Carillion

Lord Young of Cookham Excerpts

Monday 15th January 2018 Lords Chamber

[Lord Young of Cookham (Con)]

My Lords, with the leave of the House, I shall repeat an Oral Statement made by the Chancellor of the Duchy of Lancaster in the other place. The Statement is as follows:

“Mr Speaker, I wish to make a Statement to update the House on the situation relating to Carillion plc. Today the directors concluded that the company is insolvent and that it is going into liquidation. The court has appointed the official receiver as liquidator. It is regrettable that Carillion has not been able to find suitable financing options with its lenders, and I am disappointed that the company has become insolvent as a result. This is the failure of a private sector company, however, and the company’s shareholders and lenders will bear the brunt of the losses. Taxpayers should not, and will not, bail out a private sector company for private sector losses or allow rewards for failure.

I understand that members of the public and employees will have concerns at this time. The Government are doing everything possible to minimise any impact on employees. Let me be clear: all employees should continue to turn up to work in the knowledge that they will be paid, and to support the staff we have set up a helpline using Jobcentre Plus, through its rapid response service. The Government are also doing everything they can to minimise the impact on subcontractors and suppliers, who will continue to be paid through the official receiver. The action that we have taken is designed to keep vital public services running, rather than providing a bailout on the failure of a commercial company. The role of the Government is to plan and prepare for the continuing delivery of public services that are dependent on these contracts; that is what we have done.

The cause of Carillion’s financial difficulties is not, for the most part, connected with its government contracts but with other parts of its business. Private sector contracts account for more than 60% of the company’s revenue; the vast majority of the problems the company has encountered come from those contracts, rather than the public sector. Our top priority is safeguarding the continuity of public services, and we have emphasised this to the official receiver. We are also laying a departmental minute today notifying the House of a contingent liability incurred by my department in indemnifying the official receiver for its administrative and legal costs.

The official receiver will take over the running of services for a period following the insolvency of the company. The Government will support the official receiver to provide these services until a suitable alternative is found, either through another contractor or through in-house provision. The court appointment of the official receiver will allow us to protect the uninterrupted delivery of public services, something which would not have been possible under a normal liquidation process.

The official receiver is under a statutory duty to investigate the cause of failure of any company, and it is under a duty to report any potential misconduct of the directors to my right honourable friend the Secretary of State for Business, Energy and Industrial Strategy. My right honourable friend has asked that the investigation look at the conduct not only of the directors at the point of its insolvency, but also of any previous directors and whether their actions may have caused detriment to its creditors; this includes detriment to any employees who are owed money. It will also consider whether any action by directors has caused detriment to the pension schemes.

Carillion delivered a range of public services, across a number of sectors, including health, education, justice, defence and transport. In most cases, these contracts had been running successfully. We have been monitoring Carillion closely since its first profit warning in July 2017. Since then, we have planned extensively for the current situation and have robust and deliverable contingency plans in place. These are being implemented immediately to minimise any disruption and to protect the integrity of public service delivery. Other public bodies have been preparing contingency plans for the contracts for which they are responsible. The majority of the contracts awarded after the company’s July profit warning were joint venture, where the other companies are now contractually bound to take on Carillion’s share of the work.

I recognise this is also a difficult time for pension holders. The Pensions Advisory Service has set up a dedicated helpline for staff and pensioners who have concerns about their pensions. Those already receiving their pensions will continue to receive payment from the Pension Protection Fund. For those who have started an apprenticeship programme with Carillion, the Construction Industry Training Board has set up a task force to assist apprentices to seek new employment, while working with the Education and Skills Funding Agency to find new training placements. The official receiver will be in contact with all apprentices. Companies and individuals in the supply chain working on public sector contracts have been asked to operate as usual. Normally in the event of a company going into liquidation, the smaller firms working for it move across to the new contractor which takes on the work.

The private sector plays an important and necessary role in delivering government services, something recognised by this and by previous Governments of all political parties. Currently, 700 PFI and PF2 contracts reflecting capital investment of approximately £60 billion are being delivered successfully. Furthermore, we have a number of service provision contracts being delivered successfully by a range of companies. These contracts allow us to leverage the expertise of specialist providers and deliver value for money for taxpayers.

I would like to reassure the House that we are doing all we can to ensure the continuity of public services that were provided by Carillion and to support an orderly liquidation of the company. I shall write to Members today to summarise the situation and inform colleagues of a helpline for the use of Members and their staff, to provide answers to any constituency problems that may arise.

Along with other ministerial colleagues, I shall keep the House updated on developments as the official receiver starts to go about its work, and I commend this Statement to the House”.

My Lords, that concludes the Statement.

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[Lord Stunell (LD)]

My Lords, I thank the Minister for repeating the Statement. The collapse of the second-largest construction company in the country and a major provider of public services across the country is cause for concern and regret, not least for those employed by that company and those who depend on it because they are part of a long supply chain in many different industries, particularly the construction industry. The official receiver has been appointed and the Statement says that one of his duties will be to hold an inquiry. Can the Minister say something about the status of staff and employees working on public sector service provision and those working on private sector contracts? What is their future? What do the Government intend to do to protect them?

There is, of course, anger on the part of many of those working for and with the company that the warning signs were not quickly followed up by the Government after the alert in July—not least that a Crown representative was not appointed when good practice and ministerial guidelines say that that should have happened. I hope that the Minister will say something about that. If the official receiver’s inquiry does not cover such issues, I will certainly join the noble Lord, Lord Hunt, in calling for a wider inquiry.

In view of Carillion’s role in delivering numerous large-scale infrastructure projects, what are the implications of its collapse on those projects and their timetables, and what impact may it have on the Government’s industrial strategy? We should bear in mind that construction and construction training were key elements of that strategy and that many apprentices are employed not just by Carillion but by those in the supply chain, whose continuing apprenticeships are clearly at risk. Can the Minister help us on that? What are Ministers doing to minimise damage to public services and the capacity of the construction industry? Subcontractors face a very difficult time. It is one thing to say that contracts can be transferred to their partners—for instance, on HS2—but what about the backlog of unpaid bills that Carillion will owe them? Will that be coughed up by their new partners? Is that part of the deal that was arranged when the partnerships were set up, or is it more likely that the subcontractors will be expected to bear the loss?

Finally, what does the Minister have to say about the governance of that company and the way that the warning signs were there? Even the chairman has some form from times past. What exactly do the Government believe is the right governance structure for a major contractor for public services so that in future there will be protection for the public, for employees and for the country?

[Lord Young of Cookham]

I am grateful to both noble Lords for their interventions, and of course I understand the anxiety shared, I think, on all sides of the House, about the future for the employees and for those in receipt of the services provided by Carillion. To put it into perspective, if one looks at the current live contracts held by Carillion, roughly one-third were let before 2010, roughly one-third were let between 2010 and 2015, and roughly one-third were let between 2015 and now.

On the point about taxpayers’ money being at risk, as a matter of principle, money is transferred from the Government to contractors in return for work that has been undertaken. Looking ahead at the money we are going to pay for services, it would have been paid to Carillion for the relevant services, and obviously it will now be paid through the official receiver. The Government will look to the official receiver to sell off, if that is his decision, those profitable operations to get some resources in.

Reference was made to the statutory obligations of the receiver to look at the conduct of the company. I understand that the Select Committee on Public Administration and Constitutional Affairs in another place has already announced that it will make an inquiry. The National Audit Office and the Public Accounts Committee may also take an interest in this—that is a response to the point made by the spokesman for the Opposition as to how the Government will be held to account; there is a variety of means by which that can happen.

On contingency plans, before Christmas the Government made local authorities, academy trusts and others aware of the financial problems confronting Carillion and advised them to put in place contingency arrangements. From what I have heard so far today, most of the contingency arrangements are working satisfactorily—although, as I said, there may continue to be some difficulties.

As regards the loss, obviously the shareholders have been wiped out and the banks advanced substantial sums of money to Carillion, so the primary losers here will be, as I said, the shareholders, the banks, and any others who have lent money to Carillion.

On pay and conditions, I understand that for the time being they remain the same; the official receiver will continue to pay and employ them. There is a distinction to be made at some point between those carrying out public sector work and those doing private sector work for Carillion—a point raised by the spokesman for the Liberal Democrats. On contracts held by Carillion not with the Government but with private sector companies, I understand that the official receiver is allowing a period of up to two days for those companies to decide whether they want to take over the contracts. So far as the public sector contracts are concerned, as I said, the Government’s top priority is continuity of service. The official receiver will continue to make resources available to fund the public services.

The noble Lord asked about terms and conditions. I am very reluctant to give an off-the-cuff reply about whether TUPE and similar things will apply, and I hope that he will understand if I take advice on that rather than try to answer it.

On the pension fund, I think that there are 14 schemes under the Carillion umbrella, some of which may be in surplus and others of which are not. The Pension Protection Fund will carry out an assessment. If the schemes are not viable, they will be taken in-house by the PPF, together with the assets of the scheme. Those already receiving their pension will continue to get it. Those who are yet to retire will get, I think, 90% of their entitlement, subject to a cap of somewhere around £35,000.

On the supply chain, it is important that the subcontractors continue to turn up. The official receiver has the necessary resources to continue to pay them.

On the question of apprenticeships, I understand that the CITB, the Construction Industry Training Board, is aware of the issue and will try to find other companies to take on those apprentices who have been displaced by Carillion or the subcontractors, and indeed those who are hoping to take up employment with them.

I think that I have answered most of the questions that I am able to. I am conscious that I have not answered all of them but my right honourable friend will keep the House of Commons updated on developments as the official receiver starts to go about his work, and I am sure that that applies to your Lordships’ House as well.

[Lord Lawson of Blaby (Con)]

My Lords, the opposition spokesmen have called for inquiries into the Carillion affair, but the Minister has pointed out that one or two inquiries are likely to take place anyway. However, perhaps I may suggest to him that the time has come for a thorough, independent inquiry into the whole PFI—private finance initiative—process.

This idea, I think, originated in Australia and it came to me when I was Chancellor 30-odd years ago. My Treasury officials were keen on it but I refused to have anything to do with it. Subsequently, my successors—particularly, but not exclusively, Mr Gordon Brown—were enthusiastically in favour of it. Its purpose, in the eyes of the Treasury officials who tried to persuade me to take it up, was that it enabled you, at least in the short term, to dress up considerable amounts of public expenditure and put them off the public sector balance sheet. That is not a good reason for adopting something which, in my judgment, does not give good value for money for the taxpayer, and it introduces a degree of moral hazard, which we see very much in the Carillion affair—and there have been other examples. It is important that we take stock at this juncture and decide whether the whole PFI scheme should be proceeded with further. We have now had enough evidence that it is not good value for money and therefore not sensible from the point of view of the taxpayer.

[Lord Young of Cookham]

I am grateful to my noble friend. I agree with the first half of his question but I would not go quite as far as he did in the follow-up. It is important not to condemn all PFIs. This initiative has enabled the country to invest in infrastructure at a faster rate than if the investment were wholly funded by public borrowing, thereby enabling us to improve productivity. There are many very successful examples of PFI.

My noble friend’s first point was about a review. A review of PFI, which I read last night, was carried out in 2010 by the NAO, which stood back and looked at the lessons learned. It came up with a number of conclusions—for example, that the public sector should make sure that it had adequate negotiators to deal with the very skilled negotiators in the private sector. It is beyond my pay grade, but my noble friend’s suggestion that we should take this opportunity to stand back and look at the PFI model to see whether there are any improvements to be made in the light of the Carillion and other affairs seems wholly worth while. However, I hope that the Government do not go quite as far as he implied; namely, that we should rule out this form of partnership for ever and a day.

[Lord O’Neill of Clackmannan (Lab)]

My Lords, is the Minister aware that the supply chain is of some significance here? Is he also aware that many of the companies engaged in that supply chain at the second and third-tier levels employ fewer than 10 people? I should say that I have declared my interests in the register. Given the payment structure which Carillion adopted, many companies in the supply chain have completed the work but are still waiting to be paid because of the 120-day period between completion of the work and payment being made for it. From what has been said today, these people seem to have been forgotten about. They have done their duty under their contracts with Carillion and have now been left hanging with no prospect of payment or of getting any kind of money for the supplies they have utilised and the workforce they have engaged.

[Lord Young of Cookham]

The noble Lord asks a very good question—so good that I asked it myself when I met officials earlier today. It is a serious issue that there may be circumstances where Carillion has been paid but the money has not filtered down the supply chain. I have made inquiries about this. The priority of the official receiver is to maintain continuity of service and I gather that there is provision within the resources available to the receiver, in the circumstances that the noble Lord has just mentioned, for the payments that have not filtered through to be made, in order to ensure that continuity of service is provided.

[Lord Trefgarne (Con)]

My Lords, I am aware that the Ministry of Defence had important business with Carillion. Can the Minister say how that will be affected?

[Lord Young of Cookham]

The Government have been in touch with a range of government departments which have an interest, including the Ministry of Defence. The top priority is to make sure that the catering, cleaning and maintenance services provided by Carillion continue to run effectively, and I have been assured that the contingency planning carried out by the ministry means that there will be minimal impact on service personnel and their families as a result of what has happened today.

[Baroness Randerson (LD)]

My Lords, the ongoing relationship with Carillion is yet another example of poor judgment at the top of the Department for Transport. Carillion is the second-largest supplier to Network Rail and, as has already been stated, the contract with HS2 was signed after early profit warnings for the company were issued. Can the Minister now assure us that the Government will review the guidelines for and operating procedures of departments across government so that concerns about financial stability are taken into account before contracts are awarded, and so that no firm can be awarded a contract unless it can demonstrate its financial viability?

[Lord Young of Cookham]

My Lords, I am grateful to the noble Baroness. It is worth making the point that of the seven contracts that were let post July, six were joint ventures; in other words, there was joint and several liability to undertake the work if one of them collapsed. In the case of HS2, which was the largest at £1.4 billion in total, Kier has already announced this morning that it has put in place contingency plans to ensure continuity of service. The two MoD contracts were joint ventures, as were the two HS2 ones, and so was the Network Rail contract to Carillion Powerlines. Only one relevant contract was not a joint venture where Network Rail is now transferring the work to another framework contractor.

However, the noble Baroness has made a good point. When one assesses who has won a tender, one has to do it against a number of set and published criteria. If you do not, you are up for judicial review. One of those criteria is financial stability. Clearly, whatever the test was back in July, it was passed. It relates to a point made by my noble friend Lord Lawson, which is whether one should take this opportunity just to stand back and look at whether the criteria used for assessing financial stability are correct and robust enough or whether they need firming up.

[Lord Lea of Crondall (Lab)]

My Lords, is not a picture emerging of some prima facie creative accounting going on? The noble Lord, Lord Lawson, makes a fair point when he suggests that not every contract should come directly from the Government. The picture now is that in almost everything done by Wimpey, Costain and so on, they are called subcontractors, and that applies to the workforce as well. Does the inquiry not need to cast a beady eye over how far the culture of subcontracting everything—much more so than was true previously in the construction industry—is part of the background to this problem because no one can take an overall view of what is happening on the balance sheet?

[Lord Young of Cookham]

That is quite a complicated question. One can make a good argument for having subcontractors—namely, people who specialise in a particular discipline and compete against each other for contracts, rather than one company trying to cover the whole spectrum of services. Many very successful industries are built on a structure of contracts and subcontracts. Noble Lords need look only to the airline industry to see a whole range of contracts: companies lease the aeroplanes and subcontract baggage handling and catering and so on, and, on the whole, it is a satisfactorily run industry. I would not want to get drawn into conclusions about what structure is the right one for a particular industry. On the question of accounting, I should have said that the FCA and the FRC are both conducting their respective inquiries—one, I think, into audit, and the other into statements that were made or not made about the company’s prospects. These particular aspects are being looked at by the relevant authorities.

[Lord Elystan-Morgan (CB)]

On the issue of pensions, is it not the case that the statutory body that will be reimbursing loss will do so not to the tune of 90% but 85%? If I am wrong in that, I am very happy to be corrected. However, in any event, and whatever the figure, do the Government accept a moral responsibility in this matter to ameliorate so far as they possibly can the loss that many people will feel in respect of quite modest pensions?

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[Lord Young of Cookham]

I am trying to find the appropriate information—and I have now found it. It says that it is likely that the majority of pension schemes will transfer into the PPF with a consequential effect on members’ benefits. Pensioners receive 100% compensation and non-pensioners receive 90% of their accrued pension, subject to an overall cap, which is what I think I said in response to an earlier question. If by any chance this briefing is wrong, the person who wrote it will be writing very quickly to the noble Lord. On the broader issue, the Pension Protection Fund is funded by a levy on all pension funds, and I am confident that it has the resources to take on board the liabilities it is likely to inherit from Carillion. The PPF will, of course, get the assets of the scheme, which, at the time of the last audit, were worth £2.267 billion.

[Lord Higgins (Con)]

My Lords, following up the point on pensions, clearly a heavy burden will fall on the Pension Protection Fund. If I understand what my noble friend says, there are a number of individual pension funds involved. What is the position of the trustees of each of those, and will an inquiry be made into the extent to which they have fulfilled their obligations?

[Lord Young of Cookham]

That is a very good question and I hope that whoever has the responsibility for making sure that the trustees do their job—it is probably the Pensions Regulator—takes my noble friend’s question on board. There are 14 separate defined benefit pension schemes involved, which the Carillion group acquired as it expanded. Overall, there is a significant pensions deficit of £523 million as at 2013—some estimates indicate that it is now up to £1.6 billion. Perhaps I could write to my noble friend about the responsibilities of trustees, because I do not want to imply in any way that they have not been conscientious in discharging their responsibilities.

[The Lord Bishop of Durham]

My Lords, I note the comments already made about apprentices, but it is often those at the beginning of their careers who are most affected and most quickly forgotten. Carillion itself committed to creating 5,000 apprenticeships by 2019, and its website states that around 2,000 students are in training as part of an apprenticeship programme across 13 centres at any one time, so we are not talking about a small number. How can the Minister assure us that those apprentices and students—because some are on student schemes—will be given serious consideration to ensure that their careers are not affected?

[Lord Young of Cookham]

I am grateful to the right reverend Prelate. I said in my opening statement that the official receiver will be in touch with all of the apprentices with a view to finding alternative placements for them to continue their work. I also identified a role for the Construction Industry Training Board. The right reverend Prelate raises a crucial point and I will write to him with more detail about exactly how we will pursue the issue of making sure that the apprentices continue their apprenticeships and that new apprentices have somewhere to go now that they cannot go to Carillion.

[Lord Berkeley (Lab)]

Can the Minister possibly explain something? In the last five years, contracts such as for the railways, HS2 and maybe others have become more and more complex. Therefore, the cost of responding to them can, I am told, be £10 million or £20 million. These companies are not making a lot of money, so if they lose a contract they have lost that £10 million or £20 million. This may happen to rail franchises as well. If this goes on, I worry about who will be next. It is getting more and more complex, the cost is greater and the companies do not really make that much profit to get a reward. I would be interested in the Minister’s comments.

[Lord Young of Cookham]

That goes slightly wider than the Statement. There are a few limited circumstances where the Government have undertaken to reimburse people bidding for a contract for the costs of tendering. As a general principle, the Government do not pay—nor does any customer pay—for people to produce a bid. Obviously, there would be consequences for public expenditure if we went down that road. At the moment, it is not such a deterrent that we are failing to get good competition for contracts. If it appeared to be a serious deterrent, we would look at it again, but at the moment I do not think that that is the case.

[Lord Birt (CB)]

My Lords, the Carillion share price crashed in July and pretty much overnight lost 75% of its value, leaving a company with £900 million worth of debt, a pension deficit of £600 million, a market cap of £60 million and three major public sector contracts of considerable value seriously overrunning. As the Minister said, subsequent to July, seven contracts were awarded by the Government or the public sector. Was that wise? Surely, the noble Lord, Lord Lawson, is right. We must look again at the ways that contracts are awarded, and frankly at the competence of the Government in managing such contracts.

[Lord Young of Cookham]

I said a few moments ago in response to another question that, of those contracts let since July, six were joint ventures where the exposure to Carillion was substantially reduced by having other contractors underwriting Carillion if it were to withdraw. The Government can take some credit for making those precautions available. On the noble Lord’s general point, which reinforced what my noble friend Lord Lawson said, I indicated in response to an earlier question that if the assessments made of the robustness of Carillion in July ticked all the boxes in the tender document and they had to be adhered to, I agree with my noble friend Lord Lawson that this is something that we should have another look at.

[Lord Fox (LD)]

My Lords, I do not believe that the role of the auditors has been mentioned. Auditors clearly have an important role in assuring the security of companies such as Carillion. Does the Minister agree that the official receiver, which is one of the small number of companies that conduct audits in this country, may not be entirely dispassionate or capable of making the right sort of assessment of this service?

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[Lord Young of Cookham]

I think I said a few moments ago that the Financial Reporting Council had taken an interest. Again, if I am wrong I will correct myself, but I think that is the body that looks at whether auditors have correctly discharged their responsibilities. I am sure that they will be taking an interest in this case.

[Lord Naseby (Con)]

My Lords, is my noble friend aware that the depth of his response is greatly welcomed by your Lordships’ House? I re-emphasise the importance of reminding the official receiver that the payment of subcontractors is vital, because this is not the first time this happened. I have worked in the construction industry, and it was fairly common knowledge 12 months ago that Carillion was in considerable difficulty. Will my noble friend look at who in Her Majesty’s Government keeps a watch on these major contracts across departments? That question needs to be asked.

[Lord Young of Cookham]

On my noble friend’s first point, the Government subscribe to the Prompt Payment Code. Indeed, we honour that in our payments to Carillion. We would expect the official receiver to abide by the same terms in making payments on the Government’s behalf. Was his second point about the robustness of the assessment?

[Lord Naseby]

If I may help my noble friend, many of us in the industry were well aware 12 months ago that this particular company was in considerable difficulty.

[Lord Young of Cookham]

Again, that underlines a point made by a number of noble Lords, which I certainly take to heart. We should see whether the method of assessing the financial viability that we have to undertake when we award a tender needs to be reviewed in the light of what has happened to Carillion.