original/file-20180202-162066-18if5bp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/204581/original/file-20180202-162066-18if5bp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/204581/original/file-20180202-162066-18if5bp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Less money, less capacity.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/small-beginnings-micro-piggy-bank-on-114612430?src=DPlYNNqreAkO_gPkE66wng-1-2">shutterstock.com</a></span>
</figcaption>
</figure>
<p>Normally, a firm would walk away if a customer was not prepared to offer sufficiently profitable terms. Yet several outsourcing companies <a href="https://www.ft.com/content/eacb29b0-d0df-11e5-92a1-c5e23ef99c77">took on loss-making contracts</a>. This is the inevitable consequence of the relationship of mutual dependence that modern outsourcing creates. Without a steady stream of government business, specialist outsourcing companies could not maintain their scale. And if they could not maintain their scale, they would be less able to compete in future.</p>
<p>One response is to downsize, as companies <a href="https://www.ft.com/content/f0acc73e-db9e-11e5-98fd-06d75973fe09">like Serco did</a>. Likewise, Atos <a href="https://www.theguardian.com/society/2014/mar/27/atos-quite-work-capability-assessment-contract-early">terminated its contract providing</a> disability benefit assessments for the Department of Work and Pensions. </p>
<p>Reducing the level of service is also an attractive option, especially for firms providing services far from the public eye. Immigration and asylum offers a rich seam of examples for this – from replacing <a href="https://www.theguardian.com/uk-news/2016/jul/07/yarls-wood-immigration-detention-centre-staff-replaced-by-self-service-kiosks">advisors with self-service kiosks</a> to <a href="https://www.theguardian.com/uk-news/2017/oct/27/uk-asylum-seekers-living-in-squalid-unsafe-slum-conditions">unsanitary housing conditions</a>. But entities which cannot downsize or pare back quality will inevitably be forced down the path of ever-thinner margins.</p>
<p>This seems to be <a href="https://www.ft.com/content/2503316e-f9c8-11e7-9b32-d7d59aace167">what happened</a> to Carillion, whose thin capitalisation and lack of assets forced it <a href="https://www.ft.com/content/c856fcbe-fea6-11e7-9650-9c0ad2d7c5b5">into a vicious cycle</a> of chasing further contracts at ever slimmer margins to pay its suppliers. The same problems lie at the heart of Capita’s dividend suspension. </p>
<p>Capita seems to be forced down a similar path, allowing itself to become, <a href="https://www.ft.com/content/022a7814-0657-11e8-9650-9c0ad2d7c5b5%22%22">in the words of its Chief Executive</a> Jonathan Lewis, “too widely spread across multiple markets and services” while at the same time it “underinvested in infrastructure”. This was seemingly logical for a firm whose core strength is competing in complex tendering processes. Like Carillion, it ended up seeking new business to compensate for losses.</p>
<p>All this is far removed from what the proponents of outsourcing envisaged, but it should have been entirely predictable. The relentless expansion of outsourcing to ever more complex domains was premised on a level of competition which is impossible to achieve, and it ignored the phenomenon of mutual dependence which is impossible to avoid. </p>
<p>That most economists ignore this problem suggests that the economic study of the state has become, as John Rapley has provocatively argued in <a href="http://www.simonandschuster.co.uk/books/Twilight-of-the-Money-Gods/John-Rapley/9781471152740">Twilight of the Money Gods</a>, more concerned with vindicating its belief in its official doctrines, than with generating new knowledge about economic institutions. Yet the view that competition among public service providers will necessarily lead to improved services at lower costs is no longer tenable.</p><img src="https://counter.theconversation.com/content/91030/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Problems at government contractor Capita and the collapse of Carillion are part of the same story of outsourcing gone wrong.TT Arvind, Professor of Law, Newcastle UniversityLindsay Stirton, Professor of Public Law, interested in public administration and public law, University of SussexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/904132018-01-25T11:40:17Z2018-01-25T11:40:17ZHow gender equality can help fix the construction industry<figure><img src="https://images.theconversation.com/files/203205/original/file-20180124-72609-1czjls8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The government-commissioned Farmer Review <a href="https://www.gov.uk/government/publications/construction-labour-market-in-the-uk-farmer-review">warned</a> in 2016 that the UK construction industry was “facing challenges that have not been seen before”. In no uncertain terms, it called for major industry-wide change. The “overwhelming risks” foreseen in the review sadly seem to have come to pass. </p>
<p>Major contractor Carillion’s <a href="https://theconversation.com/pfi-has-been-a-failure-and-carillion-is-the-tip-of-the-iceberg-90487">collapse</a> comes shortly after an autumn in which UK construction activity fell <a href="https://www.theguardian.com/business/2018/jan/03/uk-construction-industry-optimism-slumps-to-five-year-low-survey-reveals">at its fastest pace in five years</a>. Studies have found that Brexit <a href="https://www.architectsjournal.co.uk/news/brexit-could-cost-construction-industry-10bn-khan-told/10026981.article">could cost the industry £10 billion</a>, while the 2017 government industrial strategy was widely denounced <a href="http://www.telegraph.co.uk/business/2017/11/27/inadequate-industrial-strategy-gets-tepid-welcome/">as inadequate to generate real change</a>. </p>
<p>Of the many issues Farmer highlighted, the industry’s resistance to modernisation, along with the “ticking time bomb” that is the ever-widening skills shortage, stand out. The government’s <a href="https://www.gov.uk/government/publications/uk-labour-market-projections-2014-to-2024">Working Futures report</a> into the future of the country’s labour market predicts hundreds of thousands of vacancies in skilled technical, professional and managerial roles by the early 2020s. One obvious solution is to increase the number of women in the construction industry. </p>
<h2>The worst gender balance</h2>
<p>The construction sector has the worst gender balance of any, with the UK <a href="https://www.theiet.org/factfiles/education/skills2015-page.cfm?">lagging behind the rest of Europe</a>. Less than 1% of its 800,000 construction and building trades workers <a href="https://www.nomisweb.co.uk/">are women</a>, and even when you add architects, planners and surveyors it only rises to 18%: </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/203196/original/file-20180124-72600-a7y42l.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/203196/original/file-20180124-72600-a7y42l.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/203196/original/file-20180124-72600-a7y42l.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=232&fit=crop&dpr=1 600w, https://images.theconversation.com/files/203196/original/file-20180124-72600-a7y42l.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=232&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/203196/original/file-20180124-72600-a7y42l.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=232&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/203196/original/file-20180124-72600-a7y42l.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=291&fit=crop&dpr=1 754w, https://images.theconversation.com/files/203196/original/file-20180124-72600-a7y42l.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=291&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/203196/original/file-20180124-72600-a7y42l.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=291&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Dillon and Moncaster | Data adapted from ONS figures</span></span>
</figcaption>
</figure>
<p>Of course, both industry and government have considered this issue. But attempts as far back as the <a href="https://www.wisecampaign.org.uk/about-us/history">WISE campaign of the 1980s</a> to encourage more girls to consider careers in construction just haven’t worked. While more women are entering the sector, they are leaving just as quickly. The net result is that numbers of women in construction roles have remained more or less static for at least a decade: </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/203200/original/file-20180124-72609-63jm5r.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/203200/original/file-20180124-72609-63jm5r.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/203200/original/file-20180124-72609-63jm5r.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=365&fit=crop&dpr=1 600w, https://images.theconversation.com/files/203200/original/file-20180124-72609-63jm5r.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=365&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/203200/original/file-20180124-72609-63jm5r.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=365&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/203200/original/file-20180124-72609-63jm5r.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=459&fit=crop&dpr=1 754w, https://images.theconversation.com/files/203200/original/file-20180124-72609-63jm5r.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=459&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/203200/original/file-20180124-72609-63jm5r.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=459&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Female representation in the UK construction industry. [1] Equality and Human Rights Commission, for the UK Construction Sector [2] Architects Registration Board includes equality and diversity questions for new admissions [3] 25% female representation on UK FTSE 100 boards.</span>
<span class="attribution"><span class="source">Dillon and Moncaster</span></span>
</figcaption>
</figure>
<p>The <a href="https://www.timeshighereducation.com/student/blogs/women-in-stem-how-can-we-encourage-more-women-into-engineering">blame</a> is <a href="https://www.ippr.org/publications/women-in-engineering-fixing-the-talent-pipeline">repeatedly</a> levied at parents, teachers and careers advisers, and women having children. While the data is simply unavailable for women in the building trades, recent <a href="https://www.gov.uk/government/statistics/graduate-outcomes-by-degree-subject-and-university">Department for Education figures</a> suggest an alternative reason. Just five years after graduation, long before starting a family, women engineers and architects are already being paid less than their male counterparts. </p>
<p>The lack of career progression that this suggests increases with age, with the number of women in senior positions dwindling to a miniscule proportion. With such inequality of pay, <a href="https://www.imeche.org/policy-and-press/reports/detail/stay-or-go.-the-experience-of-female-engineers-in-early-career">matched by inequality of treatment</a>, it is no wonder they don’t stay.</p>
<h2>Bad for women, bad for business</h2>
<p>A group of senior industry women believe that not only is this bad for women, it is bad for business. They set up the Equilibrium Network, which funded some of <a href="https://equilibrium-network.com/research-and-information/">our research</a> looking into whether having women in senior positions boosts business financial performance. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/203201/original/file-20180124-72618-1khscuw.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/203201/original/file-20180124-72618-1khscuw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/203201/original/file-20180124-72618-1khscuw.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=339&fit=crop&dpr=1 600w, https://images.theconversation.com/files/203201/original/file-20180124-72618-1khscuw.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=339&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/203201/original/file-20180124-72618-1khscuw.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=339&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/203201/original/file-20180124-72618-1khscuw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=425&fit=crop&dpr=1 754w, https://images.theconversation.com/files/203201/original/file-20180124-72618-1khscuw.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=425&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/203201/original/file-20180124-72618-1khscuw.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=425&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Institution of Civil Engineers members by age.</span>
<span class="attribution"><span class="source">Martha Dillon</span></span>
</figcaption>
</figure>
<p>We started by analysing major international and cross-industry studies, all of which indicate that there is a clear correlation between a greater number of women on boards and company financial performance. We then looked in the academic literature for evidence of causation, in order to predict whether this trend might hold true for the construction sector. </p>
<p>We found three explanations to suggest this is the case. First, having more women on the boards of companies improves the operation of the boards themselves. They provide a greater range of perspectives and insights, more closely representing companies’ demographically diverse stakeholders, <a href="https://www.researchgate.net/publication/313208717_Traits_expectations_culture_and_clout_The_dynamics_of_diversity_in_work_groups">as well as improving collaborative teamwork</a>. </p>
<p>Second, having women at senior levels reduces the leaky pipeline <a href="https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjAqNKYx-7YAhXQaVAKHXMkAs8QFggnMAA&url=https%3A%2F%2F30percentclub.org%2Fassets%2Fuploads%2FUK%2FThird_Party_Reports%2FThe_Pipeline_Women_Count_2017.pdf&usg=AOvVaw1jdgo0B5qLj1YSSe-rCBqq">lower down companies</a>. Senior women provide role models and mentoring, and a more positive working environment. Also, they are more likely to promote other women, as they are more likely to recognise their skills.</p>
<p>All of these lead to better retention and satisfaction of skilled employees for the company. Diverse teams have also been <a href="https://www.forbes.com/forbesinsights/innovation_diversity/">repeatedly</a> <a href="https://www.tuc.org.uk/sites/default/files/extras/talentnottokenism.pdf">shown</a> to be better performing and more innovative, and so having more women at all levels is also good for team performance.</p>
<p>Finally, better gender diversity at board level improves the image of companies – with both the public and with investors. This helps to boost sales and market performance. As the construction sector suffers from an <a href="https://www.gov.uk/government/publications/construction-labour-market-in-the-uk-farmer-review">extremely poor public image</a>, we believe this impact would be particularly positive for construction firms. </p>
<p>Our study also revealed an acute lack of gender data specific to the construction sector. It was based instead on large studies that crossed different sectors and smaller academic studies of a few niche areas or individual companies. This absence of any measurement of gender inequality can only have contributed to the lack of progress in this area. </p>
<p>The new president of the Institution of Civil Engineers, Robert Mair, used his inaugural speech to call on his profession to <a href="https://www.ice.org.uk/news-and-insight/latest-ice-news/professor-lord-robert-mair-becomes-ice-president">transform infrastructure and transform lives</a>. It is a statement for which the Carillion crisis serves as a violent example. Our research suggests that in order to do this we first need to transform our outdated industry. Promoting women to senior levels is essential for this to happen.</p><img src="https://counter.theconversation.com/content/90413/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alice Moncaster receives funding from the Equilibrium Network. </span></em></p><p class="fine-print"><em><span>Martha Dillon received funding from The Equilibrium Network for research mentioned in this article.</span></em></p>The collapse of Carillion shows that the construction sector needs to change. One option would be to include women.Alice Moncaster, Senior Lecturer in Engineering, The Open UniversityMartha Dillon, PhD Candidate in Engineering, University of CambridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/904872018-01-24T10:49:13Z2018-01-24T10:49:13ZPFI has been a failure – and Carillion is the tip of the iceberg<figure><img src="https://images.theconversation.com/files/202867/original/file-20180122-182941-13sye2q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/construction-site-workers-aerial-top-view-406114573?src=yxyQMlbc2HPQ5z_q2a2s-A-1-3">shutterstock.com</a></span></figcaption></figure><p>Carillion’s collapse has brought with it wider scrutiny of the way that UK public services are contracted out to businesses – particularly through the use of Private Finance Initiative (PFI) schemes. The UK’s second largest construction business <a href="https://www.ft.com/content/0b97c676-fd3e-11e7-9b32-d7d59aace167">had a network of these contracts</a>, worth billions of pounds, providing essential public services across government departments. The NHS, defence, education, energy, and prisons have all been left exposed by its collapse.</p>
<p>While the winter crisis <a href="https://www.theguardian.com/society/2018/jan/11/nhs-winter-crisis-hospital-felt-like-something-out-of-a-war-zone">tightens its grip on the NHS</a>, two urgently needed hospitals – the Midland Metropolitan and the Royal Liverpool – that were supposed to be constructed by Carillion under PFI arrangements, <a href="https://www.theguardian.com/business/2018/jan/19/carillion-collapse-expected-to-further-delay-building-at-two-major-hospitals">now await state rescue</a>. In addition, the fire service <a href="https://www.theguardian.com/business/2018/jan/15/fire-services-ready-to-deliver-school-meals-after-carillion-collapse">must now stand by</a> to deliver the school meals Carillion was contracted to provide.</p>
<p>But the company’s collapse is the tip of the iceberg when it comes to the failure of PFI to give the public good value for money. </p>
<h2>PF why?</h2>
<p>These financing schemes were originally devised as a means by which governments (both Conservative and Labour) could construct prisons, schools and hospitals with private sector finance – rather than directly burdening the government with the debt of the infrastructure costs. <a href="https://theconversation.com/why-private-finance-initiatives-are-so-addictive-and-yet-offer-such-poor-value-for-money-40421">In some ways</a>, the PFI process was successful: many regions of the country benefited from new hospitals and other public infrastructure. </p>
<p>But in return for the upfront capital costs being financed by private investors, the hospital trusts (or other public bodies) were then often burdened with contractually onerous financial payments for the following 25-30 years. The payments to these investors meet their capital development, service and financing costs; and provide a high return, in some cases of <a href="https://www.ncbi.nlm.nih.gov/pubmed/23332120">up to 60% to their shareholders</a>. </p>
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Read more:
<a href="https://theconversation.com/why-private-finance-initiatives-are-so-addictive-and-yet-offer-such-poor-value-for-money-40421">Why private finance initiatives are so addictive – and yet offer such poor value for money</a>
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<p>All governments since 1992 contributed to the expansion of PFI, <a href="http://blogs.lse.ac.uk/politicsandpolicy/the-move-from-pfi-to-pf2-is-likely-to-make-it-more-rather-than-less-expensive-to-deliver-new-healthcare-facilities-in-the-future/">culminating in its rebrand as PF2</a> under David Cameron’s leadership in 2012. There are currently more than 700 PFI and PF2 schemes, with capital values of about £60 billion. Altogether they are set to cost the taxpayer about <a href="https://www.nao.org.uk/wp-content/uploads/2018/01/PFI-and-PF2.pdf">£200 billion to service over the next 25 years</a>.</p>
<h2>The costs outweigh the benefits</h2>
<p>The evidence shows that PFI is always more costly relative to its publicly funded alternative – a recent government report found that some are <a href="https://www.nao.org.uk/wp-content/uploads/2018/01/PFI-and-PF2.pdf">as much as 40% more expensive</a>. These extra costs, meted out to the private sector, go on to line the pockets of shareholders – many of which hold their earnings <a href="https://www.european-services-strategy.org.uk/news/2017/new-evidence-of-the-scale-of-uk-pfippp-equity-offshoring-and-tax-avoidance">in offshore companies</a>, therefore paying little to no tax on these earnings in the UK. </p>
<p>Meanwhile, there is little to no evidence that PFI delivers operational efficiencies. Nor that it is the only route through which public assets can be maintained to a high and acceptable standard throughout the life of the asset. At the time of the rebrand of the PFI as PF2, the Treasury found and reviewed evidence that budgetary and accounting incentives also cause public bodies to choose the route of PFI, even if it didn’t offer superior benefits over a publicly funded option. Yet, the Treasury <a href="https://www.nao.org.uk/wp-content/uploads/2018/01/PFI-and-PF2.pdf">refused to close those loopholes</a>.</p>
<p>The primary justification given for why PFI/PF2 is pursued is that it allows risk to be transferred from the public sector to the private sector and hence demonstrates value for money by being a less costly alternative to public financing. So central is the assumed transfer of risk to PFI schemes that virtually no PFI scheme is seen as less costly than its public counterpart, until the assumed risks involved are costed up and added to the public counterpart.</p>
<p>The notional transfer of risk is, however, undermined by PFI failures such as that of <a href="http://news.bbc.co.uk/1/hi/england/london/8544491.stm">London Underground’s Metronet in 2007</a>, and now Carillion. Public agencies might seek to transfer risk through PFI, but they ultimately remain responsible for the delivery of public services. In failed schemes, it is the taxpayer that ends up picking up the tab for the private sector’s mistakes. All the while, more is paid for the luxury.</p>
<p>It demands a rethink of the way that the government outsources essential services, especially through PFI. The central arguments in the outsourcing of public services are those of gaining expertise and efficiency savings. These could still be paid for and cultivated within the public sector – especially given how much money is currently paid to the private sector through the PFI schemes that do not fail. Let alone the cost of salvaging those that do.</p><img src="https://counter.theconversation.com/content/90487/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The evidence shows that PFI is always more costly relative to its publicly funded alternative – and by as much as 40% in some cases.Iqbal Khadaroo, Professor of Accounting, University of SussexEkililu Salifu, Lecturer in Accounting, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/903532018-01-19T15:50:58Z2018-01-19T15:50:58ZHow Brexit puts the UK at risk of more collapses like Carillion<p>The construction industry has always been characterised by uncertainty. Managing large construction projects involves enormous challenges, coming from the political, economic, social and technological environments involved. The bigger the project, the bigger the challenge. For big infrastructure projects such as railways and hospitals, we’re talking multi-million pound contracts and thousands of employees, over a number of years.</p>
<p>So, in many ways, the collapse of the UK’s second-largest construction company, Carillion, is not surprising. The National Audit Office, which scrutinises the UK government’s public spending, predicted that <a href="https://www.nao.org.uk/wp-content/uploads/2016/01/Delivering-major-projects-in-government-a-briefing-for-the-Committee-of-Public-Accounts.pdf">more than one-third</a> of mega projects – the kind that the government outsources to Carillion – will fail in the years ahead. </p>
<p>And yet the shape and speed of Carillion’s demise was still shocking – even to the many industry observers who were watching its poor performance over the past year. Not least because its rapid descent into liquidation, without first going into administration, <a href="https://www.standard.co.uk/business/carillion-collapse-rivals-circle-for-contracts-from-failed-construction-giant-a3740091.html">put 40,000 jobs at risk overnight</a>. </p>
<p>Carillion’s demise shows the risks that are encountered in an industry that contributes <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/229339/construction-sector-infographic.pdf">£90 billion (6.9% of GDP) to the UK economy</a>. Although it is still too early to know all the details of how and why it collapsed, it is an important reminder that the construction industry is characterised by risk, uncertainty and complexity on all levels. And something we should be mindful of is how Brexit will compound this.</p>
<h2>Uncertainty abounds</h2>
<p>A quick glance at the performance of Carillion shows that it <a href="https://www.theguardian.com/business/2018/jan/15/the-four-contracts-that-finished-carillion-public-private-partnership">amassed risky contracts</a> without being able to fulfil its commitments. This put it under mounting debts – its liabilities were in excess over its total value of assets – and precipitated its demise. Winning lucrative contracts is great, but contractors need to have a positive cash flow to pay the various instalments of implementing its contracts. </p>
<p>The <a href="https://ascelibrary.org/doi/abs/10.1061/%28ASCE%290733-9364%282004%29130%3A1%2815%29">basics of planning and scheduling</a> construction projects is that contractors need to keep schedules of their projects in balance with their available cash. In other words, contractors can win as many projects as they can, but they must be able to fulfil their outward payments at any given point of project implementation. When every contract comes with uncertainty, this is magnified when more projects are run at the same time. </p>
<p>Managing projects in general means managing uncertainty that is divided into known uncertainty and unknown uncertainty. For example, companies know that when they are building over the winter, they should allow time for bad weather slowing projects down. But an example of unknown uncertainty that Carillion ran into when working on the Royal Liverpool University Hospital was the <a href="https://www.theguardian.com/business/2018/jan/15/the-four-contracts-that-finished-carillion-public-private-partnership">“extensive” asbestos that was found</a> on the brownfield site where it was being built.</p>
<p>The ongoing Brexit talks add a new layer to these uncertainties. The UK is engaged in negotiations with the EU on its single market access, which will affect the free passage of people and goods with its biggest trade partner. EU imports equal <a href="http://researchbriefings.files.parliament.uk/documents/CBP-8065/CBP-8065.pdf">6% of production costs</a> in the UK’s construction industry and <a href="http://www.constructionenquirer.com/2017/11/09/quarter-of-big-consultants-consider-post-brexit-staff-exit/">8% of the industry’s existing workforce is at risk</a> if the UK does not retain access to the single market.</p>
<p>So there is a big worry over whether companies can implement projects in the UK smoothly. Construction projects are usually labour-intensive and the right skills are needed. <a href="https://www.gov.uk/government/statistical-data-sets/fe-data-library-apprenticeships">Government figures show</a> that the skills gap is widening and there is not sufficient labour to fill vacancies on big construction projects. Added to this is the UK’s ageing workforce. Even without Brexit, the construction industry predicts a 20-25% decline in its workforce over the next decade. So, if the UK cannot reach a good deal for the construction industry, more big infrastructure projects will be at stake. </p>
<p>Brexit will also have an impact on the way that most big infrastructure projects are funded – through private finance initiatives or PFI. The government pays the private sector to build its big projects, awarding the contract to the best bidder. Some projects have also <a href="https://www.cliffordchance.com/briefings/2016/07/brexit_and_uk_pfipppinfrastructureprojects.html">benefited from the European Investment Bank</a>, which the UK will no longer be party to when it leaves the EU. This could make it more reliant on PFI, which <a href="https://www.nao.org.uk/report/lessons-from-pfi-and-other-projects/">is highly controversial</a>.</p>
<p>The construction industry has barely recovered from the 2007-08 financial crisis. The latest figures show a slight growth in output, but this was merely thanks to residential construction. Commercial and public projects <a href="https://www.ons.gov.uk/businessindustryandtrade/constructionindustry/bulletins/constructionoutputingreatbritain/november2017">have been slowing down</a>. With Brexit providing so much uncertainty in the months ahead, we should not be surprised if we see more construction companies struggling.</p><img src="https://counter.theconversation.com/content/90353/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Moheeb AbuAlqumboz does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The construction industry is characterised by risk, uncertainty and complexity on all levels. Brexit compounds this.Moheeb AbuAlqumboz, Lecturer in Project Management, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/902522018-01-17T15:17:09Z2018-01-17T15:17:09ZCarillion Q&A: The consequences of collapse and what the government should do next<p>Construction giant Carillion has gone into liquidation. The UK’s second-largest construction firm was one of the <a href="http://www.bbc.co.uk/news/business-42666275">government’s biggest contractors</a>, involved in huge infrastructure projects like the HS2 rail link and the Royal Liverpool University Hospital. It also provides services <a href="http://www.bbc.co.uk/news/business-42695661">across the public sector</a> such as running libraries, schools and prisons. Here’s what you need to know about Carillion’s collapse.</p>
<p><strong>Why did the government keep placing work with Carillion despite profit warnings and huge debts?</strong> </p>
<p>It is possible that the government did this to keep Carillion solvent. But, as we’ve seen, there is always a day of reckoning. </p>
<p>Carillion seems to have a number of long-term contracts which have been losing money. There is a view by some I’ve spoken to in the industry that they have been tendering at low prices to keep winning work. In the contracting industry the developer pays significant sums up front to get projects moving. The projects can last a number of years and management has to assess whether the project is losing money or will make a profit. In effect, Carillion may have been using the new money from contract wins to shore up the old loss making contracts. </p>
<p>Some of the issues arose <a href="https://www.theguardian.com/business/2011/may/31/construction-industry-danger-recession">during the recession</a> that followed the 2007-08 financial crisis, when contractors bid lower prices to keep winning work and keep their sub-contractors and employees occupied. These contracts have been losing money ever since. Balfour Beatty <a href="https://www.theguardian.com/business/2015/jul/09/balfour-beatty-issues-fresh-profit-warning">ran into similar problems in 2015</a> when major losses were taken on contracts. Fortunately, they had plenty of saleable assets which would act as collateral for further borrowing, and they did not have the debt levels of Carillion. </p>
<p>Clearly, there are big questions which the directors and the auditors need to answer regarding taking so long to realise their predicament. There is also a question around directors’ <a href="https://www.thetimes.co.uk/edition/news/carillion-collapse-reward-for-failure-row-hangs-over-former-boss-79wvxw3q2">bonuses and pay</a> during the last few years and whether the accounts should have told a different story.</p>
<p>We can be reasonably certain that no one will come out of the catastrophic collapse of Carillion with any real dignity.</p>
<p><strong>What are the consequences of collapse?</strong></p>
<p>Carillion’s collapse leaves almost £1 billion of debt, more than £500m of pension deficit and around 30,000 unpaid subcontractors. Work is ceasing on both public and private contracts as subcontractors down tools until they receive reassurance that they will be paid – for past and future work. The liquidator and Official Receiver is asking subcontractors to keep working but they are likely to require strong reassurances regarding payment. </p>
<p>The cash paid by government and private developers into Carillion before its collapse – which had not been previously paid to subcontractors – can be presumed to be lost. Carillion’s head office will probably close and the regional management structure dissolved as job losses mount. </p>
<p>Broadly, the business has two parts: major capital contracts (building of hospitals, roads, railways and other major structures) and facilities management (buildings maintenance, security, catering, running prisons and so on).</p>
<p>Facilities management is predominantly, but not exclusively, for the government. Clearly, these latter jobs were originally undertaken by public sector workers until outsourced to private contractors. </p>
<p>In this area, it can be argued that the government has a choice as to whether it nationalises this work or continues to rely on private contractors. There is little doubt that private contractors are cheaper because the market to provide these services is highly competitive. But there are risks over the quality of work, failure to perform and, as in this case, liquidation. </p>
<p>There are plenty of businesses willing to provide these services, such as Serco and Sodexo. Retendering is likely to produce a low cost solution but the government should learn from its mistakes with the Carillion experience and make sure it gives the contract to a financially stable company, including substantial penalties for poor performance. </p>
<p>Government-funded major capital schemes can only be performed by major external contractors. There are only a few businesses which have the size and specialist skills to do this work. These include Balfour Beatty, Galliford Try, and a few others. </p>
<p>There are also overseas contractors but governments typically give as much work to domestic firms as possible, provided the skills and capabilities exist. </p>
<p><strong>What should the government do?</strong></p>
<p>The government has made <a href="http://www.bbc.co.uk/news/business-42687032">some promises</a> to pay subcontractors working on public contracts. But the key question for the 30,000 subcontractors is what will happen to the money owed for work over the last few months? If this is not paid then they may become insolvent and the major hospitals, roads and railways will be delayed for a considerable time. </p>
<p>In effect, the government and other developers have paid this money into Carillion but it is lost. To ensure solvency and continued work on the major projects, the government will have to stand these losses and ensure that subcontractors are paid what they are owed. </p>
<p>They have no reason, however, to cover the private contracts. These are for the private developers to make a decision over. </p>
<p>Nationalising Carillion would be highly risky for several reasons. The government would have to take on all the liabilities for both public and private contracts. Other major contractors would, in effect, have to compete with a government-owned contractor for work which would scarcely be ideal as the government does not have to make a profit or pay for its capital. Finally, what does the government know about contracting? It would appear very little from this saga. </p>
<p>What we do know is that these major public-private partnership schemes will continue and that the bulk of employment will continue albeit after some disruption. Continued competition does drive a good deal for developers, including the government, but, as we have seen, also has its risks.</p><img src="https://counter.theconversation.com/content/90252/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>How to tidy up a right royal mess.John Colley, Professor of Practice, Pro Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.