Call for enquiry into collapse of Carillion - ministers ignored red flags

Janet Downs's picture
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Unions are calling for an enquiry into the collapse of Carillion, the global construction firm and provider of support services to the NHS, prisons, the Ministry of Defence and schools. 

At the beginning of January, the Financial Conduct Authority announced it would investigate Carillion about the ‘timeliness and content of announcements’ the firm made from early December 2016 to July 2017.

Today, 15 January 2018, Carillion has announced it will go into liquidation after the firm failed to secure financial support following crisis talks with its lenders and the government.

The Times says ministers ‘dismissed warnings’ about Carillion’s financial woes and continued to award Carillion ‘hundreds of millions of pounds of work’ to the firm after it had reported ‘a string of profit warnings.’ 

But suspicions about possible future problems at Carillion had serviced before last year.  In October 2015, the Financial Times (behind paywall) said Carillion had ‘become the most popular share for hedge funds to ‘sell short’ – that is, selling shares which they hope to buy back more cheaply at a later date.

By the beginning of July 2017, 17 hedge firms held ‘short positions on Carillion, Reuters announced.  These totalled more than $270m.  Adrien Brus, an investment analyst, told Reuters that Carillion and firms like it had been ‘expanding regularly over time beyond levels that are normal for the industry and there was the major red flag that got us excited about this short two years ago [2015].’ 

The red flag that so excited hedge fund managers in 2015 seems to have been missed by government departments.

It’s not as if Carillion’s reputation in delivering services was spotless.  In August 2013, Carillion’s subsidiary, Clinicenta, had its licence to run a private hospital revoked following concerns about patient safety.  In September 2013, a Carillion employee falsified tests for water supply at a Devon school.  Two months later, in November 2013, the Health and Safety Executive found Carillion guilty of not complying with ‘simple safety measures’ (see here for details).   

So eager was the Department for Education (DfE) to allow Carillion to run schools rather than just build them that it awarded a contract in early 2014 to Carillion Academies Trust (CAT) before such a trust existed.      A DfE spokesperson told me at the time that academies had to be sponsored by a properly-constituted trust.   It appears that someone at the DfE decided to ignore this rule.   CAT wasn’t incorporated until November 2014, nearly a year after Carillion announced:

Carillion Academies Trust is a fresh and innovative model of Trust that will combine educational expertise with business and commercial understanding.’

The claim about Carillion's commercial understanding now seems hollow.

Carillion's collapse and the attention of  short sellers hoping to make a profit from the collapse of firms operating in the UK's outsourcing sector (see FT article behind paywall) should act as a warning about outsourcing essential public services to the private sector.

CORRECTION 16 Jan 2018 07.51:  headline changed from 'ministers ignored red flag' to 'ministers ignored red flags'.  There was more than one warning about Carillion's problems which ministers didn't notice.

 

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