97. The capital structure of many of the large companies involved in public sector services means that it was increasingly likely a company would fail. The increased concentration in the market meant that when a company did fail, it was more likely that it would have a major impact. Companies in this case may become too big to fail. There have been recent cases in the public sector where this has been a reality: in 2016, Learndirect received an adverse Ofsted report; whereas the Department for Education would normally have cancelled the company's contract, in this case it did not. PAC speculated after these events as to whether this suggested that Learndirect Ltd was "too big, and too important to government to be allowed to fail".226
98. The NAO in 2015 published guidance to Departments about the failure of providers of public services. They suggested that Departments should develop contingency plans for failure.227 Our predecessor Committee made similar points after the collapse of the charity, Kid's Company, when we argued that contingency plans should be prepared to protect vulnerable users in the event of a failure.228
99. The Government has argued that Carillion's collapse was not entirely due to their UK government contracts. The Minister told us that Carillion's difficulties "arose out of some construction contracts" and involved "overseas clients".229 Overall Carillion's margin on public sector work was 1.4 per cent in 2017.230 The Minister is correct that Carillion's business spanned the private and public sector: according to its accounts, the UK public sector accounted for 33 per cent of its global income and 46 per cent of its UK income in 2016.231 However, as we noted above, Carillion's business model made it very vulnerable to a few contracts becoming unprofitable and undermining the entire business (Paragraphs 79 to 81).
100. The Government was initially surprised by the profits warning made by Carillion in July 2017.232 PAC published papers which suggest that the Government "was not aware of Carillion's financial distress" until its July profits warning.233 This is despite the fact that some investors were cautious about Carillion from 2015. Euan Stirling, Global Head of Stewardship and ESG Investing, Aberdeen Standard Investments, told the BEIS and DWP joint committee that Carillion's "debt levels that were growing every year and every half-year as the company failed to convert its profitability into cash flow".234 Other investors however found Carillion's profit warning in July 2017 "surprising".235
101. From July 2017, the Cabinet Office began preparing contingency plans for the Government. This process was complete for central government in January 2018, though the Cabinet Office was "still seeking information on schools and local authorities" at the point that Carillion went into liquidation.236 These difficulties were apparent to the company. Keith Cochrane, the former Chief Executive of Carillion, said that the Cabinet Office "expressed their frustration to us on occasion" about their communication with other parts of the Government and found "it quite challenging" to pull together a single public sector contingency plan.237
102. In January 2018, the Government took the decision not to supply Carillion with emergency liquidity. Sir Philip Green, the Chair of Carillion at the time, said that he was "deeply disappointed" and "surprised" by the Government's decision as, in his view, "this was a business capable of making cashback profits in the medium term."238 Carillion asked for a total of £223 million support for a period from January to April 2018, including £160 million of direct support from the Government and the deferral of £63 million of Carillion's tax liabilities.239
103. The Government decided not to provide this support. The Cabinet Office were pessimistic about Carillion's plans for the future and believed the company might ask for further funding in the future.240 They performed an options analysis exercise which "concluded that a trading liquidation was the preferred option" as it "met the Government's objectives" to maintain services, minimise disruption, maintain job security, minimise cost and avoid setting a precedent.241 The Government argued that it was "right not to reward failure" and that Carillion's "directors, shareholders and lenders… should bear the brunt of the losses".242
104. At this point, the Government's contingency plans came into operation. The Minister argued that the Cabinet Office at this point faced "one of the biggest challenges that it has probably ever confronted".243 The collapse of Carillion, according to him, represented "a huge risk to some of our core public services".244
105. The Minister said that "the contingency planning for the most part did work effectively" and "there was no interruption in the provision of key Government services".245 The Local Government Association told us in their experience that services had continued on the ground.246 Sir Amyas Morse pointed out that in many cases the partnership structures the Government had designed "worked rather well".247 The NAO believe that the net costs of the liquidation of Carillion to the Cabinet Office will be £148 million (the cost to the public sector as a whole will be "slightly higher").248
106. As some failure of suppliers is inevitable, we have heard suggestions about how the Government's approach to failure might be improved after Carillion. Sir Amyas Morse said that the Government should "have more open discussions with bidding contractors about scenario planning and what would happen in certain scenarios".249 Rupert Soames, CEO of Serco, and Matt Dykes from the Trade Union Congress both supported "living wills" (meaning a document setting out clearly what would happen in the event of a company failing).250
107. Contractors can and have withdrawn in the past from contracts in situations where they themselves did not go bankrupt. For example, on the Department for Work and Pensions troubled providers threatened to pull out in December 2012.251
108. John Manzoni told us that the Government also could see the point of ensuring that suppliers had contingency plans to ensure services would continue.252 The Minister told us that the Government was pursuing its own review of its work with Carillion during its collapse to identify lessons for the future.253 In a speech in June 2018 the Minister said that the Government would "require all key suppliers to develop what are known as 'living wills'".254
109. The Government made the right decision to let Carillion fail. The Government lacked confidence in the plans put forward by the company's management. The cost of funding the company would have been higher than the costs of the liquidation. It is notable that the shareholders and financers of Carillion have lost money through the failure of the company. We agree with the Minister that this is appropriate as it sends a signal that ultimate responsibility for Carillion rested with its management, shareholders and financers.
110. The failure of Carillion could have resulted in the collapse of public services. It did not. The Cabinet Office and the Government ensured through contingency plans worked on between July and January that they could cope with the liquidation. The Government deserves credit for ensuring that, in January 2018, services mostly continued. The Government were right to prioritise the interests of the public who use those public services.
111. The Minister for the Cabinet Office has announced a review of how the Cabinet Office responded to the Carillion crisis. That review should take note of the weaknesses in the Government's approach. These include the Government's surprise that Carillion issued a profits warning in July 2017, when some investors had been warning about the state of the company for years.
112. The Cabinet Office should ensure that it holds appropriate information about the contracts held by each of its strategic suppliers and aggregate the risk exposure from across the whole of Government to large contractors like Capita and Serco. We understand that the Public Accounts Committee will be reporting on this issue shortly and we await their recommendations with interest. The Cabinet Office should also ensure that it learns lessons from this crisis about how to quickly collaborate with local government to deal with the issues raised by a collapse such as Carillion.
113. We welcome the Minister's commitment to bring forward proposals for living wills with each key strategic supplier. The Government should lay out in their response to this report what these living wills will contain. The Government should clarify whether these wills would only apply when a contractor goes bankrupt, or whether they would also apply when a contractor withdraws effectively from a contract. The Government should set out measures to ensure that the public knows that these living wills are agreed: so that users of services can have confidence in their resilience despite what may or may not happen to particular companies.
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226 Public Accounts Committee, The monitoring, inspection and funding of Learndirect Ltd, Twenty-Second Report of Session 2017-19, HC 646, p. 3
227 Report by the Comptroller and Auditor General, Principles Paper: Managing provider failure, Session 2015-16, HC 89, p. 15
228 Public Administration and Constitutional Affairs Committee, The collapse of Kids Company: lessons for charity trustees, professional firms, the Charity Commission, and Whitehall, Fourth Report of Session 2015-16, HC 433, p. 43
229 Q764
230 Report by the Comptroller and Auditor General, Investigation into the government's handling of the collapse of Carillion, Session 2017-9, HC 1002, p. 7
231 Ibid. p 16
232 Ibid. p. 7
233 Public Accounts Committee, Forty-first Report of Session 2017-19, Government risk assessments relating to Carillion, HC 1045
234 DWP BEIS Joint Inquiry Q998
235 DWP BEIS Joint Inquiry Q1026
236 Report by the Comptroller and Auditor General, Investigation into the government's handling of the collapse of Carillion, Session 2017-9, HC 1002, p. 31
237 Q112
238 Q116
239 Report by the Comptroller and Auditor General, Investigation into the government's handling of the collapse of Carillion, Session 2017-9, HC 1002, p. 37
240 Ibid. p. 44
241 A trading liquidation involved insolvency proceedings starting but with the Insolvency Service funded to continue public services. Report by the Comptroller and Auditor General, Investigation into the government's handling of the collapse of Carillion, Session 2017-9, HC 1002, pp. 41-3
242 David Lidington, Chancellor of the Duchy of Lancaster speech to Reform, June 2018
243 Ibid
244 Ibid
245 Q767
246 Q322
247 Q548
248 Report by the Comptroller and Auditor General, Investigation into the government's handling of the collapse of Carillion, Session 2017-9, HC 1002, p. 48
249 Q550
250 Q675 (Rupert Soames), Q726 (Matt Dykes)
251 Report by the Comptroller and Auditor General, Programmes to help families facing multiple challenges, Session 2013-14, HC 878, p. 8
252 Q809
253 Q751
254 David Lidington, Chancellor of the Duchy of Lancaster speech to Reform, June 2018