The collapse of Carillion in January, should, by any reasonable analysis, be a catalyst for substantial industry change. Remarkably, whether it will be, is still open to question.
Carillion’s collapse clearly underlines that the prevailing UK construction industry model - and the prevailing business environment - is well and truly broken. Far from helping smaller businesses to grow – in the face of a skills shortage, cyclical demand, low investment and low margins - there is routine exploitation of the average 4-5 layers in its supply chain. This includes some 300,000 businesses, of which the vast bulk are SMEs.
In May’s parliamentary report into the spectacular demise of Carillion, the Work and Pensions and BEIS Committees spread the blame liberally. First in line were the Directors, auditors and the financial regulator but significantly, the report also criticised Government. Firstly, it panned the Government’s current fair payment initiatives, concluding that “Measures…to (try and) improve the business environment, such as the Prompt Payment Code, have proved wholly ineffective, and need revisiting.”
Next in line was the Government’s Crown Representative to Carillion, which we are told “provided little warning of the risks in a key strategic supplier”. Despite three profits warnings over five months, eight public sector contracts were still awarded, and when a company with 450 Government contracts goes to the wall, it inevitably leads to the public purse. Nor is there much prospect of recovering the £150 million of taxpayer’s money made available following the insolvency.
The report goes on to conclude “...successive Governments have nurtured a business environment and pursued a model of service delivery which made such a collapse, if not inevitable, then at least a distinct possibility.” While the Committees also concluded that “Government has done a competent job in clearing up the mess...”, ECA’s assessment is that we don’t yet know the full extent of the mess. The supply chain won’t be able to measure the full impact of lost revenue, impeded growth, investment jobs and skills until much later in 2018.
In considering what else Government has done since the collapse, the report says “Government has recognised the regulatory weaknesses exposed by this and other corporate failures, but its responses have been cautious, largely technical, and characterised by seemingly endless consultation. It has lacked the decisiveness or bravery to pursue bold measures recommended by our select committees that could make a significant difference.”
Significantly, the report joins a plethora of industry commentators who have long realised that lowest price procurement – a lynchpin of the Carillion model - is not the same as value for money: “The Government’s drive for cost savings can itself come at a price: the cheapest bid is not always the best. Yet companies have danced to the Government’s tune, focussing on delivering on price, not service; volume, not value. In these circumstances, when swathes of public services are affected, close monitoring of exposure to risks would seem essential. Yet we have a semi-professional [...] system that does not provide the necessary degree of insight for Government to manage risks around service provision and company behaviour.”
If after all that has happened this year, Government somehow concludes no significant interventions are required, a convenient smokescreen might be to assert that Carillion was a huge, but unique, corporate disaster. However, the Select Committees concluded by saying that Carillion “became a giant and unsustainable corporate time bomb in a regulatory and legal environment still in existence today… [another] Carillion could happen again, and soon”.
It is high time for Government intervention to make sure not only that the construction supply chain is protected, but to help move away from its ongoing crises and - somehow - towards the excellence outlined in its Industrial Strategy and construction sector deal.