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Sir Vince Cable: Carillion chaos demands deal for suppliers

January 20, 2018 8:05 AM
By Vince Cable in Evening Standard
Originally published by South Lincolnshire Liberal Democrats

Vince CableWe have just finished "celebrating" the 10th anniversary of Northern Rock. Its collapse proved to be the stone which triggered the landslide of failing banks and the many, mainly small, companies dragged down with them.

The Carillion landslide is already pulling down hundreds of contractors and subcontractors and it illustrates the way that business is a network of companies tied together by credit, contracts, and (one hopes) trust.

Carillion was not judged, in the event, "too big to fail" - rightly so - and hasn't had to be nationalised. But its failure has caused immense damage to its supply chains.

The Government moved quickly to investigate the conduct of directors, especially the former chief executive Richard Howson, whose efforts to limit the scope of his bonus drawback present almost a caricature of "fat cat" greed and irresponsibility.

It also has to be investigated as to whether Carillion was trading insolvent, which would, of course, be a criminal offence.

The finances were certainly extremely bare. The company is no stranger to the criminal courts, having been fined £5.4 million for collusion in price-rigging with other construction firms in 2009.

The first steps are also being taken to investigate the awarding of government contracts after profit warnings were issued, seemingly to feed the company's cashflow.

A more basic question is, why were government departments a year behind the hedge funds in spotting that Carillion was overleveraged and had questionable risk management capability? Or why did none, seemingly, spot the coincidence of a ballooning pension deficit, dividend payments and management bonuses?

But none of that rear-view-mirror analysis helps the small and medium-sized enterprises which are struggling to stay afloat. The immediate requirement is to stabilise public sector contracts; and, where they cannot be executed in-house, to have the Government to guarantee them until fresh providers can be identified through re-bidding.

More difficult is the collapse of private sector contracts. Because Britain lacks a US-style Chapter 11 system it is difficult to stop disorderly collapse.

Our system of dealing with corporate failure surely needs review. It is perhaps time to revisit some of the arrangements put in place after the banking crisis to support supply-chain finance. I later introduced such a system for several industries where credit had dried up.

There is also the need to revive the tougher approach the Coalition adopted towards late payment. It is outrageous that prime contractors like Carillion have been allowed to squeeze the SMEs in their supply chains for cash with 120-day payment terms (the alternative system, the Early Payment Facility that offered quicker payments through Carillion's banks for a fee, has been shut down with a reported £350 million owed to subcontractors). Where the Government resumes contract responsibility it must offer its usual 30 (or even 15) days and ensure that, in future, the supply chain does not become a piggy bank for the big contractors.

I don't, however, buy the Corbynite narrative that the Government should stop outsourcing, or nationalise the main contractors. Most of the contractors are soundly managed and some, like workers-owned Arup or Skanska or Laing O'Rourke, have built a reputation for innovation and good corporate governance. Moreover, there simply isn't the capability in government to take over.

There is, for a start, a big difference between the complex construction contracts where private sector project management skills are essential, and farming out what used to be the routine work of councils and government agencies.

As to the first, few could argue that we should return to having big, public sector in-house construction departments. But there may be a deficiency in public sector procurement and tendering skills. In France there are specialist academies which train elite government staff and we need the same. A smarter system would also enable the Government to force improvements in skill training, supply chain management, and labour standards.

As to the latter, governments (be they Labour, Coalition, Tory) became ideologically captive, or simply lazy, in believing that there are easy savings in overheads from getting a contractor like Carillion to manage outsourcing, creaming off a margin before passing on the work to a subcontractor. This suited Carillion, helping them to offset the risks in their construction project work.

We now know that public spending savings are illusory when a collapse multiplies the costs to the public purse many times over. Some of this work could return in-house but it won't happen without rebuilding capacity. Alongside that, where outsourcing is genuinely cost-effective, contracts should be placed directly with the operators.

The ideological arguments obscure the bigger question of how public sector contract work is becoming heavily dependent on a handful of business giants. At the heart of this problem is the way, in the UK, (unlike, say, Germany) SMEs are faced with expensive or nonexistent finance from the banks while big companies have easier access to capital and equity markets. An attempt was made in the Coalition years to tackle this issue through the British Business Bank.

But it is clear that much more remains to be done.

Sir Vince Cable is the leader of the Liberal Democrats