Too big to fail, too huge to succeed: What we should learn from Carillion

The collapse of Carillion could be a harbinger of failures to come, since we live in an era of mergers and acquisitions, driven by the complex financial transactions that underlie most such deals. Over the course of a decade, Carillion absorbed GT Rail Maintenance, Alfred McAlpine and other diverse companies, becoming a behemoth and saddling itself with the fees and massive debt load that such transactions require.

Carillion was tailor-made for a moment when everybody seemed to think bigger was best, except in the state. A cross-party consensus has prevailed in favour of starving the public sector and getting “value for money” through outsourcing and privatisation. As far as I can tell, the only difference between this trend to outsourcing under New Labour and the Tories was that New Labour favoured companies formed by the civil servants who drew up the procurement rules.

There has been a form of regulatory capture of the procurement process by procurement experts and corporations

The trend towards outsourcing and combined procurements also included the adoption of framework agreements, where instead of bidding for individual jobs or for land, companies could pre-qualify to be part of a framework, and government could simply ask them in for a price. Cosier all round, but tough if you were a small company. For example the London Development Panel, now being renewed, was a pre-qualified list of 25 housing developers which could be used by the GLA and its constituent bodies as well as the London boroughs to speed up the process of disposing of land for housing. It included large builders like Taylor Wimpey and Bellway, large contractors like Carillion and Kier and big housing associations including Places for People.

Of course underneath all the firms were the small suppliers and contractors who actually, built, plumbed and powered the houses, and it is they who are left most vulnerable by Carillion’s collapse. The banks holding the debt always seem to be bailed out.

The collapse of Carillion, alongside news from the audit office of the £200bn bill for the Private Finance Initiative and the fact that costs can be 40% higher under PFI, give the lie to the idea that handing services over to giant private suppliers is the solution to building government projects like rail lines, schools and hospitals or delivering services like school dinners. The complexity of these massive procurements, together with the consequences of the debt burden these companies assume, creates an immense risk to those contracts and services.

At the same time it is clear that there has been a form of regulatory capture of the procurement process by the procurement experts and the corporations, so that it has become harder for SMEs to participate unless they are brought in as lower-level suppliers by the big companies. Framework agreements tend to be written to favour multi-disciplinary firms. And the impact has been seen by the decline in the number of small house-building companies since the recession.

There have been some encouraging noises coming from government and the mayor of London about encouraging small builders, by providing access to both land and finance. But the presumption still exists in favour of the big framework agreement, and when projects are being conceived, government still tends to think of the big contract rather than of a project managed by government involving multiple specialist contractors and individual procurements for separate phases. While perhaps more cumbersome to administer, this approach can reduce risk and encourages competition.

At the same time, there needs to be better scrutiny of contracting decisions, not only on the robustness of the selected contractor (big doesn’t necessarily mean healthier), but also of thresholds and requirements which discriminate in favour of larger financial firms. RIBA has usefully pointed out some of the areas that need improvement.

Perhaps the collapse of Carillion is a teachable moment.