What the Carillion crisis means to the government

This article was originally posted by @ianmakgill on Twitter. You can read the full text on our blog.

How bad is the Carillion crisis and why is it so hard to unpick? Having spent the best part of 15 years looking at public procurement data, this is my take on the situation.

We’ve identified that 208 public bodies had some form of contract with Carillion in the last five years. The total spend with Carillion in the published spend reports was nearly £1bn in 2016, but this shrank in 2017. We don’t have complete data for 2017, but by our estimates Carillion’s public sector revenues fell by about 25%.

Of 97 public sector customers in 2017, just 23 increased the amount that they spent with Carillion. Falling customer numbers is also a common thread, from 166 customers in 2012, this fell to 135 in 2016 and 97 in 201. Upcoming publications may push this number above 105 or maybe even 110, but the customer count was down every year after 2012.

Bookings held up, despite the falling customer numbers, but with contracts in Glasgow and elsewhere going wrong, it looks like a whole slug of contracts came to an end in 2016. With the sudden drop in customers in 2017 and falling revenues from existing customers, it was obviously too much for the business to sustain. The idea that they only had £29m in the bank is just shocking though.

So where does that leave the Government now? I’m going to run through some scenarios that need to be considered, and actions to take.

Each contract, and we estimate that there are 450 of them, is going to have to be either brought in-house, or swapped out. Contracts that go back in house, will have to have staff recontracted back to the Council or School that let the contract. When those staff joined Carillion, some of them will have come from the school or Council, their old employment contracts would have been more favourable than the Carillion contract. As a result, staff moving back, or staff moving to the public sector for the first time, will want to negotiate favourable terms in their contracts, which will put greater pressure on their finances.

Carillion would have been brought in to run services and will have promised savings. Those savings have evaporated since they went bust. Government needs to have a policy for what happens if these organisations start to run out of money, will any budget shortfalls be made up?

What about the contracts that will go to different firms? Things look even bleaker here, as Government has a very weak negotiating position. Every supplier who is going to take on any of the failing contracts is going to demand more money.

Where contracts are going well, rival bidders will say “your incumbent went bust, we can’t take that risk”, so the base costs for everything will go up. They will also have to work out what’s going on, and effect a handover from Carillion, so there will also be costs for firms to manage each handover.

Worst of all, Government can’t afford to let another Carillion happen, so the work has to go to a company with a stellar bank balance. The most robust companies are going to add a premium for being more reliable than their rivals, so the cost will go up again.

From the Government’s bunker all they can see is rising costs and shrinking options, but there’s more still to come. Right now, there will be a cherry picking war going on. Remaining contractors will be trying to lure away the best staff and, if they can, whole teams from Carillion. This will give them leverage in any future negotiations, as they can say the only difference will be where you send the (much bigger) payments.

Not only will there be rising costs, complex negotiations and the distinct feeling that the Government is being held to ransom, the Government will have to deal with many of the key staff moving on to other contractors, taking valuable knowledge with them.

Perhaps their best hope is to offer profitable contracts as long as the successful supplier also takes on some of the poisonous contracts. The only problem with this is that Government can’t aggregate these contracts into packages without the agreement of each buyer, so spare a thought for the officials having to deal with what must feel like a real storm with no good options. They didn’t start 2018 thinking “let’s fix 450 broken contracts”.

You can read an excellent article with more details from our data here: http://www.wired.co.uk/article/revealed-carillions-billion-pound-government-clients.