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Sat July 21 2018

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What the MPs missed, by Richard Howson

12 Jul Carillion, says its former chief executive Richard Howson, was a victim of its clients: "any analysis as to the causes of the failure of Carillion is not complete without looking at the way in which government and the wider public sector procured services from Carillion and failed to administer payments."

Richard Howson faced the MPs' inquiry on 6th February
Richard Howson faced the MPs' inquiry on 6th February

Richard Howson and other former directors of Carillion running the company during its decline and fall have responded to a recent damning parliamentary report on the company's collapse. They all agree that the MPs were looking in the wrong places for answers.

While most responses are brief, Richard Howson has given a lengthy defence of the management and governance of Carillion. He says that to understand the causes behind the collapse of Carillion requires and understanding of the frailties of the construction industry model, where contractors are expected to bankroll the government.

The joint inquiry into the collapse of Carillion by the House of Commons select committees for work & pensions and for business, enterprise & industrial strategy (BEIS) published its findings in May. Carillion executives came in or considerable criticism. In short, the MPs decided that Carillion executives were greedy and selfish, and their auditors were compromised and ineffective. Now the executives get their say and their responses have been published on Parliament’s website.

All agree that the committee got it wrong but most prefer not to elaborate while other investigations (including by the Financial Conduct Authority and the Financial Reporting Council) are still going on.

Former non-executive chairman Philip Green says he disagrees with many of the report’s conclusions but it would be inappropriate to comment yet.

Former interim chief executive Keith Cochrane says something similar: “While I am concerned that, in reaching its conclusions, there are a number of instances where the committee appears to have taken the evidence I provided to them out of context, and note generally that I do not accept many of the conclusions reached in the report, in view of the ongoing investigations into the insolvency of Carillion, I do not consider that it would be right for me to comment in detail at this time.”

Former finance director Richard Adam says: “Your report and subsequent media appearances put the blame on me and others for Carillion’s collapse. The reasons for Carillion’s collapse are clearly complex, however, I do not believe that all the evidence you heard and read justifies your conclusions and I believe the assumptions you have made in order to arrive at your conclusions are unwarranted in respect of my role at the company prior to my retirement in 2016.”

Alison Horner, former chair of the remuneration committee, says: “There are a number of instances where the report misquotes or misrepresents the evidence that I gave to the joint committee.”

Former chief executive Richard Howson, however, gives full vent to his frustrations and has responded at length, which we publish in full here.

 

Richard Howson writes:

The Report has not considered all of the issues which are key to understanding the reasons why Carillion went into liquidation. In dealing with the issues which have been covered, the Report has omitted or ignored some of the more significant evidence submitted. The Report fails both to analyse all of the evidence received and to explain the Joint Select Committee’s interpretation of that evidence in a clear and balanced way. In some cases the Report also fails to understand the complexity of the contracts or markets that Carillion was party to and describes the evidence in a misleading fashion. I have therefore restricted my comments to a few key observations; however, failure to deal with any point should not be taken as acceptance of those points:

1. The reasons for Carillion’s demise are mixed and varied (and are yet, I believe, to be fully understood). Yes, debt was too high but for my part I was absolutely committed to working through to conclusion our challenging contracts and reducing it. As a board we relied on cash flow forecasts, working capital projections and on our customers acting in accordance with the contracts and administering fair and timely cash flows. However, any examination of the causes of the liquidation has to look closely at the events immediately preceding the liquidation. Without such an investigation, any findings are flawed and incomplete. No review was conducted of those last few crucial months and the actions taken or more importantly not taken leading up to the liquidation both by the company and by Government.

Given the size of the contracts and the contractual claims Carillion had against its customers for additional and variable works and suppliers for significant non performance, cash collection was a key part of the senior and executive management team’s role (see my evidence Q426). It is not clear to what extent effort was expended in this regard in the last few months immediately preceding the liquidation, when 4 out of the 5 existing experienced Divisional Managing Directors were removed from their roles. I have had numerous concerns raised with me, from those there to the end, that amounts owed were not pursued by senior and executive management, and that they appeared to ignore the fact that those on the other side of the negotiating table expected executive management (given the seriousness of the situation) to be present to lead the collection of cash or conclusion of accounts.

2. Crucial to a thorough and proper investigation was for the Joint Select Committee to obtain an understanding of the amounts owed to Carillion by various Government Departments and agencies. In investigating the causes of the failure, the Committee should have asked Carillion’s Government and public sector customers how much was properly due to Carillion under the contract. Emma Mercer referred to the cash flow issues when she gave evidence (Q338). In my letter dated 10 April 2018 I suggested that details of the sums could be obtained from Emma Mercer but I see no reference to this in your report. In my letter of 10 April I referred to the NOMS (National Offender Management Service) contract to provide facilities management services to the prisons in the South of England. Despite the fact that Government had completely underestimated in their tender documents the size of the estate (which turned out to be some 60% bigger by number of assets than Government had estimated), Carillion was obliged contractually to maintain and administer this bigger estate and rely on change mechanisms within the contract to make it and its suppliers whole and to undertake substantial variable works (for example, following prison riots). Carillion did this and bore the significant additional costs as a result. Despite the fact that Carillion was not being paid for this additional work, it continued to deliver the daily services and pay its own suppliers as it should.

Carillion in my time was constantly chasing up its Government and public sector customers to agree such additional amounts, despite the fact that such amounts had arisen because those customers had failed to adequately understand the size of their estate and had failed to administer the contract between the customer and Carillion in a fair and timely manner. Therefore, these amounts should never have been disputed because they flowed from the pricing structure in the contracts and the terms and conditions within the contract relating to change management. At the time of my departure substantial amounts were properly due to Carillion under the contract from Government, or from Government-owned or majority-owned entities on a range of contracts (for example, MoD on NGEC, Highways England, Transport for Scotland, NOMS, Network Rail). I understand from concerns raised with me by senior members of the Carillion team present at the point of the liquidation that similar large amounts were still outstanding.

3. Whilst I am aware of the work of the PAC/PACAC Joint Select Committee looking at government and public sector outsourcing, any analysis as to the causes of the failure of Carillion is not complete without looking at the way in which Government and the wider public sector procured services from Carillion and failed to administer payments. Government and the wider public sector failed to provide adequate data and threatened to strike out the company as a contender for future work if Carillion had pursued its claims against the Government by the threat of litigation.

Carillion is one of a number of companies that have commented on such treatment. Rupert Soames, CEO of Serco, has recently talked of the need for four principles in government contracting, with transparency and fairness on both sides being key. Construction and facilities management contracts are not static: the approach required to ensure that contracts are successful and deliver the customer’s objectives must be based on partnership between the customer, the contractor and suppliers to support service delivery excellence and honest and fair cash flows. This must not be solely based on timing, but, just as importantly, on quantum.

I note that the Federation of Small Businesses states in its letter of 27 February 2018 that “As you know, the general problem small businesses across the economy face with poor payment is much wider than simply payment terms- it is just as much about issues such as spurious invoice disputes, barriers and delays before issuing a purchase order, unfounded quibbles with work carried out”. In my letter to you dated 10 April (which was not referred to in the Report and was not disclosed by the Committee), I discussed Carillion’s Early Payment Facility (EPF) and I described the challenges that contractors face in collecting all of the amounts due to them. The Government quite rightly mandates contractors to pay suppliers on 30 day terms; however, in order to achieve this, Government should be prepared (in all senses of the word) to administer monthly payment applications holistically to enable all parties in the supply chain to be paid fairly for all of the work undertaken within a given period. Hiding behind spurious disputes around scope, changed or varied works, eligibility for legitimate additional costs or punitive levying of performance penalties, and therefore effectively using its supply chain as a bank, is not acceptable. In this regard, the Federation of Small Businesses is quite right, but be under no illusion that this problem starts at the top.

4. The Joint Select Committee asked for and invited evidence from a number of sources. Any report into the collapse of Carillion, for it to have weight and be credible, has to both analyse all the evidence received and explain its interpretation clearly and in a balanced way. In many instances, the Report arrives at conclusions but no evidence is given in support. In its approach, the Committee chose to publish the evidence it received selectively, ignored some of the more significant evidence submitted to it and quoted information in a misleading fashion.

First, my letters of 21 February 2018 (second letter), 10 April 2018 and 9 May 2018 (pointing out an inaccuracy in the Committee’s first report and commenting on EPF and Msheireb Properties and other issues) were never published, despite the Committee agreeing with my evidence (and also set out in my letter of 21 February) and changing their first report as a result. I also note that a large number of letters (13 in total) were not published until the Committee published its second report on 16 May 2018, despite being received much earlier (between February and April), meaning that interested parties had no opportunity to provide further evidence prior to publication of the second report. For example, Emma Mercer’s letter to the Committee dated 5 March 2018 was only published on 16 May 2018 and the letter from Gavin Vaughan dated 30 March was published on 16 May 2018. I am also aware that various other correspondence has never been published by the Committee.

Second, in my letter of 10 April 2018 I provided significant detail in respect of the project in Qatar for Msheireb Properties, which the Committee has not published and which appears not to have been considered in the Report. In my letter I referred to the fact that the issue which Carillion faced in terms of payment by Msheireb Properties was also confirmed by the experience of other contractors; “clearly demonstrate that Carillion’s experience with Msheireb Properties (owned by the Qatar Foundation) has been and is being experienced by a number of other contractors and sub-contractors in Qatar”.

Third, in dealing with the EPF issue, I do not consider that the way in which Carillion structured its EPF has been communicated accurately within the Report. Both Emma Mercer and myself dealt with this at Q352–355 and Q545 and in my letter dated 10 April 2018. The Report states that “Carillion was a signatory of the Government’s Prompt Payment Code, but its standard payment terms were an extraordinary 120 days. Suppliers could be paid in 45 days, but had to take a cut for the privilege.” This is just not correct. As I said in my letter of 10 April (which the Committee has chosen not to publish and not to refer to) I explained that the EPF “allowed suppliers to choose when they took payments on approved invoices, which they could do at no cost to themselves on 30 days on government contracts and on 45 days on non-government contracts.” The bank would deduct the interest for this but Carillion would make the supplier whole, so it is simply not correct to say that the supplier had to take a cut for the privilege. Whilst the 120 days was provided for in the contract, this (as I said in my letter) “effectively set the time period with which Carillion paid its EPF partner banks, not the time period it took to pay its suppliers.”

Mr Howson's letters have since been published on parliament.co.uk, just this week, two months after the committees published their joint report.

 

The BEIS/work & pensions committees' report into Carillion's collapse found little to say about what reform might be needed to the construction industry or public procurement. Instead it blames Carillion's collapse on the failing of individuals within the company leadership.

For example, “Zafar Khan failed to get a grip on Carillion’s aggressive accounting policies or make any progress in reducing the company’s debt.”

Richard Adam “knew exactly where the company was heading once it was no longer propped up by his accounting trick.”

Of Richard Howson they said: “His misguided self-assurance obscured an apparent lack of interest in, or understanding of, essential detail, or any recognition that Carillion was a business crying out for challenge and reform.” They said: “He was part of the problem rather than part of the solution.”

Under the joint chairs Frank Field and Rachel Reeves,it successfully fed the public appetite for a slaughter of fat cats but it was of no use whatsoever to a construction industry eager to understand the lessons of Carillion's fall.

That work – that far more important public services – was left to the Public Administration & Constitutional Affairs Committee, chaired by Sir Bernard Jenkin. Its report, published earlier this week, After Carillion: Public Sector Outsourcing and Contracting, is the one worth reading.  No showboating, just real lessons.

 

 

 

 

 

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