The liquidation of Carillion will cost UK taxpayers an estimated £148m, the National Audit Office (NAO) has said, excluding around £2.6bn pension liabilities and losses by the firm’s non-government creditors.
The NAO has published its investigation into the Government’s handling of the collapse of the infrastructure and outsourcing giant.
The Government has largely escaped criticism in the report, although the NAO said it needs to ‘do better’ at understanding the financial health of its top suppliers and avoid creating relationships with those that are already weakened.
Carillion was a major supplier to Network Rail
The Cabinet Office's estimated £148m bill for the insolvency is subject to a range of uncertainties and it could take years to establish the final cost, auditors said. This would be covered by the £150m the Cabinet Office has already provided.
The NAO added that Carillion’s non-government creditors ‘are unlikely to recover much of their investments’, and the company’s extensive pension liabilities, totalling £2.6bn as of June 2017, will need to be compensated through the Pension Protection Fund.
Amyas Morse, the head of the NAO, said: ‘When a company becomes a strategic supplier, dependencies are created beyond the scope of specific contracts.
‘Doing a thorough job of protecting the public interest means that government needs to understand the financial health and sustainability of its major suppliers, and avoid creating relationships with those which are already weakened. Government has further to go in developing in this direction.’
John Trickett MP, Labour’s shadow Cabinet Office minister said the Conservatives had been wrong to say the cost of Carillion’s collapse would be borne by shareholders. He wrote on Twitter: ‘Yet again the public pay the price for a Government blinded by an obsession with privatisation.’
The investigation has identified that the Cabinet Office began planning for the possible failure of Carillion shortly after the company posted its first profit warning in July 2017. It states: ‘The scale of the profit warning came as a surprise to the Government, as it contradicted market expectations and information and commentary that had been provided by Carillion.’
The Cabinet Office raised Carillion’s risk rating from amber to red in response to the profit warning ‘but did not increase Carillion’s rating to its highest rating, “high risk” as it accepted Carillion’s argument that it was already in receipt of the sensitive financial information such a rating would require and that did not wish to risk precipitating Carillion’s financial collapse’.
The company subsequently announced £1.9bn of new government work, including £1.3bn of HS2 contracts. Many contracts had been agreed before the profit warning, although in some cases contracts were signed, or variations agreed, afterwards.
According to the NAO, none of the contracting authorities believed they had grounds for disqualifying Carillion’s contracts under procurement rules. Carillion’s partners in joint ventures were also liable to take over and finish the contracts if Carillion failed.
In the case of Network Rail, ‘not awarding contracts would have meant re-procuring and redesigning the projects, increasing costs for the taxpayer and delaying work'. At the point of liquidation, Carillion had around 420 contracts with the UK public sector.
The Cabinet Office suggests all services have continued uninterrupted following liquidation, although work on some construction contracts stopped including two PFI hospitals, the NAO said.