‘Procurement lessons must be learned’ after Carillion demise
Trade bodies and unions have called on both the UK and Scottish governments to ensure that appropriate lessons are learned for future decisions on the procurement of large scale construction projects following the collapse on the UK’s second biggest construction firm.
Carillion was placed into compulsory liquidation before opening of business this morning after talks with the UK government to save the company were unsuccessful.
The firm had been involved in the £745 million Aberdeen Western Peripheral Route (AWPR) and had contracts with NHS Greater Glasgow and Clyde and Network Rail among many others and was also responsible for two facilities management contracts worth £158m with the Ministry of Defence (MoD) which cover 83 military sites in Scotland.
The Scottish Building Federation (SBF) said the Scottish Government must learn lessons on the procurement of large scale construction projects and also raised concerns about the potential impact of the company’s liquidation on smaller subcontractors currently working on major projects.
Scottish Building Federation President Stephen Kemp, managing director of Orkney Builders, said: “The news that Carillion has now gone into liquidation has major ramifications for the UK construction sector. But it should also stand as an important lesson for government that, when it comes to awarding public sector work, big is by no means always best. As a trade federation, we have long argued that the bundling of contracts into huge frameworks that only the very biggest companies can bid for is not only detrimental for SME contractors that are unable to compete – it also creates big risks for government when something like this happens.”
Mr Kemp added: “I think the Scottish Government needs to take a closer look at procurement practices and put in place measures to enable greater SME participation. This may require the procuring authority to do more work to manage the contract across multiple contractors. But spreading the work and associated risk across multiple smaller companies would not only be good for the industry – it should deliver better outcomes for the taxpayer.”
Willie Gray, managing director of William Gray Construction and director of the Scottish Building Federation, said: “We are concerned about the potential fall-out of this news on smaller contractors working on major projects involving Carillion such as the Aberdeen Western Peripheral Route. We are now contacting the SBF membership across Scotland to identify any subcontractors who may have been adversely affected by Carillion going into liquidation. We will be offering them whatever help we can to negotiate this difficult period and ensure those adverse effects are kept to a minimum.”
The Federation of Master Builders (FMB) said the UK government must learn from Carillion’s demise and assess its over-reliance on major contractors.
Brian Berry, chief executive of the FMB, said: “Carillion’s liquidation is terrible news for all those who work for the company and it will have serious knock-on effects for the many smaller firms in its supply chain, some of which will be in serious financial danger as a result of Carillion’s demise.”
He added: “Carillion’s liquidation raises serious questions for the government, not least about its over-reliance on major contractors. The government needs to open up public sector construction contracts to small and micro firms by breaking larger contracts down into smaller lots. That way, it can spread its risk while also reaping the benefits that come from procuring a greater proportion of its work from a broad range of small companies.
“Construction SMEs train two-thirds of all apprentices and are a sure-fire way of spreading economic growth more evenly throughout the UK.”
The Association for Consultancy and Engineering (ACE) warned that the collapse of Carillion also has a number of major ramifications for its own industry.
Chief executive, Dr Nelson Ogunshakin OBE, said: “It’s always a sad day when a company goes into liquidation, putting at risk thousands of jobs and livelihoods.”
He added: “In the immediate term, we need to ensure that our members from the consultancy and engineering sector, who worked with Carillion on some of the key infrastructure contracts they held, are paid. There are always competing interests when a company goes into liquidation, but the importance of our members to delivering the nation’s infrastructure is such that we would argue they should be at the front of any queue. We will lobby the government and creditors to ensure that this is the case.
“In the medium term, our members are ready and willing to provide their knowledge, expertise and guidance to the government to help see them through the difficult months ahead. We cannot allow the collapse of Carillion to slow the delivery of some of our major infrastructure projects like HS2, nor affect the maintenance of our existing infrastructure, like the rail network.
“In the long term, this is an awakening for major structural change in the construction industry. The challenges of low profitability and negative cash flow experienced by the contracting sector confirm that the current procurement process is broken. A new business model, coupled with client leadership, is urgently required to make our industry fit-for-the-future and ensure we won’t experience difficulties with other major players.”
Unions have warned that the collapse of Carillion collapse must not mean “business as usual” for the UK’s largest companies and is another example of the “perils of privatisation” within the public sector.
Jim Kennedy, Unite national officer for local government, said: “These have been a grim few days for this workforce. They will head into work today not knowing if their wages, pensions and even their jobs are safe.
“The administrator must provide reassurances on these to the workforce as a matter of urgency, and also that vital public services on which many depend will continue to be provided.
“We will be seeking a meeting with the administrator today to press home that that the priorities now are not the shareholders but the workers who provide the service and the people relying on them.
“One thing is evidently clear from this: there must be no business as usual for big business. There has to be an urgent inquiry into how a company that loaded itself with debt, which undercut competitors with unsustainable bids, which hoovered up vats of public money, and that had repeatedly alerted the government to its own financial shortcomings got its hands on so much of the public sector and taxpayers’ cash.
“We are also very concerned about the impact of Carillion’s collapse on the wider supply chain. Many of these small firms are the lifeblood of their community but their exposure to Carillion’s debt puts them at serious risk.
“PWC must put workers and suppliers at the head of the queue for payment, not the banks and certainly not the Carillion boardroom whose greed and recklessness has brought this giant company to its knees and imperiled so much of our public services.”
Rehana Azam, GMB national secretary, added: “The fact such a massive government contractor like Carillion has been allowed to go into administration shows the complete failure of a system that has put our public services in the grip of shady profit making contractors.
“The priority now for the government and administrators is making sure kids in schools still get fed to day - and our members still have jobs and pensions.
“There is no place for private companies who answer to shareholders, not patients, parents and service users in our public services.
“What’s happening with Carillion yet again shows the perils of allowing privatisation to run rampant in our schools, our hospitals and our prisons.”
GMB also called on Prime Minister Theresa May to act immediately to take Carillion contracts into public ownership.
The union called for a full and transparent inquiry into the provision of public services by private sector contractors once jobs and services were secured.
Tim Roache, GMB general secretary, said: “The Prime Minister must act right now to bring Carillion contracts back into public ownership. That is the only way to safeguard the jobs and services this mess has put at risk.
“Merely propping up this botched shell of a company is not a secure or stable solution for our public services. It’s high time we brought this vital work back in house.
“Despite months of profit warnings, ministers have failed to prepare for the collapse of Carillion, which has plunged workers into crisis today.
“The government has continued to spoon-feed the company taxpayers’ money by awarding them yet more contracts. Ministers should be hanging their heads in shame today - it’s a complete shambles.
“Carillion is the tip of the iceberg. Continued privatisations have mortgaged our future and services that we all rely on to profiteering companies.
“The minute jobs and services are secure, the Prime Minister must conduct a full and transparent inquiry into the provision of public services by private sector contractors with a view to taking them back under public control. What is unfolding at Carillion must never be allowed to happen again.”
The Federation of Small Businesses (FSB) stressed the importance of Carillion’s small suppliers being paid what they are owed.
FSB national chairman, Mike Cherry, said: “It is vital that Carillion’s small business suppliers are paid what they are owed, or some of those firms could themselves be put in jeopardy, putting even more jobs at risk besides those of Carillion’s own employees.
“These unpaid bills may well go back several months. I wrote to Carillion back in July last year to express concern after hearing from FSB members that the company was making small suppliers wait 120 days to be paid.
“Sadly these kind of poor payment practices are all too common among some big corporates. Perhaps if they weren’t it would be easier to spot the warning signs of a huge company in financial trouble.
“When the dust settles on this sorry saga, there is also a wider lesson to learn about the concentration of public contracts in the hands of a small number of very big businesses. Public procurement must be much more small-business friendly, in which it is easier for small firms to navigate the system and the Government should prioritise meeting its target of at least one third of taxpayer-funded contracts going to smaller firms.”
The Institute of Directors (IoD) said governments must consider how they can better monitor the robustness of governance at key contractors.
Roger Barker, head of corporate governance, said: “We are still in the early stages of finding out what went wrong at Carillion. However, it is clear that major providers of public services must be governed in a prudent manner. Today’s outcome suggests that effective governance was lacking at Carillion, and we must now consider if the board and shareholders have exercised appropriate oversight prior to the collapse.
“There are some worrying signs. The relaxation of clawback conditions for executive bonuses in 2016 appears in retrospect to be highly inappropriate. It does no good to the reputation of UK business when top managers appear to benefit in spite of the collapse of the organisations that they are responsible for.
“Going forward, it may be necessary for government to consider how it can better monitor the robustness of governance at key contractors.”