We must hope for real answers about Carillion. We don’t usually get them | Business


Underbidding for contracts to bring in cash – if that is what has happened – is a dangerous practice. We need to know

3500 - We must hope for real answers about Carillion. We don’t usually get them | Business






Cranes at a Carillion construction site in central London.
Photograph: Simon Dawson/Reuters

The collapse of Carillion, the building and outsourcing company, throws up so many questions about the state of UK business and government services it is difficult to know where to begin.

Lifting the lid on Carillion’s strategic plans, it is clear that the company’s board mistook tactical nous for strategy. Not that there was much common sense in taking a building company and morphing it into a conglomerate that tries to meld together the management of prisons, hospitals and schools as if they were all the same.

Worse, the board chased contracts without appearing to assess the risks. The suspicion must be that the directors needed to get cash in to service existing contracts that were going awry.

Underbidding for contracts seems to have become necessary to bring money in at an accelerated rate. This is an age-old problem of robbing Peter (the cash from the newly acquired contract) to fund Paul (a troubled existing contract that is suffering cost overruns the provider must cover). It must be hoped that the Insolvency Service report into the firm’s collapse is a no-holds-barred examination that exposes all these tactics and their effect on Carillion’s finances.

It should be a lesson to other businesses that underbidding for disparate contracts may give the business a lift with a temporary injection of cash, but stores up huge problems for the future.

Last September, the chief executive brought in to clean up the mess left by his predecessor said in the half-yearly report: “Our objective is to be a lower-risk, lower-cost, higher-quality business generating sustainable cash-backed earnings.” Unfortunately he was too late and the ship was already sinking.

Which brings us to the auditors who verify company accounts and supposedly provide a bulwark against the kinds of financial mismanagement that Carillion’s board have been accused of. Carillion was so large and sprawling that it employed three of the four main auditing firms – KPMG, EY and Deloitte – to check on its finances.

That left only PwC to take on the job of investigating the collapse for the Insolvency Service. Except that PwC recently advised the Carillion pension fund trustees about the impact of the firm going bust on the £2bn final salary scheme they oversee. As the pension scheme is a prime creditor of the company, PwC has become another conflicted participant in the insolvency.

Hopefully the Insolvency Service navigates the conflicts and uses its considerable powers to conduct a thorough investigation of how Carillion was managed.

But few people will hold their breath. It was the Insolvency Service that examined the entrails of HBOS following the bank’s collapse in 2008. HBOS was, along with Royal Bank of Scotland, offering loans on wafer-thin margins to almost anyone who wanted one. This boosted short-term profits and director’s bonuses. It also made the company vulnerable to the slightest ill wind blowing through the industry.

However, to everyone’s dismay, the Insolvency Service’s verdict, four years after the event, was that there was “insufficient evidence” to prosecute.

The government must also take its share of the blame as Carillion’s prime customer. Labour has rightly called into question the appetite for outsourcing public services and, in particular, partnership deals, whether under the banner of the private finance initiative (PFI) or other forms of “risk-sharing” collaboration that have tended to privatise the profits and socialise the risks. There are better ways to run public services.

But Jeremy Corbyn’s Labour party must address the concern, dating back 40 years, that public sector managers are in no fit state to manage large, complex infrastructure projects or even some basic services.

A sea-change in how public sector managers are trained and how Whitehall departments are run needs to happen before these schemes can be brought back “in-house” without repeating the same mistakes Carillion has made.

Black Friday was a success, but retailers are blue about winter

There was good news and bad for high street retailers in the official figures for December. The bad news was that, after poor figures for December, 2017 was the worst year for retail since 2013. Last year, shops struggled against the headwinds of rising inflation and the debilitating and constant uncertainty which was brought about by the government’s Brexit negotiations.

December itself was down 1.5% on the previous month, confirming what most of the shop owners have already indicated was a Christmas sales period they would much prefer to forget.

The good news, as every Brexiter will emphasise, is that the situation wasn’t even worse. Sales growth in 2017 was still up 1.9% on the previous year, which is a better performance than many economic forecasters dared predict.

Setting aside the “it wasn’t so bad” argument and the obvious counterpoint that consumers have yet to feel the full impact of leaving the European Union, there was another possible bright spot for retailers, and that was the movement of sales to November as a result of Black Friday.

Now a yearly shopping discounting event, Black Friday has helped spread the load of Christmas spending. For that, retailers ought to be grateful.

Such are the fireworks around the day itself that even the clothing retailer Next, so often a discounting refusenik, joined in.

It’s as if a rent-free marketplace had been invented to which the world’s most voracious consumers turned up. It might seem like a version of retail hell, where the only way to seal a deal is to lop 50% off the price, but in terms of bringing shops and consumers together, it is retail heaven.

That said, it is an event conducted mostly online and only adds to the pain felt by the traditional high street.

Finance aside, renewables will be nuclear’s real foe in the future

The new chief executive of EDF Energy admitted last week that it had been a “monstrous job” drumming up the backing for the UK’s first new nuclear power station in decades.

The next nuclear plants will need to be built for a much cheaper, subsidised price of power than the generous one awarded to EDF’s Hinkley Point C, Whitehall has warned.

So those who undertake construction will need every possible weapon at their disposal to defeat their biggest enemy:  financing.

Public finance is the magic sword that some think could slay the Godzilla-sized challenge facing Japanese firm Hitachi, which wants to build a plant on the island of  Anglesey.

Japanese press reports recently put the capital cost of the project at £19.5bn, with more than £14bn to come from loans from the UK and Japanese governments.

The rationale for Tokyo is clear. The big question is why the UK would want to shoulder the risk of such a huge scheme.

The idea of taxpayers taking on any of the construction risk of building new nuclear plants has been political anathema for years. It has become a government mantra that the subsidy cost promised to EDF is justified because the public is not bearing the risks of building Hinkley.

EDF’s chief executive confirmed last week he was also talking to the government about how to finance a second plant, at Sizewell in Suffolk.

But EDF said public finance was not a prerequisite for £16bn Sizewell C, and it is courting institutional investors. Whoever coughs up – assuming they do – it’s still unclear whether their investment will be a good one.

By 2030, when Sizewell C might be under construction, there could be five times as much offshore wind capacity as there is today, according to a report this week.

Renewables, battery storage and other technologies could prove to be the real monster facing nuclear.