07/06/2018 00:00 BST | Updated 07/06/2018 08:43 BST

Carillion Collapse Will Cost Taxpayers 'At Least £148m'

Major profits warning in 2017 'came as a surprise' to ministers, says audit watchdog.

PA Wire/PA Images

Taxpayers will foot a bill of at least £148m to clear up after Carillion’s collapse, a damning report of the government’s handling of the crisis has revealed. 

The National Audit Office, published on Thursday, sheds fresh light on the timeline of events leading up to the outsourcing giant’s catastrophic failure in January. 

Despite the outsourcing giant having £1.7bn worth of public sector contracts, a major profits warning in July 2017 “came as a surprise” to ministers.

The government nevertheless had to finalise deals after the warning, as the March accounts for the previous year of 2016, filed by accountants PwC, had given the company a relatively clean bill of health. 

And while the warning prompted the Cabinet Office to raise Carillion’s risk rating from amber, it was not increased to red - the highest - so as to avoid precipitating Carillion’s financial collapse, the watchdog concluded.

“In the months following Carillion’s first profit warning, the company announced £1.9bn of new Government work, including £1.3bn of HS2 contracts.

“Many of these contracts had been agreed before the profit warning, although in some cases contracts were signed, or variations agreed, afterwards,” said the report.

Ministers began contingency planning for the mega-constructor’s failure shortly warning, however, and had completed a strategy by January 15 when Carillion collapsed, said the report.

PA Wire/PA Images
(l-r) Keith Cochrane, Emma Mercer and Zafer Khan answering questions at a joint hearing of the Commons Business, Energy and Industrial Strategy Committee and the Work and Pensions Committee at Portcullis House in London, which is examining events leading up to the business failure

Carillion asked the government for £223m in January to help it through to April and additional support with its financial restructuring, said the report, adding: “Rather than provide this, the Cabinet Office decided it was better that Carillion enter into a trading liquidation, because it had serious concerns about Carillion’s business plans, the legal implications, potential open-ended funding commitments, the precedent it would set, and the concern that Carillion would return with further requests.”

The collapse will have a devastating impact on workers, investors and the firms which supplied it with goods, the report adds.

It could take years to establish the final cost of the liquidation, while the £2.6bn pension liabilities will have to be compensated through the Pension Protection Fund.

Around two-thirds of Carillion workers - 11,638 - have found new jobs but more than 2,300 have been made redundant and 3,000 are still employed on contracts.

Amyas Morse, the head of the NAO, said: “When a company becomes a strategic supplier, dependencies are created beyond the scope of specific contracts.

“Doing a thorough job of protecting the public interest means that government needs to understand the financial health and sustainability of its major suppliers, and avoid creating relationships with those which are already weakened. Government has further to go in developing in this direction.”

PAUL ELLIS via Getty Images
Chair of the Commons' Business Energy and Industrial Strategy Committee, Rachel Reeves, has called for the 'big four' accountancy firms to be broken up

Labour MP Rachel Reeves, chair of the Business Energy and Industrial Strategy Committee, hit out at accountancy firm PwC, who she says “raked in millions” in the run-up to and aftermath of the firm going bust.

She said: “On Carillion, taxpayers are left to foot the multi-million pound bill for corporate failure. PwC, who profited from Carillion as it inched towards collapse, are expected to wring at least another £50m from its ruins as the government appointed special managers to the insolvency, while thousands of smaller creditors will get nothing at all.” 

Frank Field, chairman of the Work and Pensions Committee, who alongside Reeves investigated the firm’s demise, has written  to the Official Receiver to demand answers about PwC’s role.

He said: “It is difficult to shake the impression that this was conscious cash-chasing, bugger the long-term consequences and bugger the interests of suppliers, workers and pensioners.

“As special managers, with a contract to print money awarded without any competition, PwC will draw £50m for six months’ work.” 

Tim Roache, general secretary of the GMB union, said ministers should have taken control sooner.

He said: “This report is damning.

“Carillion held £1.7bn of public contracts, but this report suggests that ministers were working for the company, not the other way around.

“The same corporate bosses who are responsible for Carillion’s failure pocketed millions while going cap in hand to the taxpayer, begging for help to prop up their failing business model.”

A Cabinet Office spokesman said: “Throughout this process, the Government has been clear that its priority is to ensure that public services continue to run smoothly and safely.

“The plans we put in place have ensured this, and we continue to work hard to minimise the impacts of the insolvency, having safeguarded over 11,700 jobs to date.”