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TUC 2018 Driving out the bandits — no more Carillions

Carillion’s collapse in January was the largest corporate failure in modern British history, Britain’s equivalent of the Enron scandal in the United States, writes GAIL CARTMAIL

CARILLION was a multinational which had mutated from a construction firm to an entity which was as likely to be providing the outsourced cleaning contract in a hospital to constructing new buildings.

When it went bust Carillion had liabilities of £7 billion, including pension liabilities of £2.6bn, it had just £29 million in the bank. 
It employed over 19,000 people, 3,000 of whom were eventually made redundant. An additional 35,000 people were employed by its subcontractors and its supply chain. 

Eight months after Carillion went bust companies are still going to the wall because of the losses they suffered. We will never know how many workers lost their jobs as a result of the company’s demise.

While there are several ongoing official inquiries into what happened at Carillion and a highly influential and critical select committee report into the company, the government’s view is of business as usual — an entirely unacceptable attitude.

It is workers who have borne the brunt of Carillion’s collapse through losing their jobs or being transferred from one outsourced contract to another on inferior terms and conditions, due to the fact that Carillion was in compulsory liquidation and the protections afforded by Tupe did not apply.

At the same time the “guilty men” who crashed the company are finding new lucrative work. For example, former Carillion director Mark Davies has recently been appointed by Balfour Beatty to oversee the High Speed 2 (HS2) rail project.

As trade unionists we need to ensure that the government’s business-as-usual attitude is challenged at every turn and radical policies to guarantee that there are no more Carillions in the future are adopted.

Until July 2017, Carillion was seen as a highly successful company, it had recently paid its shareholders record dividends and its accounts were showing a very healthy set of finances. It was all an illusion.

Sir John Bourn, the former auditor general and hardly a raving socialist, has described Carillion as acting like a “Ponzi scheme” which was constantly acquiring new contracts in order to offset the losses it was making. Finance expert Frances Coppola has said that Carillion “was effectively insolvent from 2016.”

The reason this wasn’t spotted earlier was due to the company’s so-called highly dubious “aggressive accounting” practices. 

Under the former finance director Richard Adam, who retired and cashed in £776,000 worth of shares before Carillion hit the rocks, financial reports were altered to show that large projects which were in reality suffering serious losses were on paper showing a profit.

In July 2017 the house of cards began to collapse when Carillion was forced to issue a staggering £845m profit warning and its share price tumbled overnight. A black hole which had been gradually growing for years and that the auditors failed to spot.

The only thing which kept Carillion going for another six months was that inexplicably the government kept awarding it contracts, worth in excess of £2bn, including the prestigious HS2 project.

Those contracts were critical as they gave false confidence to subcontractors and the supply chain, the fact it was receiving blue-chip contracts, gave the impression that its financial problems were temporary, not terminal. Without that false confidence companies could have exited from Carillion’s embrace with much lower financial losses.

Even after Carillion’s collapse the government seems to have learnt nothing. In June it announced that it had awarded the 12-year contract to run the Ministry of Defence’s fire and rescue service to Capita. 

A company that had to find an additional £700m in capital this April and the government had found it had a risk factor of 10 out of 10 and a financial health score of just three out of 100.

There are some key reforms needed to prevent a further Carillion style collapse including:

  • Holding a public inquiry into how Carillion collapsed, which includes examining the failure of the regulatory regime to spot what was happening and the government’s role in the debacle.
  • Rapidly moving towards insourcing of public-sector contracts which ends the outsourcing mania which has afflicted our public sector for too long and has resulted in a race to the bottom on pay, conditions and quality of service.
  • An immediate end to the use of all forms of PFI for public-sector infrastructure projects. Especially given that the Midlands Metropolitan Hospital, which was originally a Carillion PFI scheme costing £350m, will now be at least two years late, will cost £524m and will be completed under direct government finance as the private financers have pulled out.
  • Reform of directors’ duties to require promotion of the long-term success of the company as their primary aim.
  • The recognition of a trade union on all outsourced contracts and that agreements secured through collective bargaining become the minimum terms of conditions regarding pay, terms and pensions, in each sector.

The joint select committee report into Carillion said: “Carillion’s rise and spectacular fall was a story of recklessness, hubris and greed. Its business model was a relentless dash for cash, driven by acquisitions, rising debt, expansion into new markets and exploitation of suppliers. It presented accounts that misrepresented the reality of the business, and increased its dividend every year, come what may. Long-term obligations, such as adequately funding its pension schemes, were treated with contempt. 

“Even as the company very publicly began to unravel, the board was concerned with increasing and protecting generous executive bonuses. Carillion was unsustainable. The mystery is not that it collapsed, but that it lasted so long.”

What the trade union movement needs to recognise is that Carillion was not a one-off, there are plenty of other companies, especially those who specialise in outsourcing, with similar business models. 

The role of unions is to protect workers and the best way is to end the outsourcing racket and introduce laws and regulations to make it impossible for a company to lie and distort its true financial position.

Gail Cartmail is assistant general secretary of Unite the union.

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