It’s now a little over a week since the collapse of Carillion and the implications of the construction firm’s collapse continues to dominate political discourse across Westminster (Brexit notwithstanding). The government is faced with the immediate question over what role they’ll play in helping resolve the crisis, while also being forced to think about introducing broader reforms to its approach to public sector outsourcing in the round.
In the short term, the government promised staff working on Carillion’s public-sector contracts they would continue to be paid under the government’s Insolvency Centre (IC), however, this has only been confirmed until the end of this month. Meanwhile, the government remains adamant that no bailout will be provided to rescue other parts of the business. Although this raises the prospect of job losses at Carillion, it also means a host of outstanding projects will require new contractors to fill in the cracks and get them over the finish line. Groups of infrastructure investors are already circling many of Carillion’s distressed assets, ready to cherry pick assets at cut-price rates. Carillion’s market capitalisation totaled £2bn in 2016, meaning there could be a host of “jewels in the damaged crown” according to Garry Wilson, chief executive of PE firm Endless, for investors willing to strike while the iron’s hot.
Although investors could see a number of lucrative opportunities crop up in the short-term, this is unlikely to come without risks, especially as pressure mounts on the government from unions and opposition MPs who are calling for a reduction in the number of private companies delivering public services. Carillion played a vital role in delivering services ranging from thousands of school meals, to the building of the Royal Liverpool Hospital.
Carillion’s collapse came just days after the publication of a high-profile National Audit Office (NAO) report that heavily criticised the government’s Private Finance Initiative (PFI), concluding that PFI projects are between 2 and 4 per cent more expensive than other government borrowing, raising questions over what the true value of PFI is to the taxpayer. The opposition is also pushing heavily for the publication of Carillion risk assessments made months before the firm’s collapse, which could expose the government’s lack of scrutiny before awarding high-profile public contracts and apply further pressure on the need to introduce a series of reforms to the current system.
Combined, this increases the likelihood of the government taking a revised approach to outsourcing as part of its review into the Carillion collapse. Recommendations are already surfacing from across the political spectrum – Clive Lewis, Labour’s shadow Treasury minister, has called for a “modern, 21st century model of public ownership” in areas such as water and the railways, speaking directly to disgruntled voters angered by failures in PFI over the past two decades. Shadow Chancellor John McDonald has taken a more gung-ho approach in the past, suggesting a Labour government would tear up PFI contracts entirely and replace them with a nationalised scheme across key areas of the economy. Investors should expect to hear much more of this from the Labour camp over the coming months as they look to make this a central part of the political discussion.
In the press, the Financial Times has called on government to become a more “canny customer” when dealing with private companies. Whitehall has traditionally followed the principle of “too big too fail” in the past, believing that the biggest players in the industry – Carillion, Gailliford and Balfour Beatty – were the safest bets when deciding who to award public contracts to. Much like financial services after the 2008 crash, the construction industry could be about to undergo radical change.
Despite all the talk of sweeping reforms to PFI, the government will need to ensure that any changes ensure tendering – and government contracts – remain attractive to private companies and the government can still run a competitive auction process. A heavy-handed approach could be perceived negatively by investors. However, this is both unlikely from a Conservative government and a risk this Prime Minister cannot take as the country tries to secure as much investment as possible amidst preparing for life outside of the EU. Reforms are more likely to focus on improving risk assessments before awarding public contracts, greater scrutiny of profit levels of private companies involved in PFI or simply a beefing up of regulatory powers to avoid a repeat of Carillion.
Government contracting is not a simple business. Failure to accept the lowest bid risks criticism from the opposition and the press. However, the case of Carillion, and others, such as the East Coast Mainline, show that high quality and (relatively) low cost are not natural bedfellows. Efficiencies in process and delivery can only take you so far before you start eating into your bottom line.
In the short-term, investors could be in for a windfall as the government looks to private investors to quickly help pick up the humpty-dumpty pieces of Carillion. Looking ahead, the government will have to demonstrate that it is looking beyond the biggest players in the sector, focusing on quality and getting away from the race to the bottom that has dominated the PFI market for decades. The emphasis will have to be on value for money, rather than on costs in a more limited sense. This could be particularly beneficial to those with investments in smaller, more niche assets where they have real sector specialism, and the expertise to present bids that both make sense from a commercial perspective, but also present high-quality deliverables for the government.