The case for the government to bail out Carillion

As Carillion went into “apparent” liquidation at the beginning of this week, everyone assumed that Carillion was operating a completely broken business model and the company was a victim of the “fat cat” greed-driven culture.

But was that correct? And if not, is there a case for the government to step up more than they appear to be doing?

There is plenty of evidence to show that the delivery model was operating reasonably effectively. Big bonuses for senior execs aside, companies which have a large and accelerating debt mountain tend to work very hard to scrape every last piece of cost out of the delivery model. It’s the first thing companies do when they are faced with loss-making situations. The revenue side of the equation may have been wrong, but I doubt whether Carillion’s established competition could have delivered any more efficiently from a cost perspective.

The real issue was that Carillion bid for projects with margins so tight to win business, so they could fight another day. The possibility here is the government has been paying below fair value for Carillion’s work for years. If that is the case, how much have they undercharged?

My guess is that sum is 900 million odd GBP (minus bank interest and charges) plus the 587 million GBP missing from the pension plot plus the operating costs necessary before next payments are due plus a bit of operating profit.

Finger in the air – I estimate that Carillion undercharged in total by about 2 billion GBP. Great for winning business and securing a personal bonus for the execs. High risk for business longevity!

If these “finger in the air” figures for undercharging are correct and the assumption that the delivery model was operating as frugally – is there not a case for the government simply to pay the amount it should have paid in the first place and keep Carillion going? This is not a traditional bail-out i.e. government being asked to fund the failure between external entities. The government was the customer in this case and the supplier operated to a procurement model that the government set-up in the first place.

I’m not suggesting for a second that Carillion’s apparently suicidal commercial model was not driven by greed (initially to quickly grow) followed by fear (desperation to bridge cash shortfalls to survive) should not have consequences. But should the government at least investigate whether they ended up underpaying in the first place and supporting private enterprise more than it has done?

It is these very UK entrepreneurs who the country needs to grow and thrive.

If an investigation did go ahead and showed that the government did receive services below fair price, then it would take a very brave politician to stand up and say – yes Carillion did some stupid things, but the government did pay below market value and would make good the difference. In addition, the whole nature on the way government procurement works particularly on the massive and higher risk construction projects needs to change. Yes, the opposition parties will have a field day but most of the public would respect an admission and clear steps to change (if validated) rather than finger pointing fault after the fact and allowing private enterprise suppliers to suffer through no fault of their own.

Here is another opportunity:

If the underlying Carillion delivery model proves to be operationally frugal in delivery, then why doesn’t the government take that aspect on and see whether there is some good to be gained by adopting some of that frugality in house and turning this whole mess into an opportunity?