19. Some of the Government's contractors developed unsustainable business models over recent years, underbidding for contracts, recklessly acquiring other businesses and maintaining high bonuses and dividends. For example, Carillion's balance sheet, before its failure, was propped up with high risk construction contracts and high valuations of goodwill, arising from overpayments for acquisitions. The directors and shareholders of the companies involved are responsible for this. Share prices, buy, hold or sell recommendations and public statements are a poor guide to the long term security of companies. Shareholders can accept higher risks for an equity rate of return and can exit at short notice. Government is in for the long term and cannot take such risks with public money or with the security of public services. The Government as the major customer of these firms is responsible for the services they supply and consequently needs to ensure that its contractors are able to deliver those services sustainably. As Ministers are accountable for the resilience of services, they cannot be blind to the risks that the companies delivering those services hold. (Paragraph 86)
20. The Government should improve its due diligence processes to understand the resilience of the cashflow and financial position of its partners. In 2017, the Government still awarded contracts to Carillion despite the weakness of the company's balance sheet on the basis of "quite detailed tests on the financial capability of Carillion". The Government should urgently review its due diligence procedures on the contracts awarded to Carillion. The Government should commit to announcing its findings from this review in its response to this report. (Paragraph 87)
21. There is widespread agreement that contestability (the credible threat of competition) is important in order to support an efficient market for public sector services. Contestability motivates firms to improve services and cut costs and motivates the public sector itself in the same way. The combination of limited competition and high barriers to entry generates worse outcomes however for the Government. (Paragraph 94)
22. The Government needs to ensure that the market for Government contracts remains contestable from within the public sector, from existing companies and new entrants. We welcome the Minister's commitments in this area and we await to see in the Government's response details on its new measures to increase small and medium sized enterprises' participation in the market. (Paragraph 95)
23. The Government should test the thesis that less competition (as opposed to contestability) also undermines outcomes for the public sector. This reflects a widely held consensus but it would be useful for the Government to commit in its response to commission further research. The Government should outline in its response to our report the detail behind the Minister's commitment to a new playbook of guidelines, rules and principles. (Paragraph 96)
24. 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. (Paragraph 109)
25. 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. (Paragraph 110)
26. 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. (Paragraph 111)
27. 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. (Paragraph 112)
28. 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. (Paragraph 113)