Carillion’s bankruptcy could be an unfortunate coincidence of cost over-runs on big projects, or a systemic problem of our corrupt political culture. Who you blame is a clue to what you think should happen next. For example, if you believe it’s just one bad apple, that we get them in all walks of life and maybe they require a bit more regulation, or a tightening of existing rules, then generally life goes on unchanged.
My own view is that no one and everyone is to blame. I don’t attribute Carillion’s failure solely to the greedy individuals who ran the company, fleeced it and left the pension fund over half a billion pounds short. Carillion’s demise can’t be a failure of strict corporate auditing, enforced by big accountancy firms like KPMG, nor can it be a failure of shareholder governance, nor a banking oversight. Nor the bad decisions made by politicians and civil servants who fail to see any other way of running the world. It can’t be any, or all, of the above, unless you are willing to put the entire culture of British corporate capitalism in the dock and to dismantle the entire system of privatisation. The reason I don’t blame individual actors, or institutions, is because these features of Carillion’s business practice are not the exception, they are the rule.
Rewarding greed, rather than success, is built into the system. The ex-Chief Executive Howson, was due to continue receiving his £660,000 salary and £28,000 benefits until October this year - although he hasn’t worked for them since last autumn. Thankfully, the liquidator is addressing this injustice. Howson earned £1.5m in 2016, including £591,000 in bonuses. The chief Finance Officer got a similar bonus, on top of a lucrative fat-cat salary. In 2016, the rules had been changed to make it harder for the company to claw back his bonus in the event of things going pear shaped.
Shareholders were given priority, as taxpayers’ money was sucked upwards from the running of public services and the construction of essential community facilities like hospitals. Shareholders got an increased dividend every year for 16 years. They even got an increased dividend last May, two months before the first of the profit warnings started to ring alarm bells in the City. Should that £83m have gone into paying off the debt, or filling the growing gap in the pension fund, or paying sub-contractors on time? Clearly it should, but no one will be asking the shareholders for the money back. This is not a one off and Theresa May is talking about giving the pensions regulator the power to fine company directors who do this in future, but the Treasury and the Department for Business are likely to fight tooth and nail to stop such interference in corporate affairs.
The auditors KPMG did their job and got paid well for ensuring that everything at Carillion was in order. I imagine that one of the country’s other big finance firms, Price Waterhouse, will now make a lot of money from helping to liquidate Carillion. It could easily have been the other way round and maybe next time it will be. Either way, we will always be reassured that they did a good job and regardless of whether it is Price Waterhouse who audits and KMPG that liquidates, neither will consider asking the other to help pay for the failure.
These two firms operate within a system that the Government regulates, so surely it is this government’s failure? After all, Conservative Ministers were complicit in keeping the Carillion ship afloat by awarding £2bn in contracts after the warnings had been signalled. But isn’t that what any Minister, of any party, might have done when thousands of jobs and millions of pounds are at risk? The system of privatisation evolved and spread through the course of many different Governments: Labour, Conservative and Coalition have contributed to the £200bn of PFI debt. KPMG recognised this by donating to all three main parties on a regular basis, although they have been less keen on Labour since Corbyn took charge. It’s true that both Price Waterhouse and KPMG lobbied hard to spread privatisation and influence the rules under which contracts where awarded and monitored, but they have levels of expertise that civil servants don’t. If successive Governments have listened to the advice of these giant corporations, then is it the corporations fault and is it fair to solely blame this Government, rather than share the blame amongst many of the MPs who currently inhabit the opposition benches, or elevated positions in the Lords? When the inquiries into Carillion get off the ground in Parliament, I doubt that this past generation of politicians will step forward and say it was all a mistake.
Our banks are always first in the queue when the liquidator starts work. They were smart enough to start pulling their credit after the first profit warning. This will apply to Carillion and to the thousands of sub-contractors and self-employed professionals who will shortly file for bankruptcy themselves, as Carillion’s debt mountain cascades downwards. The banks will gobble up any of the crumbs left of Carillion’s assets and then they will come for the sub-contractors who will go to the wall, after not being paid what they were promised. I would love to be surprised at the banking sectors good sense and restraint in dealing with this crisis, but I suspect that the scale of this painful process will be more dependent upon the level of taxpayer bailout and how much we sweeten the pot to attract other companies to take over many of the Carillion contracts. This could be hundreds of millions of pounds.
To blame the banks would be to imply that they lend money based merely on a calculation of short term return and only assess risk based upon the assets that they can grab before anyone else, if a business goes bankrupt. If banks operated like this then surely past governments would have noticed the repeated failure of British innovators to grow into successful medium sized UK businesses through lack of financial backing and attention? Politicians who went through the housing crash of the 1990s would have realised the connection between small businesses going under and the banks auctioning the houses of small scale entrepreneurs who had offered them up as their only collateral. Such a systemic weakness of our economy, accompanied by the occasional major financial crash like 2009, would have been addressed and solutions debated at length on radio 4.
The truth is that everyone from the KPMG auditors, to the bankers, to the Ministers and their civil servants, to the shareholders and even including Carillion’s bosses, have all acted rationally. This is fat-cat heaven and greed is legally sanctioned. I’m not excusing appalling behaviour, such as Carillion blacklisting staff who raised concerns about safety on building sites, I’m just saying that it’s normal for this system. Nice people, as well as outright sociopaths, are all working hard to uphold a flawed and exploitative system of corporate capitalism that is leeching off the public sector and sucking taxpayers dry. A small elite gets richer and avoids0 the taxation that the less well-off pay to keep the system going.
This is not the only form of capitalism and it hasn’t always functioned this way, but it does now and we must deal with it. The first step is to cut off the benefits paid to the privatised gravy train by taking many services and functions back inhouse. For example, both Ken Livingstone and Boris Johnson acted as London Mayors to reverse the disastrous and expensive PFI deal for upgrading the London Underground brought in by Gordon Brown. Those contracts that are outsourced need to be on a tight leash, so they can be pulled if the company acts badly by blacklisting, de-unionising or not paying its own contractors within 3 months. Next, we do a proper job of sorting out the banks, so that they work on behalf of communities and businesses. Finally, we make transparent all the connections and hidden influences that steer government thinking.