Let's fasten our seatbelts

On a recent trip to the US my American colleague passed comment that visitors from the UK always fasten their seatbelts, whereas many Americans view it as an infringement of their basic human freedoms. This is the conundrum, possibly hard-baked with political ideology, with which the inquiries into both the Grenfell Tower tragedy and now the Carillion collapse will have to wrangle.

That is, to what extent can and should government mandate and check how individuals and businesses behave and to what extent should we expect to rely on people and businesses following guidelines, doing a good job, behaving properly, being entrepreneurial, and seizing opportunities? And, indeed, are these two things mutually exclusive?

A particularly pertinent argument in favour of some level of compulsion is to examine who really pays when something goes wrong. At Grenfell Tower people lost their lives, whereas with Carillion at least it’s “only money” – but it is a humungous amount of money, which will impact a lot of people. 

The question is, not just with Carillion but across the industry in general, was everything done – and is everything now being done – to ensure that clients and suppliers are protected?

It has already been reported that Carillion’s funders will sustain losses approaching £1bn, its shares – worth £1.5bn at peak – are now worthless and its staff pension is underfunded by £600m. But Carillion also had extensive trade debts of reportedly between £1bn and £2bn; they had an order book of around £16bn, which even at a 5% cost to move to someone else to finish will attract a premium of almost £1bn; and they employed 20,000 staff in the UK, who may well lose income or become unemployed. And then there’s the cost of the official receiver and their consultants. After a few months the human impact of this will go unreported, but people will lose their homes – SME business owners who used their houses as collateral to expand their capacity to fulfil Carillion contracts – and there will be a wave of stress, anxiety and mental health issues precipitated by the collapse.

The true cost of this failure will run in excess of £5bn and will take years to unravel. The question is, not just with Carillion but across the industry in general, was everything done – and is everything now being done – to ensure that clients and suppliers are protected from the very worst impact of company collapses? 

Current government best practice demands that project bank accounts (PBA) should be used on public sector construction contracts, unless there are “compelling reasons” not to. PBAs mean that the client’s money is paid into a ring-fenced bank account, and payment is made automatically to suppliers and subcontractors from the PBA. In the event of contractor insolvency the client has the financial security of knowing that the money they paid out on their project has gone directly to the companies working on the project, and the subcontractors know that their payments are protected. So, what proportion of Carillion’s public sector appointments had project bank accounts? If the answer (as I suspect) is less than 100%, what were the compelling reasons not to, and in the light of the collapse are they now being instituted on all public sector contracts? 

What proportion of Carillion’s public sector appointments had project bank accounts? If the answer […] is less than 100%, what were the compelling reasons not to?

The only real argument against the PBA principle – which is well and forcibly made – is that they tie-up cash flow and, without this buffer, tier one contractors could not operate at the margins at which they do currently. To me that is a bit like a Victorian sympathising with child chimney sweeps, but still insisting it’s the only way to clean the chimneys! The fact is that PBAs work on Crossrail, Ministry of Justice and Department of Transport projects. 

Whenever I think of Carillion, Mark Farmer’s prescient report Modernise or Die comes to mind. Farmer highlighted key factors that would lead to the death of the industry as we know it, including “low industry margins, adversarial pricing models and financial fragility, interlinked with the issues of productivity, predictability and structural fragmentation”. The challenge he threw down was to modernise. Carillion demonstrates that the dress rehearsals are over.

One way or another – whether through the funding of unemployment benefits, the additional cost of finishing projects or the wider impact on pensions through the pension protection scheme and the loss of share value – everyone in the UK will be affected by this collapse. Perhaps PBAs should now become the industry seatbelts in both the public and the private sector. Mildly annoying at first, but you quickly get used to them, and one day they might save your life.