Carillion

Rachel Reeves Excerpts

Thursday 12th July 2018 Commons Chamber

[Rachel Reeves (Leeds West) (Lab)]

I beg to move,

That this House has considered lessons from the collapse of Carillion.

I am grateful to the Backbench Business Committee for scheduling the debate for today, which is timely. This Sunday it will be six months since Carillion entered liquidation. When it collapsed, it employed 42,000 people, more than 19,000 of them working in the United Kingdom. It held liabilities of £7 billion, including a £2 billion liability to 30,000 suppliers and subcontractors, and it held just £29 million in cash to meet those liabilities. In the past six months, nearly 2,500 Carillion workers have been made redundant and more than 1,000 have voluntarily left what remains of the business. Projects have been mothballed and suppliers have faced ruin.

Since the collapse of Carillion, five Committees have looked into the issues surrounding its collapse. Along with the Work and Pensions Committee, my Committee—the Business, Energy and Industrial Strategy Committee—has considered the causes of the collapse. The debate is also timely because this morning our Committees published a special joint report containing 24 responses to our original report. It gave those criticised in the report, and those with a significant interest, a chance to respond ahead of the Government’s formal response to our findings. In the time that I have this afternoon, I shall set out what my Committee found, and what needs to change. I thank fellow members of the Joint Committee, some of whom are in the Chamber today, for their work to uncover the lessons from Carillion.

When it collapsed, Carillion had been in existence for 19 years. It was the second largest construction company in the UK, having grown through large and frequent acquisitions and Government outsourcing. Carillion’s directors, and those who know the construction industry, told us that it was a low-margin industry, and part of a highly competitive market with inherent risks. Businesses do collapse every day, and the process of business creation and failure is part of any well-functioning modern economy, but warning lights should have been flashing when such a big business was on the brink. We should demand the highest standards of corporate governance to help to ensure that British businesses are well run, but that did not happen with Carillion.

Despite its catastrophic failure, the Carillion directors, when they sat in front of our Committee, continually claimed that the business was sound, even after it had gone into liquidation, and that only a handful of contracts had brought it down. They even said that everything was fine until just a few months before the collapse. As late as the day before Carillion went into liquidation, the directors thought that they could avert the collapse. They seemed to have a sense of entitlement, and a belief that the Government would step in and bail out their failed business. In their evidence to us, they blamed everyone but themselves. They blamed the Bank of England, the Canadian construction market, Carillion’s suppliers, and professional designers of concrete beams.

However, the collapse of Carillion has meant that our Committees have been able to see the board papers and minutes from company meetings, many of which we have published. Looking inside the company, we have seen a business that acquired other businesses, and relied on unrecoverable “goodwill” to prop up its balance sheet; a company that kept increasing senior salaries and bonuses, and ensured that a dividend was paid regardless of its own health; a company that was paying suppliers late, and bidding for contracts that it could not afford to deliver on time or on budget.

Carillion’s largest acquisitions—of companies such as Mowlem, Alfred McAlpine and Eaga—allowed it to put “goodwill” on its balance sheet. Those notional values of each acquisition, totalling almost £1.5 billion, were allowed to sit on the balance sheet for year after year, without any link to reality and the real value. When the company collapsed, the goodwill was wiped out, too, showing its true value—a value of zero. Carillion’s board needed healthy balance sheets to continue its dividend policy of increasing its payout to shareholders, but the truth is that it paid those dividends regardless of whether it had the cash flow required for them. Right up to the spring of 2017, it was promoting its growing payout with little challenge—no challenge—from directors as to whether the money might have been better spent supporting the pension fund, for example, or any part of the failing business.

Despite the growing pensions deficit, there is one area where directors felt able to spend money, and that was on growing salaries for the leaders of the business. Its remuneration committee increased payouts on the basis of industry averages, rather than the performance of the business Carillion. A responsible business would see payment by results, not payment by averages.

When Carillion’s directors needed to prop up their balance sheets, they did so by putting pressure on the suppliers. Carillion was, ironically, a signatory to the Government’s prompt payment code, promising suppliers they would be paid within 60 days. When the code was launched in 2013, Carillion was already known to Government as being poor payers, but the National Audit Office report into the company showed that in signing it up to support the policy the Government seemed to turn a blind-eye to Carillion’s failure to meet its duties to suppliers.

We heard on our Committee from the Federation of Small Businesses that some businesses were waiting more than 120 days for payment and Carillion had become notorious as late payers. Carillion managed to use this to its advantage, arranging an early payment facility with the banks, meaning suppliers could receive payments earlier than Carillion’s 120-day terms but they would have to face a cut in what they were owed in order to do so. Carillion was effectively borrowing from its suppliers, propping up its balance sheets again without a care for the state of the balance sheets of the thousands of businesses relying on it and doing its work.

[Stephen Kerr (Stirling) (Con)]

rose—

[Rachel Reeves]

I give way to my fellow Committee member.

[Stephen Kerr]

The hon. Lady is making a powerful case for what we found in the inquiry. As evidence of this house of cards that she is describing, which it undoubtedly was, Richard Adam, the former finance director, told the inquiry that not only did he sell all his shares when he left the business, but he would not be prepared to put his own money at risk by being a shareholder.

[Rachel Reeves]

I absolutely agree. The directors of the business were not invested in the business. They were not part of the pension fund that collapsed and, as the hon. Gentleman said, Richard Adam, the finance director who oversaw the accounting practices that helped to contribute to the collapse of the company, sold his shares as soon as he could because he knew what we all now know: this business was a failing business that would not be around for much longer.

What we found in Carillion was a board focused on short-term fixes and growing payouts, with no plan for what would happen when the illusion was shattered. Looking at the poor treatment of suppliers when the company was solvent and the trail of destruction the management of the company has caused, I cannot see how Carillion’s directors can make any claim that they had anything other than their own personal interests at heart. In the latest responses that we have published today, Carillion’s directors continue to refuse to demonstrate any culpability for the state the company was in. They have denied that our report is accurate, but have given no evidence whatsoever to support their case.

Let me be clear: the directors of Carillion are culpable for the company’s collapse. They should be ashamed of their performance and they should not be allowed to take the helm of a company ever again.

[Kelvin Hopkins (Luton North) (Ind)]

My hon. Friend is making a first-class speech. Does this not bring to mind the quotation from John Maynard Keynes that capitalism rewards bad behaviour?

[Rachel Reeves]

I thank my hon. Friend for that intervention. Bad behaviour was being rewarded at Carillion, but the people being rewarded were not the people investing in the business, or the people working for it and saving for their pensions with the business; the people being rewarded were those making the decisions about where the money went—making the decisions about whether to plug the pensions deficit or pay dividends to shareholders. Those are the people who should be paying the price, but under the system we have today, they walk away with their bonuses and their dividends intact. It is other people—the people who are not responsible and did not make the decisions but who did the work—who are paying the price, and that is what needs to be reformed.

When corporate governance is failing, there should be checks and balances, but our inquiry found a regime that was not up to the job of doing that. The first line of defence should have been those who were auditing and advising the company. KPMG, Carillion’s auditors for 19 years, continued to give a clean bill of health to the business, even just a few months before the July 2017 announcements that heralded its swift but painful decline. In the report we have published today, KPMG’s chairman, Bill Michael, denies any issues with the clean bill of health that his company gave to Carillion just months before it began to publicly collapse. Mr Michael is burying his head in the sand, which reflects badly on his understanding of the impact of Carillion on the reputation of his company, and of the future of audit as an industry. The status quo is simply not sustainable, and the big audit firms must understand that and respond to it.

Competition in industry is supposed to drive up quality and bring down costs. It is not working in the audit market, where a cosy club of four hoover up huge fees before, during and after any corporate failure, yet their audits and accounts, as one investor put it to our Committee, read like a mystery novel—a fiction, with the reader searching for scant clues on what is really happening. The big four firms audit all the FTSE 100 businesses and all but a handful of the FTSE 350 top businesses, as well as providing them with advice on a range of services. There are conflicts of interest at every turn, and it was left to the least conflicted, PwC, to clear up the mess during the liquidation process.

[Kelvin Hopkins]

My hon. Friend is making an important point about the audit companies. Is it not a major problem that they are ostensibly there to represent the shareholders’ interests against those of the managers but that they are actually employed by the managers, and that if they do not give the managers what they want, they will not get the next contract?

[Rachel Reeves]

My hon. Friend makes an important point. The people who rely on audit are the shareholders, and also the small businesses that supply the company, the people who work there and the pensioners who have saved for their pensions with that business. But they are not the people who employ the auditor, and they are not the people the auditors are accountable to. The auditor is accountable to the audit committee of the business, and it is often appointed by that committee on the advice of the chief financial officer. So, as my hon. Friend says, the incentives are all wrong.

I am pleased to see that our report has prompted some long-overdue soul searching in parts of the audit profession. While the written reactions of the big four accountancy firms to our report differed, they all seem to recognise that there were issues to be addressed. The Institute of Chartered Accountants in England and Wales has recognised this as a watershed moment, and it is leading a review of the audit profession. I hope that that review will propose some radical solutions. We have now referred the audit market for investigation by the Competition and Markets Authority. The new chair of the CMA, Lord Tyrie, was endorsed in his role by the Business, Energy and Industrial Strategy Committee, and he should now demonstrate the same determination he showed in this place leading the Parliamentary Commission on Banking Standards when he looks at the future of the audit market. I am convinced that we have to find a way of making the audit market more competitive and audits themselves more trusted, and of ending the conflicts of interest that can damage the reputation of some of our economy’s major firms.

Behind the company and its auditors and advisers, there are statutory regulators who should have been expected to step in when the business and the audits were seen to be failing. Carillion’s finance directors and auditors were subject to scrutiny by the Financial Reporting Council. Now that the company has collapsed, two former CFOs are under investigation for the preparation of financial statements, and Carillion’s auditors are subject to further scrutiny. During our inquiry, we heard that the FRC had already taken an interest in the situation at Carillion, and that it had concerns about the quality of previous audits by KPMG. However, the regulator had been far too passive. It accepted extra disclosures being made by KPMG and Carillion the following year without any further follow-up action and, although it found repeat issues with KPMG’s wider audit work across other companies, it seemingly took no firm action there either.

Carillion’s huge pension debt was a matter of concern to its pension trustees and the Pensions Regulator, the other regulator involved, but the regulator’s response, again, was feeble. It threatened to impose a contributions schedule and then left the power unused. It sought to negotiate a payment agreement and then agreed precisely with what the company wanted. It launched action only once the company collapsed and then it was too late. Again and again, the Pensions Regulator barked but did not bite. While plugging the £2.6 billion hole in the pension fund would not have saved the company, it could have reduced the largest ever burden on the Pension Protection Fund, which will see pension holders receive less than they have been promised by their company’s scheme. It is telling that none of Carillion’s directors was in the collapsed scheme.

The Committees found serious concerns about the performance of both regulators, including their powers, remit and leadership. If regulators are not working well, employees, investors, suppliers and customers can have little confidence in the businesses in which they are invested. Statutory regulators need to be doing more. Across the work of the Business, Energy and Industrial Strategy Committee, we rarely find ourselves criticising regulators for being too bold. Instead, we keep hearing timid bodies apologising for letting consumers down. That needs to change, and the change should be led from the top.

[Chris Stephens (Glasgow South West) (SNP)]

The hon. Lady is making an excellent speech so far. Does she agree that one of the Committee’s concern was that the companies that were being taken over all had sick pension schemes and that the Pensions Regulator should have been asking serious questions at that point?

[Rachel Reeves]

The hon. Gentleman, who sits on the Work and Pensions Committee, is absolutely right. When Carillion took over companies such as Mowlem, McAlpine and Eaga, it was taking on businesses, yes, but it was also taking on huge pension deficits, which contributed to the problems. However, the business could have decided to address that pension deficit. It was not that nothing could be done. It could have decided to pay money into the pension fund instead of paying out to shareholders and to directors in the form of bonuses, but it decided to do the exact opposite. It made the wrong choices and prioritised the wrong people. It prioritised itself.

The announcement of the Kingman review into the FRC is a welcome start, but the Government must confirm that they are willing to see radical change, including giving regulators more powers if needed and holding them better to account for not using the powers they already have.

The Government, the audit profession and the regulators need to take urgent action. They owe it to the tens of thousands of people affected by Carillion’s collapse and to the untold number of people who could be affected if this is ever allowed to happen again. There are some clear lessons. In contracts, best value is not the same as the lowest price. Outsourcing is not always better than doing things in-house. Privatisation does not mean that the risk or the cost of failure when things go catastrophically wrong are contracted out.

We would all like to think that this is a case of one horrendously badly run company—Carillion was horrendously badly run—but with Interserve, Capita and Mitie all facing difficulties, we would have to be pretty brave to conclude that this is a one-off. We need to restore integrity to British business and the firms that audit them. Six months on, we have regulators reviewing and reviews of the regulators, but we need firmer action on corporate governance, on breaking up cosy cartels and on toughening up sanctions for misconduct. To secure our public services, for jobs, for small business, for contractors and for pensioners, that action is needed and it is needed now.

--- Later in debate ---

[Rachel Reeves]

It has been a real privilege to have this debate in the Chamber today, and I welcome the contributions from all hon. Members, including the Front-Bench spokespeople and the Minister. As Chair of the Business, Energy and Industrial Strategy Committee, I get to see the best of British business, but sadly also the worst, and Carillion was the very worst of business. We now need to learn the lessons, because we saw the impact on small businesses, pensioners, workers and investors. I urge the Government, when they respond to the Committee’s report—the response is due on Monday 16 July—to respond in detail to the points on corporate governance, regulation, audit market reform and outsourcing. We need those changes, and we need them urgently, if we are to ensure that we learn the lessons of the collapse of Carillion, get justice for those affected and ensure that we see more of the best of British business and less of the worst.

Question put and agreed to.

Resolved,

That this House has considered lessons from the collapse of Carillion.