Oral evidence: Collapse of Carillion, HC 851
Oral evidence, 27 February 2018.
Witnesses
Keith Cochrane, Philip Green, Richard Howson and Emma Mercer.
Chair
Welcome to this joint hearing of the Public Accounts Committee and the Public Administration and Constitutional Affairs Committee to look into the collapse of Carillion. It is pertinent that we are looking at this today: we note that the latest news headlines show us that the Carillion job losses are now at 1,370, with 230 more redundancies just announced. That reminds us of one of the reasons that this is a very important issue to look at: people are very badly affected by this. Individuals have lost their jobs and companies have gone to the wall. What we are keen to do today—both Committees have an interest in how the Government handle large contracts—is to look at the Government side of this. We have seen and are au fait with the evidence that you all gave to the Work and Pensions Committee and the Business, Energy and Industrial Strategy Committee at their recent joint hearing, so we do not intend to repeat that. If you stray into repeating that, I will nudge you away from that, and if members of the Committee stray into repeating that, I will likewise nudge them away from it. We want to get to grips with what the Government knew and what your relations were with the Government in this, as well as with some of the wider issues about how the company played. Assume that we know what you have said before, because we have all been prepared and read that. I should acknowledge that there are two, maybe three, investigations into Carillion under way—by the Financial Reporting Council, the Financial Conduct Authority and potentially others along the way. We will be looking at this again, and the National Audit Office will be looking at it at some point. That is the signal from the Public Accounts Committee. I am now going to hand over to the Chair of the Public Administration and Constitutional Affairs Committee—PACAC—Bernard Jenkin.
Mr Jenkin
Thank you. Thank you for coming today and suffering another ordeal in front of a Select Committee. We do appreciate your candour. I emphasise that we are very interested in what the Government can learn from this and what lessons we need to make sure the Government learn from this. To that extent, the first area I want to discuss is when the Government should have understood what the financial health of Carillion actually was, and when they first should have understood what risks the Government were carrying. Philip Green, as Chair of the business for a considerable period, what were your anxieties many years ago about the long-term sustainability of this business, and how should the Government have understood them in the way that you understood them?
Philip Green
Thank you for the question. Before I answer—this is repeating one thing I have said before, but forgive me, because I want to say it—let me reiterate what we said in terms of our deep sorrow at what has happened.
Chair
I appreciate you want to repeat that, but we also appreciate you have said it before. You have said that—thank you—so you can answer Mr Jenkin’s question.
Philip Green
Fine, but it is really important to say it. I became Chair in 2014. You talk about anxieties. The principal anxiety was around the level of debt that the company had. I would say that anxiety began in late 2015 to early 2016, and the level of anxiety then gradually increased.
Mr Jenkin
If the level of debt is the indicator the Government should be looking at, I would suggest that that is too late.
Philip Green
Sorry, I thought you were asking me what anxieties I had and when they started.
Mr Jenkin
No, when did you start becoming anxious about the direction of the business, the degree of risk on the balance sheet and the narrowness of the margins? When did you start thinking that it might not survive?
Philip Green
Forgive me, there are several different questions there. Right through 2017, we believed a restructure was achievable.
Mr Jenkin
I am asking a much deeper question here. We are looking at the whole relationship between the Government and a set of 27 or so contractors. The Government seems to have transferred a great deal of risk to these businesses without actually understanding how much risk it has transferred and how much risk it cannot transfer. The risk, in respect of Carillion, has come boomeranging back to Government, because Government clearly did not understand those risks. Are you telling me, Mr Green, that you thought that this company was high-risk only when the debt was going up? I do not believe that.
Philip Green
The company successfully delivered many hundreds of contracts to the satisfaction of Government and all stakeholders. The company got into difficulties during 2017 because it had too much debt and its balance sheet was unable to withstand the shock from, in particular, four contracts that went badly wrong in the middle of 2017. There are lessons in that for Government and for companies. The balance sheet did not have the robustness to withstand the shocks that it suffered. One of the issues within that, which I think is one of the points that you are touching on, is the balance between risk and reward.
Mr Jenkin
I would suggest that when any company is called a “construction and catering company”, as I have heard Carillion described, alarm bells should ring, because there does not seem to be a lot of synergy between construction and catering.
Philip Green
We described the company as construction, support services and some PFI—we never used the word “catering” in a headline description of the company—and we believed that there were synergies between those elements of the business. Keith and the new management team put together, at the back end of last year, a business plan based on a revised strategy, a new structure and some new people, but the basic combination of construction, outsourcing and selective PFI was part of the business plan that the board and management believed in.
Mr Jenkin
Are you saying that the Government are blameless for letting all these contracts to a company that was vulnerable to four other bad contracts?
Philip Green
I am not saying that either the Government or the company are blameless. I think that there are things that both companies—
Mr Jenkin
Okay. What should the Government have seen, several years out, about their relationship with Carillion that they might also find with other contractors, and which would mitigate the risks to the continuity of public services and the jobs of people providing public services? What are those risks?
Philip Green
I do not believe that there was a material risk to Carillion’s survival several years ago. Carillion was, at that time, performing in line with market expectations. It was delivering a series of high-quality contracts and had a very good, transparent relationship with the Government. The relationship was principally between the chief executive and the Crown agent—the Crown representative. At the very top of Government, that was the key relationship.
Chair
Just to put it another way, if you were the Crown representative, advising the Government on Carillion, when would you have started to raise warning signs with the Government?
Philip Green
I would have said at the same time as the board, which was during 2016, when the board became very focused on the level of debt. Management put in place what we called a “self-help” plan to bring debt down. At the beginning of 2017, Richard stood up and said that by the end of that year debt would be lower than it was at the beginning of the year.
Mr Jenkin
When was the first time that the Government had a conversation with the company about the level of risk in the company?
Philip Green
Richard had the relationship up until July of last year with the Crown representative. I did not have those discussions.
Richard Howson
I met our Crown representative each quarter, and on an ad hoc basis in between. It was a collaborative relationship. She would phone me and others in our organisation. She did not have to route questions or inquiries through me; she had free access to my managing directors and their managing directors, so it was a collaborative relationship. When the Crown representative started to ask questions about the level of shorts in the business, which was perhaps an indicator that the market—
Mr Jenkin
The level of what?
Richard Howson
Shorting in the stock, which rose from 2012, when I think it was at a level of around 11% or 12%. It went up, ultimately, to about 23% in 2016 to early 2017. We had a number of conversations about why the City was shorting our stock to that extent. We went through the three principal reasons for that: the level of indebtedness, which was rising; the pension deficit, which was rising during that period of time; and the level of receivables that we were finding it difficult to turn into cash flow from customers. Some of those customers were in the UK; some were, as we saw in the last Committee, in the Middle East. I spoke very openly in each meeting with the Crown representative, with Mr Rhys Williams, on the occasion that I met him, and with Mr Manzoni, about the challenges we had on certain contracts in turning receivables into cash. We also asked for and got support from the Secretary of State to help us try to leverage receivables into cash in the Middle East during 2017.
Chair
The Secretary of State intervened with a contract for you.
Richard Howson
We briefed the Secretary of State for International Trade in April or May of ’17 on an increasingly difficult situation in Oman and Qatar, asking him to help us, alongside the ambassadors in those countries, to get a fair administration of those contracts.
Chair
Thank you. It is useful to have that on the record.
Mr Jenkin
Just to confirm, did you say that the market started shorting the stock in 2011?
Richard Howson
There has been a short position in Carillion—I am working from memory—probably for the last 10 or 12 years. There is in most companies. In 2012 it was probably around 10% or 11%.
Mr Jenkin
Emma Mercer, you have been outed in the newspapers today as a whistleblower. Can you explain to us what you understand that to mean?
Emma Mercer
I have been outed in the papers this morning as a whistleblower. I would not describe what I did as a whistleblowing incident in the true sense of the word.
Mr Jenkin
That is what I rather expected.
Emma Mercer
We have a process within Carillion, which is an independent one, for whistleblowers to contact if they need to. As a senior individual in the organisation, I did not feel the need to go to an independent hotline or whistleblowing process. I had full access to management both from an executive and a non-executive level. I think the minutes refer to one of the non-executives questioning whether I had been deemed to whistleblow, but I would not necessarily describe it as a whistleblowing incident.
Mr Jenkin
And this was before you were a finance director?
Emma Mercer
I came back to the UK. I had been working in our Canadian division for a number of years and returned to the UK in April. We went over that story in the last Committee. When I returned to the UK, I raised some concerns around accounting with the executive team.
Mr Jenkin
What date was that?
Emma Mercer
I raised some concerns around accounting and the way we were accounting—
Chair
This has been covered in the previous Committee.
Mr Jenkin
But can we just ask what date it was that you first raised these concerns?
Emma Mercer
I raised concerns around some internal accounting guidelines during the middle of April.
Mr Jenkin
The middle of April 2017?
Emma Mercer
April 2017.
Dame Cheryl Gillan
May I just ask you a quick question? As I understand it, your revenue was declining quite steadily between 2009 and 2016, and was due to fall further in 2017. Before that, it fell by as much as 12% around 2009. In 2013, you hit a low spot of 26% below what you were expecting. Did you discuss that at all with the Crown representative, Mr Howson?
Richard Howson
Yes, and can I just explain the background to that fall in revenue, because it was by design? In 2009, in response to the global financial crisis, the board developed and approved a new strategy, which was to half the size of our construction business in the UK. It was a £2.2 billion revenue business in the UK and we planned to take it down to around £1 billion, because the Government said at that time, you will recall, that they were reducing their construction spend by between 30% and 40%. That was our response to one of our largest customers reducing its spend in the external market. The quid pro quo against reducing the UK construction business was to double the size of the Middle East business and the Canadian business, each from £500 million to £1 billion in revenue. I stopped that strategy in 2013. So the decline in revenue that you have just spoken about is the reduction in scale of the UK construction business from 2010 to probably the middle of 2014, where—from memory—our turnover dropped to around £4.2 billion or £4.3 billion.
Dame Cheryl Gillan
But coupled with those problems in the market and also the shorting process by the City on your position, surely that must have worried you considerably?
Philip Green
The reduction in revenue did not concern the board because, as Richard said, it was part of a conscious strategy. Yes, we were aware of the shorting. Richard and his colleagues had many communications with shareholders, and I was always available to speak with shareholders when and if asked. We believed at the time that the company’s strategy was the right one. We consistently believed that we could deliver market expectations, which we indeed did for a number of years.
Dame Cheryl Gillan
Did you discuss that with Ministers?
Philip Green
Personally, no. The principal relationship was through the chief executive.
Mr Jenkin
That takes me to the next question. There were some 25 meetings once the profit warning had been issued. What information were the Government asking for?
Philip Green
Post July?
Keith Cochrane
Perhaps I could answer that question, since I took over as interim chief executive on 10 July following the profit warning. One of my first meetings was with Government, because naturally they were concerned with understanding the background to the profit warning and the write-downs that we were taking on particular contracts, as well as understanding the scope of the strategic review that we had announced, that was taking place on 10 July. It was about explaining to them the basis of the announcement, the background to it and the actions that we now planned to take over the coming weeks. I committed to going back and seeing Mr Rhys Williams and his colleagues as we progressed through that strategic review and to give them an interim update. I did that in early September, and thereafter—prior to announcing our half-year results and the results of that strategic review at the end of September—I had a further session with Mr Manzoni and Mr Rhys Williams to take them through the backcloth of our announcement at that time. So it was very focused on the strategy for the business, our plans around disposals, our plans around cost reduction and how we saw the shape of the business evolving going forward.
Mr Jenkin
How adversarial was that process?
Keith Cochrane
At that stage it was a constructive, two-way conversation. They were seeking information from us, they were seeking to understand our position, and obviously there was concern around continuity of service. There was particular interest in relation to some of our potential disposals which at that stage involved a number of health contracts to Serco, which was under way. We brought the Cabinet Office inside so that they were aware of that process.
Mr Jenkin
How much time did you spend discussing what you should show them and what you should not show them?
Keith Cochrane
I did not spend any time on that frankly. We had a very open discussion with them.
Mr Jenkin
So they could have asked for anything.
Keith Cochrane
And indeed, as time progressed, they did. As we put into place our additional financing arrangements in October, we essentially agreed with the Cabinet Office that they would get exactly the same information—including weekly cash flow information—that the banks, the pension funds and our other financial stakeholders would receive. Emma Mercer would give them a weekly update and commentary on the progress around the development of those figures.
Mr Jenkin
How much do you think they shared your view about the risk in the company?
Keith Cochrane
There was considerable concern, particularly around the issue of continuity of service. They were interested in understanding the degree of headroom and the amount of liquidity—the amount of cash—that we had in the business and our ability manage that.
Mr Jenkin
Why were they asking about continuity of service? Were they expecting you to go bust already?
Keith Cochrane
No, they were not expecting that.
Mr Jenkin
What was the context?
Keith Cochrane
The context was that in relation to a small number of loss-making contracts, there was a concern about whether we would seek to hand them back to Government as part of our restructuring process. Alongside that, a business such as Carillion is an asset-light business. Its true asset is its people and the good work that they do. This was not unique to Government; a number of other customers expressed similar concerns about our ability to hold on to those good people and to continue to deliver on our contracted commitments going forward.
Mr Jenkin
This was the Cabinet Office, was it?
Keith Cochrane
I was dealing with the Cabinet Office.
Mr Jenkin
Did they also look at your NHS contracts and your local government contracts? Did they include them in the assessment?
Keith Cochrane
They certainly asked us questions on the healthcare contracts. As to the degree of detail that they went into them, I cannot comment. We provided a lot of detail in relation to our NHS contracts, some of our education contracts and, indeed, our prisons contract as well.
Mr Jenkin
Did they let you know that they were preparing for your possible demise?
Keith Cochrane
We were aware that they were undertaking contingency planning, but as I say, from our perspective in October and November, the context was very much contingency for contract failure, as distinct from failure of Carillion.
Mr Jenkin
My last question is, what effect did the absence of a Crown representative have on the frequency, depth, understanding and effectiveness of your discussions with the Government?
Keith Cochrane
Again, perhaps I can comment. Obviously, I did not have the experience of having a Crown representative, because essentially there was not one when I took on the post on 10 July. I dealt with the set-up and the circumstances that I found.
Mr Jenkin
Who were you dealing with?
Keith Cochrane
I was dealing with Mr Rhys Williams and other members of the Cabinet Office procurement team.
Chair
Were they people junior to Mr Rhys Williams, or did you deal with Mr Manzoni directly?
Keith Cochrane
I occasionally met Mr Manzoni. I think I had a call with him at the end of July and, as I said, I met him at the end of September—so from time to time. From my perspective, it was more to update him on strategic developments, whereas you could argue that the discussion with Mr Rhys Williams and his colleagues was, let us call it, slightly more transactional in terms of specific issues that were happening in contracts or specific data information requests that we had. Coming back to your question, a Crown representative was appointed in mid to late November, from memory. They were someone who came in from outside the civil service. We did find that constructive and helpful. They were seeking to spend a considerable amount of time with my team to get into the business. They had relative freedom, in the sense that there was considerable interest in Carillion right across Government up to ministerial level—for obvious reasons—which coloured some of the debate and discussion that we had on a weekly basis responding to particular concerns or issues that were being raised. Our Crown representative was able to help us to seek to present a more rounded, bigger picture.
Chair
The Crown representative and John Manzoni will obviously have provided advice to Ministers. Did they tell you what advice they were providing to Ministers about the future of Carillion?
Keith Cochrane
No.
Chair
So you had no idea what the Government’s policy position on this was? You were just dealing with officials at a transactional level.
Keith Cochrane
We met officials. I met John Manzoni on a number of occasions and briefed him, and we had a good open dialogue. In the last week or 10 days before Carillion went into liquidation, there was fairly intense engagement, as you can imagine. But even through that process, Government expressed some of its frustrations and its belief that we could have perhaps done things differently.
Chair
At any point, did you know that the Government was considering making you a high-risk supplier?
Keith Cochrane
Yes, I was aware of that. The Government had written to us at the end of November indicating that it was minded to—
Chair
That document is on record. Did you get any hints of that beforehand? Were you told in private meetings?
Keith Cochrane
I think they had told us a week or—they had phoned me saying, “There is a letter coming. This is what we’ve decided to do.”
Chair
Okay, so it was just prior to the letter.
Sir Geoffrey Clifton-Brown
In the profit warnings in July and September, you wrote down £1 billion of assets on a company that was making about £150 million. You were haemorrhaging cash at an alarming rate. When was the first time you had a discussion with Government that this company might not survive?
Keith Cochrane
Our belief was that we had a viable restructuring plan right up until the last weekend, and that was very much what we focused on. Having said that, part of that viable restructuring plan was working with all our stakeholders, including Government—that is Government very much in the context of being a major customer of Carillion. As I mentioned earlier, we had shared cash flow forecasts with Government. We had been asked to prepare a liquidation scenario, which we shared—
Sir Geoffrey Clifton-Brown
Can I stop you there? At what point were you asked to prepare a liquidation scenario?
Keith Cochrane
That was described to me as a standard request of the banks, so it was undertaken through November and December. It was very much in the context of restructuring, so that the banks could work out and establish the best route for the company to work through. In certain scenarios that I could imagine, perhaps the liquidation scenario might have been the least worst option. What the liquidation scenario showed very clearly—this goes back to the point about it being an asset-light business—was that all financial creditors would recover no more than 1p in the pound, at best. That analysis was shared with Government pre-Christmas.
Chair
Can I move on to your expectations of Government financially? I am looking at the statement that you submitted to the court for liquidation, Mr Cochrane. You talk about the continuous dialogue that you have had with the Government. On page 9, at paragraph 39, you say that the company’s hope was that HMG would provide support to the company to mitigate and help manage the challenges that it faced so that it could continue to make progress in respect of its restructuring plan. You talked about meetings with advisers across December 2017 and into early 2018. Could you tell me what and who in Government gave you any indication that you could hope that HMG would provide you with support?
Keith Cochrane
First of all, I should say that the Government were seeking to be supportive. Part of our regular ongoing engagement since July was to—
Chair
You say “supportive”. Meetings can be supportive. Were there discussions about cash being provided?
Keith Cochrane
We discussed cash, outstanding claims, how we could move payments through the system to get paid and how the Cabinet Office would seek to do what it could. Could more have been done? Probably, yes, in hindsight, but they did seek to be supportive. In terms of the specific discussions, to come to the nub of your point, as my witness statement indicates, our banking group—. Let’s be very clear: we were not anticipating seeking formal Government support beyond them paying our bills on an ongoing basis.
Chair
Except that in paragraph 42 of your statement you talk about proposals. You say that you wanted to set out a request for short-term financial support from HMG, and you mention issues relating to settlement of payments. The document is littered with mentions of requests. You tell the court that you requested support from Government; it reads as though you are hoping at each stage, right up to the point at which you collapse, that the Government will either provide you with support or maybe talk to the banks about providing you with support. Can you tell me what actually happened?
Keith Cochrane
Let me just clarify: my point was that until the middle of December, that was the position. We recognised that there was going to be a cash shortfall in the first quarter, and the banks then said, “Look, Government are a very important party. We want your company to ask Government for specific support alongside the support that we will give you to work our way through this short-term funding need as we put together the longer-term restructuring plan.”
Chair
So after that December point, when the banks were really snapping at your heels—it is quite clearly laid out in your statement, so I will not repeat—did the Government or any one individual in Government give you any assurance that there would be potential cash support from Government to get you over what at that point you considered a hump, to get you through to the end of the financial year?
Keith Cochrane
The Government certainly did not say to us, “Yes, we will support you.” What they did say is, “Please put forward a proposal. We are prepared to consider and contemplate that proposal.” As we analysed the potential ramifications of a liquidation scenario, we believed, and, frankly, I continue to believe, that the least-cost outcome to the taxpayer would have been if Government had been willing to support.
Chair
Philip Green, you were obviously around and involved at this time. Did you get any reassurance from Government that they might bail you out—any private assurances?
Philip Green
No, but the meetings with Cabinet Office were all led by Keith.
Chair
Mr Cochrane, you wrote to the Cabinet Office on 8 December asking not to be made high risk.
Keith Cochrane
That is correct.
Chair
Was that after you had the verbal warning? It was before you actually received the letter, presumably.
Keith Cochrane
That was after we received the letter. Essentially, we were given 10 days to make our representations before Government concluded that they were minded to make that high-risk status.
Chair
Just to be clear, for the record, you hoped that Government would support you. The banks hoped the Government would support you; but you are telling us categorically, here in Parliament, under privilege, that nobody in Government said “There is a prospect that we might provide you with some financial support to get you over the hump”.
Keith Cochrane
Government engaged—I cannot say categorically that they said yes—I am saying that; but what I am also saying is Government was engaging with us. They asked us to put forward a proposal and as we and our advisory team looked at what we believed to be the economically logical outcome it was that, just as we see in many other instances, your major customer would participate in a process of supporting a business, given the potential downsides, which, regrettably, we have seen play through over the last weeks. Therefore from our perspective Government had not said no to us, but equally they had not said yes to us. We were engaged in a dialogue and a debate, discussing our propositions.
Chair
Did you believe that you had reasonable grounds to hope that there would be a bail-out by Government; because you were still hoping for that right up to just before—
Keith Cochrane
We continued, obviously—a key element of our duties as directors is to test the going concern assumption on a very regular basis. Essentially the board met every two or three days to test that with its advisory group. That requires you to have reasonable prospects of seeing a way through to a successful financial restructuring. Right through to that final weekend we continued to believe, reinforced by the perspectives that our advisors contributed, that we did have reasonable prospects to continue as a going concern.
Shabana Mahmood
Did the intervention you mentioned earlier in evidence—the Secretary of State for International Trade in respect of your Middle East contracts—help to give rise to the assumption or as you would say reasonable expectation that the Government would step in and help out with cash to keep the business going?
Keith Cochrane
No. I should say that I also had discussions and Government sought to be helpful during my tenure as interim chief executive in seeking to resolve the particular issues that we had in Qatar; but I think we saw that as very much independent of the broader discussions. I think that was from my perspective a very specific sort of contractual question where Government, and particularly the Ambassador, could help support us in terms of making sure that we were getting a fair hearing and we were able to try and progress the outstanding issues on that contract.
Shabana Mahmood
At what point was it clear to you that your business could not continue as a going concern without support from the Government? At what specific point would you say that that was the case?
Keith Cochrane
I think we recognised in our dialogue through January—our belief was that we needed additional support.
Shabana Mahmood
As late as January. Not at any time before did you think you needed support from Government.
Keith Cochrane
To be very clear, our focus throughout this period had been on achieving a viable restructuring plan.
Shabana Mahmood
Which would not have involved—
Keith Cochrane
Which would not have involved specific additional support from Government—correct. We were in the process of preparing our business plan, which we had agreed with the banks. It would have been presented on 17 January. Because of events getting slightly ahead of us, in many ways, by late December, we pulled forward the delivery of that business plan to 10 January. We shared that business plan with the Government. There was a requirement in that business plan for a short-term loan—essentially a bridge loan—to help facilitate a longer-term restructuring. The specific ask of the Government was to help to facilitate that, along with looking at other ways in which they could support us, in terms of a specific contract as part of our longer-term restructuring, recognising that we were talking to investors, who were doing due diligence on the business, about investing in Carillion for the long term. The business plan showed that once you got beyond the legacy contracts and the cash burn associated with them, you had a viable, profitable business that could generate cash.
Chair
We are particularly focusing on Ms Mahmood’s point, which was what you expected from the Government at that point.
Shabana Mahmood
You mentioned the specifics of the contracts earlier, on health, prisons and so on. We know that, on prison facilities for example, when prisons are in a state of disrepair, there is more chance of riots and so on. Was there an expectation that, because the consequences—not just in terms of job losses but for the realm of the public sector—were so big, in the end, the Government would step in?
Keith Cochrane
No. We thought about it in the round. There were particular issues on the prisons contract. There were claims outstanding and there was ongoing debate about the terms of that prisons contract.
Shabana Mahmood
Were you hoping to get more money out of that prisons contract?
Keith Cochrane
We were hoping to get more money out of that, and we had claims on the table that we were discussing with the Ministry of Justice.
Shabana Mahmood
How advanced were those discussions on getting more money out of the prisons contract?
Keith Cochrane
It was a slow process.
Shabana Mahmood
How contingent was getting more money out of the prisons contract on your ability to keep going?
Keith Cochrane
We had not assumed that we would get a substantial sum of money out of that prisons contract as we put our cash flow forecast together.
Chair
It was very clear in your witness statement that it was one of the issues to help you get over the hump. “The company’s proposals to HMG regarding the settlement of issues relating to certain of its contracts”. Presumably that is just the sort of contracts that Ms Mahmood is discussing?
Keith Cochrane
If we had been able to reach an agreement with the Government on that particular contract, that would obviously have given rise to a cash injection into the business, which would clearly have been beneficial. The key point here is that there are a number of different ways that cash could have come into Carillion. We could have reached a settlement with the Government on specific contract issues, or the Government could have given us a short-term loan, which, to be clear, would have been repaid out of the financing of the results of the restructuring plan that we were working through.
Shabana Mahmood
Mr Green, just to pick up on one of your answers earlier, am I right in thinking that you didn’t talk directly to the Government, even in the very last moments of Carillion’s life, when the Government was in fact the only body that could have stepped in to prevent insolvency?
Philip Green
In the middle of January, I attended a meeting, with Keith, with Mr Manzoni.
Shabana Mahmood
In the middle of January? That is the only time at which you got involved? Isn’t that a bit odd? Would you expect that in the normal run of things?
Philip Green
I was always available to speak to any customers and any shareholders.
Shabana Mahmood
But you didn’t have any involvement with the Government until right at the death?
Chair
When you say the middle of January, do you mean 8 January or 14 January?
Philip Green
14 January; on the Sunday.
Shabana Mahmood
That is right at the death. Is that not odd, Mr Green?
Philip Green
I had a lot of involvement with the Government as a customer, both post July and pre July, but the discussions with the Cabinet Office around restructuring were handled by the chief executive.
Shabana Mahmood
At the death, only the Government could have stepped in to help Carillion to keep going. You, in your position, did not get involved in that until that final discussion with the Cabinet Office. I think that is a bit odd. Don’t you?
Philip Green
No. My role was non-executive chairman. I was there to support and challenge and counsel management. We were a very engaged board. Keith updated us regularly—multiple times a week, on occasions—on the discussions. I was there to help and to assist if required. As we have talked about, the discussions were led by the chief executive, which I think is—
Chair
Did you have any approaches from the Government outside those meetings?
Philip Green
Personally? Do you mean if I was asked to attend?
Chair
Yes. No phone calls or anything?
Philip Green
No. Let us be very clear: if I had, I would have attended. I had two informal meetings with Ministers during the course of last year, but not on the subject of restructuring.
Chair
So if Mr Manzoni or someone had called you and said, “Philip, pop in for a chat,” you would have done that.
Philip Green
Absolutely, I would have been there.
Chair
But nobody asked you, and you did not seek to—
Philip Green
No; correct.
Chair
I am going to ask Sir Geoffrey to come in, and then Ronnie Cowan. To summarise, Mr Cochrane, on a scale of one to 10 how high was your expectation that the Government would give you financial support? Was it a realistic expectation?
Keith Cochrane
The feedback that we had from Government to our initial request was, frankly, that there was concern that if they provided the funding, the banks would pull the rug from under us and they would be left taking the business forward.
Chair
On a scale of one to 10, how much did you realistically expect the Government would provide you with the financial support?
Keith Cochrane
We believed there was a logical case. On that basis, I am still somewhat perplexed that they were unable to give us that support. So actually, I felt quite confident that Government would support us, while recognising some of their concerns. Our final proposal was very much one where we managed to get the banks to commit to put additional funding in.
Chair
On the basis that Government were going to—
Keith Cochrane
The banks were going to put £10 million in if the Government put £10 million in in week 1. We would then have a review at the end of that week to see where we had got to with our restructuring plan. If we were making good progress—and we believed that we could move quickly to launch a restructuring—in week 2 the same thing would happen: the banks would put in £10 million and the Government would put in another £10 million. That proposal went in to Government at 7 pm on Saturday 13 January.
Mr Jenkin
How surprised were you when the Government did not continue with those discussions and decided to suggest that you should call in the receiver?
Keith Cochrane
I was very disappointed.
Mr Jenkin
How surprised were you?
Keith Cochrane
I was surprised, because for me it was not the logical, rational decision to take.
Chair
Did you think that because you were running so many critical services—Ms Mahmood laid out some of them—you basically had a gun to the Government’s head so that when it came to the chicken moment, they would not give in and would give the money to ensure that the services did not end?
Keith Cochrane
We recognised, because Government challenged us around the risks that they would be taking if they did provide support and around the question of moral hazard, particularly in the context of PPP contracts and how that might be perceived across the broader issue—
Chair
Just to pick up on your phrasing, they “challenged us around the risks” if they did not provide support. So you were having discussions with Government about the possibility of, on the one hand, support to get you through this and, on the other, not having any support.
Keith Cochrane
My point is that as part of those conversations, they said that they would need to think through the ramifications. Going back to this point, there was an ongoing dialogue with Government right through until that last proposal went in on the Saturday night.
Chair
I am just going to bring in Sir Geoffrey and Dame Cheryl quickly.
Sir Geoffrey Clifton-Brown
Mr Cochrane, was there not a huge conflict in what you were doing with your discussions with the Cabinet Office? On the one hand you were lobbying throughout November not to be made a high-risk supplier, but on the other hand you were lobbying for Government support. How can you have it both ways?
Keith Cochrane
It is the sequence and timing. Events obviously unfolded very rapidly over the last few months of Carillion’s life. During November, we were still confident at that stage that we could achieve a viable restructuring without the need for explicit Government support, other than the continuing support of existing contracts and the payments against those. One of the key challenges of the business throughout the entire period post 10 July was retaining confidence. These are asset-light businesses, and to maintain the confidence of employees, who deliver the services day in and day out, to maintain the confidence of the supply base and to maintain the confidence of future investors, continuing to win work is very important.
Chair
We appreciate that. We understand that.
Dame Cheryl Gillan
Mr Cochrane, am I correct in assuming that you are still a non-executive board member of the Scotland Office?
Keith Cochrane
I have stood aside for the period of the investigations that are under way, but I was a non-executive director of the Scotland Office.
Dame Cheryl Gillan
So it is fair to say that you are particularly familiar with the way Government operates?
Keith Cochrane
I am aware. Obviously, the Scotland Office is a Department with its own specific needs—
Dame Cheryl Gillan
I don’t want to go into the Scotland Office, but you are intimately engaged with the process of Government. Did you ever have a conversation with your colleagues, saying, “Actually, the Government’s never going to let us go to the wall, because we’re too big to fail and we’ve got such major contracts, for example HS2”, because you express such surprise that I feel as if you really believed that Government was going to bail you out of what was a poor situation? Would that be fair?
Keith Cochrane
No, it wouldn’t be fair. Let us be very clear: we were not looking for a bail-out. It may be characterised as such, but that was not how I viewed Government support. This was a short-term loan to help us facilitate a broader restructuring. Just to put that in context, Government represented 45% of Carillion revenue, so it was by far and away our largest customer. We were in discussions with a wide range of our financial stakeholders and our expectation was that pensions, bond holders, the banks—it made sense for everyone to contribute to securing a successful restructuring. And Government had a role to play in part of that—
Dame Cheryl Gillan
So you never had a conversation with your colleagues that said, “Government will help us out. We’re too big to fail. We’ve got too large a slug of Government business.”?
Keith Cochrane
We certainly believed that there were strong grounds for Government supporting us, because of the breadth of contracts—
Dame Cheryl Gillan
So the answer is yes, basically?
Keith Cochrane
I recognise that—
Chair
You were optimistic that something would happen. Did you ever put in writing to Government plans for them to loan you money, bail you out, provide a cash injection—whichever way you want to put it?
Keith Cochrane
Yes, we did.
Chair
You did? Thank you very much.
Ronnie Cowan
How helpful was it to you that the Government let and extended major contracts with you after the profit warning in July 2017?
Keith Cochrane
Apologies, but I am unclear as to which contracts you—are you talking about new contracts being awarded to us?
Chair
The new ones.
Ronnie Cowan
There was more than that—there was an HS2 contract worth £1.4 billion, but there were also contracts for military sites across the United Kingdom. So you were gaining new contracts having already issued a profit warning. How helpful was that to you?
Keith Cochrane
Going back to my earlier comment, a business such as Carillion is underpinned by confidence—the confidence of the supply chain and employees. So the fact that a major customer was continuing to award us new work was certainly a sign of confidence and positivity, and it was encouraging in terms of our discussions with banks, because it demonstrated that the underlying work that this business was doing was well regarded.
Ronnie Cowan
Okay. Mr Howson?
Richard Howson
I agree with Keith’s comments. It only gives confidence to employees, to other customers and to the supply chain, so it was helpful.
Ronnie Cowan
Does Ms Mercer want to add to that?
Emma Mercer
I agree. I would just add, though, that those contracts that were awarded gave us very little benefit financially, in terms of cash into the business during the time up to January.
Ronnie Cowan
So was it false hope, then? As you said, this was not going to solve your cash crisis, and ultimately that’s what brought you down.
Richard Howson
It was more around confidence from the stakeholders that we mentioned. The other point that is worth mentioning is that certainly in the case of HS2 and the Hestia contract, which is the defence contract that you alluded to, we had been bidding those contracts for up to three years and had spent several million pounds bidding them. Now, that doesn’t mean we should be awarded them, but there had been a significant effort in joint venture in both cases—on Hestia with Aramark and on HS2 with Eiffage and Kier. Over a long period of time, significant investment had been made, in order to position ourselves, should we be competitive and offer value for money, to win. And we were lucky to win. But as Emma said, it wouldn’t have brought cash flows in 2017, but it certainly underpins confidence for the future.
Ronnie Cowan
So, Mr Green, what would the impact have been on your share price and on your negotiation with lenders if those contracts had not been awarded?
Philip Green
I don’t think winning those contracts had been factored into the share price. I think you have heard from colleagues that the benefit of winning the contracts was very much around confidence. It wasn’t short-term cash.
Ronnie Cowan
Do you not think that that contract for £1 billion was beneficial to your share price?
Philip Green
Of course it is beneficial, but the principal benefit was the confidence it gave to employees, other customers and suppliers.
Ronnie Cowan
Could those contracts, in fact, be seen as a bail-out from the Government?
Philip Green
As Richard has said, those negotiations had gone on for three years.
Ronnie Cowan
There were other people bidding for these contracts—other businesses also put in money to bid. They did not get those contracts, but you guys did. Tie it up any way you want: were those contracts a bail-out?
Philip Green
That is not how we see it, no. Those contracts had been won over a number of years on a level playing field. That is the information we have.
Richard Howson
Here is some context in terms of High Speed 2: a 10-year contract; £1.4 billion; a three-way joint venture; say £140 million a year divided by three. It is not a significant contract to Carillion’s revenue and earnings, particularly in the next three years, so it would not have moved the share price significantly, in my view. On Hestia, there are seven parts to Hestia around the UK. From memory, I think we had already won two or three. Our target was to win two, so to win another one was very good, but that was not our expectation.
Ronnie Cowan
You mentioned HS2. Did the Department for Transport discuss with you your financial health before letting the HS2 contract to you?
Richard Howson
As part of the bid process on High Speed 2 there were numerous financial reviews. I did not attend any—the bid team attended them with our joint venture partners. In my memory, I seem to recall that there was a financial review during the first half of 2017, but I cannot be sure. Emma, perhaps you know.
Emma Mercer
As with all joint ventures, there is always a review of the joint venture arrangements, to make sure that if one party fails at any point, the others are capable of stepping in. That is a review that we have on every single joint venture that we go through, as a matter of course, both with Government and outside Government.
Ronnie Cowan
Presumably, you go into a joint venture hoping that nobody is going to fail.
Emma Mercer
Of course. It is preventive.
Ronnie Cowan
Did the Department for Transport do its job properly to make sure that Carillion was not going to fail?
Emma Mercer
If we think about when that contract was bid and awarded, as Richard said, it was bid far in advance of the July statements.
Richard Howson
I seem to recall that there was a review sent either in Q1 or early Q2 2017. Perhaps we can come back to you on that.
Ronnie Cowan
Yes, but there was a profit warning in July 2017, and you still got the contract after that. From my perspective, I have alarm bells ringing, and I wonder why the Department for Transport did not.
Richard Howson
I was not party to the review.
Ronnie Cowan
Did the Department for Transport put anything into the contract to protect it in any way, as a result of your financial health? Did it put in any more clauses or guarantees?
Emma Mercer
I can’t recall whether it did afterwards, but I can recall that these contracts would be quite watertight: if one joint venture failed, the others would be able to step in. In addition to that, if one party failed, often the client would be able to terminate the contract.
Ronnie Cowan
We don’t seem to be getting anywhere with that one. Could you have taken legal action against the Government, had it decided to award HS2 or the electrification contracts to your rival bidders?
Richard Howson
There is always the opportunity to challenge a decision if you lose a particular bid. In my time in Carillion I do not recall us ever challenging a decision with any customer, so I think that was highly unlikely.
Chair
Mr Cochrane, would you have done, in the circumstances?
Keith Cochrane
I think it would have been very unlikely. The reality is that we were winning other contracts during this time, post 10 July, so the Government were not alone in giving us work. Equally, we were losing contracts, too. By taking legal action, you probably would have made a bigger deal of it than you might have wanted, given that we were trying to work through the restructuring process at that time.
Ronnie Cowan
To what extent was there any change in the approach of your customers—local Government and private companies—during this time?
Keith Cochrane
Similar to Government, there was ongoing dialogue. I met a number of our major customers from time to time. There was real sensitivity about the financial position and each customer was seeking assurances about our ability to continue to deliver on projects. As we moved through the autumn into November to December, it was becoming more challenging in terms of work-winning. Customers—particularly construction customers—were looking for the establishment of what are called project bank accounts where the cash flows for a particular project are essentially insulated from the rest.
Chair
In summary, they were being more cautious.
Keith Cochrane
Yes.
Ronnie Cowan
Were they given false hope back in July when the Government were seen to be giving you more contracts? If I were a private investor, the signal to me would be that everything was okay if the Government are still pumping taxpayers’ money into Carillion, so I have got nothing to fear. That was not the case.
Keith Cochrane
I don’t believe so. Back in July—
Ronnie Cowan
It certainly gave people more confidence.
Keith Cochrane
It does give people confidence, but my point was that we were working and believed—truly believed—that we could work our way through these challenges and create a viable and successful Carillion.
Chair
So in spite of those contracts, you still had jumpy customers.
Keith Cochrane
I am saying there was naturally a degree of sensitivity on the part of customers.
Chair
Okay, we will now move to a couple of quick-fire questions from Layla Moran and Dame Cheryl, and then to Anne Marie Morris.
Layla Moran
Mr Cochrane, as you are probably aware, Oxfordshire County Council cancelled a 10-year contract worth £148 million five years in at the end of 2017, off the back of concerns about service delivery. How many other local government contracts did Carillion carry in total and what were they worth?
Keith Cochrane
I am sorry, I do not have those numbers to hand.
Richard Howson
I think—and again, I am working from memory—we had a local authority contract with Lancashire County Council, we had one with Stockport, one with Sunderland, one with Tameside and one with Oxfordshire. We had bid for others, which we had been unsuccessful with.
Layla Moran
Was this information, to your knowledge, ever passed on to Government? Did the Cabinet Office know how many other contracts you had with local government and were they managing those as well?
Keith Cochrane
One of the information requests from the Cabinet Office was for details of all our contracts with public sector bodies, so we did provide those.
Layla Moran
Mr Howson, how many of those other contracts were under review at the time?
Richard Howson
None to my knowledge, but I would like to add that in my quarterly meetings with the Crown representative, we would talk about local authority contracts that we were bidding for and the performance on those contracts as they were being delivered.
Chair
Thank you very much; that is very helpful.
Dame Cheryl Gillan
Earlier on you said, on the HS2 contract that you were awarded alongside Kier and Eiffage, that all three of you in the consortium were aware that others would pick up the problem within the consortium if one of you had a problem. Did Kier and Eiffage ask for full disclosure on your financial position? Did they do any due diligence on you at all and did you do any due diligence on Kier and Eiffage before entering into those arrangements?
Richard Howson
All three of us considered numerous partners before coming together as a three-way joint venture. From memory, that was in 2014/early 2015. We certainly did desktop due diligence at the time on Kier and Eiffage in terms of capability, capacity and obviously balance sheet. I don’t know whether they did due diligence on Carillion; I can only assume that they did.
Dame Cheryl Gillan
So you entered into a contract with Government without the three of you formally having looked at your financial positions and what could go on.
Richard Howson
We looked independently at Eiffage’s balance sheet and at Kier and their capability and what they would bring to the joint venture. I assume they did the same with us.
Dame Cheryl Gillan
We are not allowed access to the contracts because they are commercial in confidence, apparently. What arrangements did you have? Did Government ask you if you were capable of carrying out the contract if Kier or Eiffage went under and vice versa? Was that interrogation carried out by Government during the contractual process?
Richard Howson
I do not know because I did not attend any meetings.
Dame Cheryl Gillan
Could you find out for us and let this Committee know?
Richard Howson
I can find out, yes.
Dame Cheryl Gillan
The last point, very quickly: on 17 July when the contracts on HS2 were announced in the Chamber, warnings were given on the Floor of the House about the financial situation at Carillion. Were you approached at all by the Government following that statement on the Floor of the House, checking up on your financial position and where you were?
Richard Howson
I had stepped down on the 10th.
Keith Cochrane
As I said, I had met the Cabinet Office a few days prior to that to give an update on the reasons behind the write-off, but I do not recall a specific request in relation to the HS2 contract.
Dame Cheryl Gillan
So following that statement on the Floor of the House and the warnings that were given, the Government did not follow up with you to double-check again?
Keith Cochrane
I don’t recall. As I say, we were then in a process of regular, on-going discussion with Government.
Dame Cheryl Gillan
When did the Department for Transport know that you were facing difficulties?
Keith Cochrane
I presume that the Department for Transport knew when everyone knew—when we made the announcement on 10 July.
Anne Marie Morris
Mr Cochrane, you have already said to one of my colleagues that the Government had started talking to you about contingency planning in the event of your financial failure. When did that start?
Keith Cochrane
The Government request for information, which we understood to be associated with them starting to think about contract contingency planning, was in early October onwards.
Anne Marie Morris
October of which year?
Keith Cochrane
October 2017.
Anne Marie Morris
Your challenges go back to 2009. Then under your restructuring plan in 2010, you were going to halve your construction, which would have impacted Government contracts, and develop more in the middle east and Canada. Given that, are you not a bit surprised that they did not talk to you about contingency planning much earlier than 2017?
Keith Cochrane
Mr Howson will be able to comment on the specific discussions that he had prior to 10 July. But from my perspective, the key issue in the contingency planning at that point was not about contingency planning for failure of Carillion. Rather—this was the point I made earlier—it was about contingency planning for continuity of service around the risk of loss of people and for inability to meet our commitments on a real-time basis on health contracts, education contracts and the like.
Anne Marie Morris
Mr Howson, given that going back to 2009 and 2010 is very much your territory—
Richard Howson
I was in the Middle East at that time, but okay.
Anne Marie Morris
Right. In the days when the company was going through a challenge and putting in place its new strategy—
Chair
Was Mr Green there?
Richard Howson
No, Philip was not on the board at that time. I will try to answer the question. Sorry, what was the question?
Anne Marie Morris
We have understood that the Government got involved in the contingency planning in 2017, but I am a little bit surprised, given what happened to you in 2009 and 2010, and the new strategy, that they did not get involved earlier. Mr Cochrane has talked about the positivity of transformation, but clearly there were no guarantees that was going to happen. Therefore, surely somebody in Government should have been talking to you about potential failure.
Richard Howson
From memory, the Crown representative process started around 2010 when, after the credit crunch, the Cabinet Office asked its key suppliers to reduce costs on existing contracts—a programme that, as I understand it, is still running today—to help the country with its austerity. Out of that came engagement with formal Crown representatives, either in ’10 or ’11. The reduction in the revenue of our construction business from 2009 onwards was in response to the Government’s statement at the time that they were reducing their spending on construction by 30% to 40%. Naturally, there is not going to be the work in the market that we will be able to bid and win. So we decided to be proactive and reduce the size of our construction business. We also flagged at that time with Government that there would be a resultant outflow in working capital, because construction, by its nature, enjoys negative working capital, i.e. cash in advance. That is why the debt rose from 2009 to 2014.
Anne Marie Morris
If we go then to 2017 when contingency planning started, what was the nature of what the Government said to you?
Keith Cochrane
The Government asked us for specific data on names of employees, specific contracts, arrangements for pensions and the like. They were obviously creating a database to understand the essential assets and people required to deliver on those contracts. We did not see the Government’s contingency plans, so I cannot comment on those. They were not shared with us, but our understanding was that they were speaking to a number of our joint venture partners, because we heard that—
Chair
We have heard from Government about that and how they planned. If you cannot tell us more—
Keith Cochrane
What we then did, when we got to early January and we recognised the need to address the cash challenge we had identified in Q1, was to appoint PwC to focus on a more broad-based operational contingency plan arrangement. PwC were obviously supporting the Cabinet Office at that time as well, but we thought it was helpful to let them almost straddle both sides as they sought to put together a framework preparing, at that point, for a possible failure of Carillion, as a sensible precautionary move.
Anne Marie Morris
Was there any indication that the Government contingency planning was being used by your creditors not to advance further support?
Keith Cochrane
It is fair to say that there was natural tension between the banks and the Government. On the one hand, the banks were sensitive to the fact that if they advanced further funding it might just give Government more time to get their contingency planning together and then be able to take contracts off Carillion. On the other hand, Government were sensitive to the fact that if they advanced the money, the banks would not, and they would be left running Carillion in its entirety. There was a natural tension throughout the process. That was why the final solution we came up with was essentially everybody collectively taking steps through the process and having a road map of gateways to go through before the next funds were advanced, to demonstrate that we could continue to move forward and deliver on our restructuring plan.
Anne Marie Morris
How joined up do you think the Government response was across Departments, local authorities, the NHS and other agencies? The sense I get is that you were not involved—you have said so yourself—in understanding exactly what the Government’s contingency plan was. How much comfort did you have that there was any communication between the relevant parts of Government?
Keith Cochrane
The Cabinet Office expressed their frustration to us on occasion, because obviously, with the complexity of some of the contractual relationships, the establishment of PPP entities and SPVs, there were a number of different interested bodies. Certainly, my sense was that the Cabinet Office were finding it quite challenging to try to pull that together in a cohesive overall plan, albeit we were aware that they did have various meetings with groups of NHS trusts and the like.
Chair
To be more precise in response to Ms Morris, you said it was quite challenging. Do you think they were over the breadth? Were they managing it, even though it was quite challenging, or were they falling short in seeing the overall picture?
Keith Cochrane
That is very difficult for me to comment on, because I did not see their contingency plans. All I knew was that they were asking—
Chair
No, but you could perhaps just give us a flavour of the types of questions they were asking you.
Keith Cochrane
They were asking us for lots and lots of detailed data, which we assumed and understood they were using to flesh out their contingency plans. Beyond that, I personally—
Chair
Before you gave them that data, do you think they had an overview?
Keith Cochrane
I am not sure the Government had a complete overview of every public sector contract that we had, if I am honest, because one of their requests to us was to provide a list of every contract.
Stephen Morgan
Mr Green, what is your view on the Government’s response following Carillion’s downfall?
Philip Green
I would echo what Keith said earlier on. Right up until the very end, we were optimistic that they would be able to play a positive role. We were deeply disappointed and, to an extent, surprised when that did not happen, particularly because—to slightly repeat what Keith has said—we passionately believed in the business plan that Keith and the management team had put together. We believed, as I think Emma has already said, that that was a business capable of making cashback profits in the medium term. Therefore, we believed that liquidation was the worst outcome for all stakeholders, including the Government. We absolutely believed that, and at the meeting on the Sunday with Mr Manzoni we said that.
Stephen Morgan
Mr Cochrane, what is your view?
Keith Cochrane
I would echo that. Let me put this in context: the funding we were asking for, for those two weeks in January, was essentially £10 million from the banks and some guarantee underpinning for supply chain financing arrangements, against which we would be tested through the broader restructuring plan. I do find it somewhat perplexing when one looks at the funds that Government are now having to spend on the liquidation, on Carillion, and on the guarantee arrangements that have needed to be put in place to support the supply chain. I still truly believe that the least-cost outcome for the taxpayer would have been to support Carillion as it sought to restructure the business in that difficult time.
Stephen Morgan
On liquidation, do you think the Government are managing the trading liquidation well?
Keith Cochrane
Sorry, I didn’t catch your question.
Stephen Morgan
It was about what the Government are doing around the trading liquidation. Do you think they are managing that well?
Keith Cochrane
I left the business on 19 January, so I cannot comment. I have no visibility of current developments within Carillion.
Ronnie Cowan
Very briefly, you have talked about £10 million from the bank and £10 million more from the taxpayer. Bearing that in mind, do you regret paying out, in 2017, £4 million in executive bonuses?
Philip Green
We have said publicly that there are a number of decisions that, with hindsight, we may have taken differently.
Ronnie Cowan
Is that one of them? A bonus is a bonus; why are you paying a bonus in a company that is going to the wall?
Philip Green
I think that at the last Select Committee, Mrs Horner said that. She said, “With hindsight, we may well have taken a different decision.”
Dr Huq
I want to ask about the Government’s capability to deal with the crisis, because I am on PACAC. We have looked a lot at the civil service: how it has shrunk since 2010 and, if it is smaller and smaller, just how well equipped it is to manage these contracts that are bigger and bigger, or these overstretched public services. First for Philip Green and Richard Howson, in the period up to July 2017 when that first profit warning was made—I want to ask this is three time shifts—how well equipped do you think the Government were in terms of capability to deal with this crisis at that moment?
Philip Green
Let me say one thing, and then Richard is far closer to the detail. Until the discussions with the Cabinet Office post July, the Government was not a homogenous entity. In aggregate, it was our largest customer but actually it is a series of separate customers. Whether it is Network Rail, the Ministry of Defence, hospitals, prisons—these are all separate customers with separate relationships. I was personally involved in visits to many of them, and I saw high quality services being delivered and very good relations: Northwood, for example; I visited the military on Salisbury Plain; I visited two hospitals. There were very good relationships where contracts were being successfully delivered. There were service issues on some contracts, absolutely there were. Richard and his team were focused on fixing those, but from my perspective, before it got consolidated under the Cabinet Office during the more challenging period in the second half of the year, the relationship was very much bilateral with individual Government Departments.
Richard Howson
Certainly, in the meetings I had with the Crown representative, I communicated openly the challenges we had on any Government contracts individually. Keith talked about the claim on the NOMS contract—
Chair
Just to be clear, the question was about the capability. You have already touched on that a bit, so you can probably give quite a short answer.
Richard Howson
I was just giving some context. We were very open: you knew the problems we had, contract by contract, the money that we believed we were owed by Government. The Cabinet Office cannot go to the Ministry of Justice, the Ministry of Defence, an NHS trust, a local authority and say, “Right, we are going to have a workshop for two days and work out whether or not Carillion really is owed £30 million.” That doesn’t happen because you have to work with your customer, which is your Department, to leverage that, and that takes a long time. The Cabinet Office has an overview: it understands that we have a problem on prisons; we think we are owed some money from the Ministry of Defence; we’ve got a claim on this; we’ve got a claim on that. It sees the picture—
Chair
Ms Huq was asking about Government; that could be individual Departments. Ms Huq, do you want to follow up?
Richard Howson
No, that is Cabinet Office—
Chair
No, sorry, it is the Government. Every Government Department is part of Government. Perhaps Ms Huq could probe a bit more.
Dr Huq
Before that first profit warning, and then after July 2017, and the period when increased monitoring kicked in, was there any heightened vigilance? Following increased monitoring, did any capability issues and how ready the Government were to deal with them change? What about after 31 December, when you made the request for financial support?
Chair
Who would you like to address that to, Ms Huq?
Dr Huq
I think all three.
Keith Cochrane
Why don’t I take that? As I mentioned earlier, there was clearly a heightened degree of engagement with the Cabinet Office. My principal relationship was with the Cabinet Office, and other members of the management team dealt with individual Departments. As Mr Green has indicated, there were some very good working relationships with Departments, and a good level of engagement, typically with more mature contracts that had been operating for a number of years. With some of the more recently awarded contracts, it was clear that learning was still happening on both sides—the prisons contract is a good example of that, given the outstanding claims that we believed we were entitled to. In terms of the Cabinet Office and its capability, there were some capable individuals in the Cabinet Office, but I think they were stretched quite thinly. The challenge for them regarding some of the correspondences was that they were responding to specific issues—perhaps points raised by Ministers, or by others; I am obviously not aware of that. It meant at that level that there was quite a transactional relationship, if I can describe it as such, in the sense that people were dealing with specific issues. My broader discussions with John Manzoni and Gareth Rhys Williams were, let us say, more strategic in terms of trying to paint the bigger picture.
Chair
Perhaps we could summarise it. Ms Huq’s line of questioning is: were they a good customer? Were there things they could have done that would have been sharper and better at holding you to account?
Keith Cochrane
From my perspective, they sought to be a supportive customer as we worked our way through this challenging period. I really speak from a Cabinet Office perspective because that was my direct exposure to Government, as distinct from individual Departments. They increasingly became a more demanding customer in their information requests. Sometimes we were not always able to satisfy the information request, which created frustrations on both sides, but it reflected the reality of the level of detail they were looking for, or the many different challenges that we as a business were trying to deal with at that particular time. As I have said, they sought to support us in Qatar. We on the other hand enabled them to meet our pension advisers, and with banks and financial advisers.
Dr Huq
Local government is even more overstretched in some ways. Were they keeping tabs on you? How would that apply to local government contracts? You have one with my own borough.