Carillion and Public Sector Outsourcing

James Cartlidge Excerpts

Wednesday 24th January 2018 Commons Chamber

[Jon Trickett (Hemsworth) (Lab)]

I beg to move,

That an humble Address be presented to Her Majesty, That she will be graciously pleased to give directions to the Chancellor of the Duchy of Lancaster that the assessments of risks of Government Strategic Suppliers by Her Majesty's Ministers referred to in the Answer of 19 December 2017 to Question 114546 and any improvement plans which Crown Representatives have agreed with such strategic suppliers since 2014 be provided to the Public Accounts Committee.

Thank you for calling me to speak, Mr Deputy Speaker. My thoughts, and I am sure those of everyone in the House, have been with you during this very difficult time for you and your family.

Time is running on, and I am going to attempt to be brisk, but I am not going to be non-partisan, because the Government have been negligent in the exercise of their duty to protect the public purse. In the past two hours, the Government have attempted to pre-empt this whole debate by sending a letter to every one of us. The purpose of the letter is to attempt to whitewash the way in which the Government have conducted outsourcing, particularly in relation to Carillion. Those who have had the chance to study the letter will find the names of six companies that are going to take over the public sector contracts that Carillion was administering. I have only just had a chance to look at it myself, but that list is quite extraordinary. What a catalogue of failure!

One of the six firms donated money directly to the Tory party. Two of the firms are known for blacklisting workers. Amazingly, one of the firms is currently under investigation by the Serious Fraud Office for suspected offences of bribery and corruption. Another has previously been caught red-handed mispricing contracts, underestimating their eventual cost. As a consequence, £130 million was wiped off its share value. Another of the companies operates in the Cayman Islands and has been shown to use that location as a way of avoiding tax. Another of the firms is part of a group that has reportedly abused and exploited migrant workers in Qatar. My reaction to all that—I do not know whether it is unparliamentary—is to use three letters: WTF! What were the Government doing producing a list of that kind?

The truth is that, as it is now with this list, so it ever was with this Government. Back in 2017, while the Government were sleeping on the job, I submitted a written parliamentary question asking how many strategic suppliers had been rated either green, amber, red or black according to the severity of the risk posed by the supplier to the taxpayer. The Government’s reply was fascinating. They refused to tell us how many of the suppliers posed a risk, saying that that could prejudice the contractors’ commercial interests. I did not ask the identity of those contractors; I asked only for the number that posed a risk to taxpayer interests. So my question posed no commercial threat whatever to any company. The Government’s response illuminates their whole approach, which shows little regard for the needs of the taxpayer while paying far too much attention to protecting the commercial interests of their suppliers through every stage of the procurement process.

In the past few days, I have been approached by a whistleblower. He told me that the civil service had advised Government Ministers to insert into every outsourcing contract an indemnity clause whereby the supplier of the service would indemnify the taxpayer, should the company get into difficulty. Remarkably, according to my whistleblower, the Government completely ignored the risk and rejected the advice. It was even more remarkable to discover that Carillion’s contracts with its subcontractors insist on the inclusion of such clauses in their contracts. The company, which has now become the poster child for corporate recklessness, took more steps to protect its finances than the supposed custodians of the taxpayers’ money sitting in their comfortable ministerial offices.

Carillion not only issued a number of profit warnings over the past few months, as we all now know, but it was also targeted by short selling, which is also wicked. Short selling is a practice whereby so-called investors bet on the collapse of a share price. It is as if the Government accept that the serious business of financing large enterprise is nothing more than a casino, with people betting against the price of companies. One firm, BlackRock—remember its name—was shorting so much that at one stage it owned nearly 10% of the entire company. The fact that that happened is troubling, but we then discover that Mr Osborne, the former Chancellor of the Exchequer who signed off the Government deals with Carillion, is now being paid £650,000 a year by BlackRock. While it was common knowledge that Carillion was one of the most shorted stocks on the exchange, the Government, seemingly wholly ignorant of everything going on around them, continued to hand contracts to Carillion to the tune of billions of pounds.

[James Cartlidge (South Suffolk) (Con)]

rose—

[Jon Trickett]

I will give way to the hon. Gentleman, but I ask him to answer the following question. Does he believe it to be right and proper for the governing party to receive donations from a person who is currently exercising a supervisory public function as a Crown representative on the Government’s behalf? Does he think that that is right?

[James Cartlidge]

It is very kind of the hon. Gentleman to tell me what my question should be about, but I was going to ask him whether it is his policy to take all the contracts in-house.

[Jon Trickett]

I will get to that in due course. However, the hon. Gentleman did not defend the practice of Crown representatives handing money to the Conservative party. Not only is the Crown representative for the energy sector a Tory party donor, but that person donated £15,000 to the Prime Minister, who took the money.

Court testimonies submitted over the past few days as part of Carillion’s liquidation show that its key clients, lenders and insurers were already pulling out of the business and getting well clear of it months ago. The private sector clearly saw a fire, but the Government did not even detect smoke from a company that appeared to be then, and obviously is now, going up in flames. Perhaps that was why the Government failed to appoint a Crown representative for the three crucial months at the end of last year when it became clear that Carillion was in deep trouble and was issuing profit warnings left, right and centre.

Crown representatives are appointed to monitor, on behalf of the taxpayer, the contracts of key strategic suppliers to Government and to ensure that everything is running smoothly. I have already referred to one Crown representative, but the House may be interested to know about the backgrounds of some of them, because they are curious. A number of them—this is unbelievable—actually oversee contracts that relate to their own private sector work and yet they are appointed by the state to look after outsourcing on the public’s behalf. As I just mentioned, one of them donated £15,000 directly to the Prime Minister herself. I will use some strong language here: the ordinary man or woman in the street can draw only one conclusion, which is that this has been a complete racket.

Carillion posed a clear and present risk to the taxpayer, but not only did the Government fail to act, they had a cosy relationship with the key decision makers, some of whom were active Tory supporters.

The problem goes well beyond Carillion, so let me widen the argument. The Government have failed to think strategically about the risks to the economy, as well as the risks to the taxpayer and public services. The Government handed over 450 separate contracts to Carillion, which employed 20,000 workers and used 30,000 separate subcontractors. This was a major industry that had an impact everywhere in the country, yet the company was clearly deep in trouble for some time. Frankly, I have no confidence at all in the statement rushed out by the Minister for the Cabinet Office and Chancellor of the Duchy of Lancaster, the right hon. Member for Aylesbury (Mr Lidington) in the last couple of hours before this debate. The assurances in that document are pretty feeble. We want an absolute guarantee on behalf of the people employed directly or indirectly by the company that both their jobs and the services provided by the company will be protected.

--- Later in debate ---

[James Cartlidge (South Suffolk) (Con)]

May I add my comments to those welcoming you back to the Chair, Mr Deputy Speaker? I want to return to the comments of my hon. Friend the Member for Cheltenham (Alex Chalk), who reminded us of the potential human cost of such collapses. That is why we should all be concerned about them. However, so far, the Government have handled the situation well and—touch wood—it appears as though things are continuing as well as could be expected.

On that front, I would highlight three positives: the way public services have continued, which is of huge importance to our constituents; the way joint venturing has protected taxpayers and reduced the potential harm of the situation; and—we have not heard this yet—let us not forget that earlier today we saw in the labour force survey that we still have record employment. We also have record levels of vacancies. Therefore, although it is worrying what may happen to people, including my hon. Friend’s constituents, we could not ask for a better situation in which people might be out there looking for work, because a huge amount of work is available in construction and other parts of the economy. We have a strong job-creating economy and we should remember that real positive.

On the broader points, pensions are a particular concern for me. My hon Friends the Members for Hitchin and Harpenden (Bim Afolami) and for Ochil and South Perthshire (Luke Graham) referred to the auditors, but we should not forget the pension trustees. Up to the general election, I was on the Work and Pensions Committee, and in December 2016 we published a report on the new powers of the Pensions Regulator, given what had happened at BHS. I fear that that could happen again at other companies. We really need to look at pension scheme oversight so that schemes are not abused, as might have been the case at this company.

There is a real challenge for this country in all aspects of pensions policy. Not just in the context of this company, but in terms of the forthcoming White Paper, which I strongly welcome, we must have a joined-up look at this issue and consider how we support overall investment and the economy—we do not want to denude that—and ensure we have effective oversight of pensions so that people do not lose their pensions when companies go under and we do not pass the burden on to the taxpayer.

There are many other issues to look at, but, given what could have happened, so far it has gone reasonably well—[Interruption.] Opposition Members are laughing, but I would have loved to see some of those hon. Members, who have almost no business experience between them, in charge of this situation. It has been well handled, and let us hope that that continues.

--- Later in debate ---

[Rebecca Long Bailey (Salford and Eccles) (Lab)]

I am delighted, Mr Deputy Speaker, to see you in the Chair. The House will share my sentiments in sending our love and prayers to you at this difficult time.

Given the limited time available, I will not refer to all the poignant speeches that we have heard. We have heard Members in all parts of the House relate tales that have resulted from the aftermath of a week of crisis. Last Monday morning over 20,000 direct employees and pension-fund holders, as well as over 30,000 sub-contractors, suppliers and their staff, awoke to find they might be facing financial ruin. In the hours that followed, the cataclysmic effect that Carillion’s collapse could have on people’s lives became clear, along with the chaos it could cause to public services across Britain. One of the most scandalous stories to emerge in the aftermath was how much the Government knew, and how much they ought to have known, about the risks that Carillion posed, and how little they did to mitigate them.

In the last six months of its existence, Carillion issued three profit warnings. Indeed, the Government knew that those red flags were serious. Their own strategic risk management policy directed them to deem a business as high risk if it issued a profit warning. It specifically directed that for high-risk businesses, all Government Departments should be advised to reduce additional work with that business where possible. Despite that, the Government continued recklessly to award Carillion contracts again and again and again. They failed to monitor Carillion properly. The position of Crown representative was vacant from August to November 2017, and there were no meetings between senior UK Government Ministers and Carillion in the months immediately after the first profit warning. But that is not all. Even Government Members will think that what I have said so far is simply astonishing, but sadly—

[James Cartlidge]

Will the hon. Lady give way?

[Rebecca Long Bailey]

Given the time I have left, I am afraid I cannot—I would love to.

Sadly the Government’s culpability also extends to the reckless treatment of Carillion’s suppliers and subcontractors. The late payment of suppliers by Carillion was no secret, and the Government knew this. In July last year, both the Specialist Engineering Contractors’ Group and the Federation of Small Businesses highlighted to the Government how risk was transferred to suppliers at Carillion; that it was not paying suppliers on time and extended its payment period to over 120 days; how the Government were not enforcing the Public Contracts Regulations 2015 that ensure that subcontractors with a public sector contract should be paid within 30 days; and how Carillion made money off the back of early payments by charging fees.

The Government were also advised on suppliers’ retention moneys—a security deposit held by Carillion until project works are completed—which were not ring-fenced, despite these organisations advising the Government of the risks. They were even advised by Labour back in 2014, when my hon. Friend the Member for Oldham East and Saddleworth (Debbie Abrahams)—the shadow Secretary of State for Work and Pensions—stated:

“There is evidence that cash retentions have been used to shore up the working capital of…tier 1 suppliers…if tier 1 suppliers become insolvent, the small businesses in the supply chain are at risk of losing their retentions.”—[Official Report, 18 November 2014; Vol. 588, c. 210.]

Today, those retentions are estimated at a whopping £1 billion, which suppliers may never, ever see again.

Then there was the Government’s aversion to project bank accounts to protect project moneys from insolvency and ensure prompt payment to subcontractors. Both Her Majesty’s Treasury and the Cabinet Office have historically recommended that project bank accounts are used by public sector organisations on appropriate projects, so why was that not enforced in Carillion’s case? The simple fact is that suppliers were mistreated again and again, and the Government did not care. They did not step in and act. They must now support subcontractors and ensure that all the issues that I have referred to are dealt with in both existing and future Government contracts.

Then there is the workforce—the good people the Government have asked simply to keep coming to work every day. They have stepped up in this crisis, but what security were they offered? Carillion was a company renowned for its poor treatment of workers. It was found guilty in court of widespread blacklisting that destroyed livelihoods and the lives of many workers’ families, yet the Government continued to award contract after contract to it, no questions asked. Through the lack of protection for subcontractors, they again put workers’ lives at risk. What they also failed to tell us last week is that under a compulsory liquidation, all employee contracts are terminated, so the fact is that most Carillion employees do not have an official contractual relationship any more. There are no existing terms and conditions to transfer to a new contractor, so what support have they received—a hotline? Some 88% of RMT members who work for Carillion have not been contacted by the liquidator so far.

The Government must assure us that any business or provider that takes over Carillion’s contracts must also take on those employees on their pre-existing terms, or better. Until the long-term position is clear, they must assure us that the official receiver will grant formal contracts to employees to give some degree of certainty as to the period they will be employed for. They must also seek to protect agency and zero-hours contracts for Carillion workers to ensure that people can recover unpaid wages and report back in detail to us on the workforce who were affected in Carillion’s private sector arm. We also want assurances from the Government that they are doing all they can to replace apprentices within other companies that the Government have contracted with.

Finally, I want to highlight the Government’s failures to spot the alleged corporate abuse. Carillion handed £500 million to shareholders in the seven years before its collapse, while its pensions black hole spiralled out of control. It is, frankly, a national scandal that Carillion paid sums in dividends similar to what could have filled the gaping hole in its pension deficit. Did the Government request to view the company’s accounts? Did they look at the auditors’ submissions? Who knows! But even the most basic due diligence would have uncovered this.

It is a little too late, therefore, for the Prime Minister to wax lyrical about her desire to protect workers’ pension schemes by stopping payments to directors, when all the evidence suggests the Government knew exactly what was happening—that the pensions deficit was spiralling out of control. This is typical of the last seven years: a laissez-faire approach from a laissez-faire Government. It is clear that the Government knew of the risk Carillion posed and failed to do anything about it, and Britain is left worrying who is next. Is this a house of cards waiting to collapse? How secure is the outsourcing of our public services? I urge the Government to be transparent about the risks we face and ensure that the Public Accounts Committee has sight of all the risk assessments and improvement plans as a matter of urgency, and I urge them to support today’s motion.