Newspaper article The Evening Standard (London, England)

Carillion Chaos Demands Deal for Suppliers

Newspaper article The Evening Standard (London, England)

Carillion Chaos Demands Deal for Suppliers

Article excerpt

Byline: Sir Vince Cable comment

WE HAVE just finished "celebrating" the 10th anniversary of Northern Rock. Its collapse proved to be the stone which triggered the landslide of failing banks and the many, mainly small, companies dragged down with them.

The Carillion landslide is already pulling down hundreds of contractors and subcontractors and it illustrates the way that business is a network of companies tied together by credit, contracts, and (one hopes) trust. Carillion was not judged, in the event, "too big to fail" -- rightly so -- and hasn't had to be nationalised. But its failure has caused immense damage to its supply chains.

The Government moved quickly to investigate the conduct of directors, especially the former chief executive Richard Howson, whose efforts to limit the scope of his bonus drawback present almost a caricature of "fat cat" greed and irresponsibility.

It also has to be investigated as to whether Carillion was trading insolvent, which would, of course, be a criminal offence.

The finances were certainly extremely bare. The company is no stranger to the criminal courts, having been fined PS5.4 million for collusion in price-rigging with other construction firms in 2009.

The first steps are also being taken to investigate the awarding of government contracts after profit warnings were issued, seemingly to feed the company's cashflow. A more basic question is, why were government departments a year behind the hedge funds in spotting that Carillion was overleveraged and had questionable risk management capability? Or why did none, seemingly, spot the coincidence of a ballooning pension deficit, dividend payments and management bonuses? But none of that rear-view-mirror analysis helps the small and mediumsized enterprises which are struggling to stay afloat. The immediate requirement is to stabilise public sector contracts; and, where they cannot be executed in-house, to have the Government to guarantee them until fresh providers can be identified through re-bidding.

More difficult is the collapse of private sector contracts. Because Britain lacks a US-style Chapter 11 system it is difficult to stop disorderly collapse.

Our system of dealing with corporate failure surely needs review. It is perhaps time to revisit some of the arrangements put in place after the banking crisis to support supplychain finance. I later introduced such a system for several industries where credit had dried up.

There is also the need to revive the tougher approach the Coalition adopted towards late payment. It is outrageous that prime contractors like Carillion have been allowed to squeeze the SMEs in their supply chains for cash with 120-day payment terms (the alternative system, the Early Payment Facility that offered quicker payments through Carillion's banks for a fee, has been shut down with a reported PS350 million owed to subcontractors). …

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