Some thoughts on Carillion's liquidation and systemic risk management in public procurement

REUTERS/Simon Dawson

REUTERS/Simon Dawson

The story that was developing over the weekend finally broke as Carillion plc has gone into compulsory liquidation. Carillion is one of the largest contractors of the UK public sector and holds a very large number of contracts for a range of infrastructure and services projects. The immediate concern of the UK government will now be how to ensure continuous provision of those services (which include catering and cleaning services for schools and hospitals), and finding ways to ensure completion of the ongoing infrastructure projects, possibly through 'bringing them in-house' or re-nationalising the contracts--although it seems a reasonable to question whether there is capacity in the civil service and in local government to manage such a volume of complex outsourced contracts.

However, that is not the focus of this post. In my view, one of the aspects that should not go unnoticed in this crisis is that the public sector had had information pointing towards Carillion's increasingly dire financial situation for a while. Indeed, as The Guardian reports, "Carillion ran into financial difficulties last year after issuing three profit warnings in five months and writing down more than £1bn from the value of contracts. It has debts of about £1bn and a £600m pension deficit, and is being investigated by the Financial Conduct Authority over announcements made between December 2016 and July 2017." Very clear information about Carillion's severe financial difficulties was in the public domain in November 2017, and the first of the three consecutive profit warnings had been issued as early as July 2017.

Here, I offer some thoughts on the share of responsibility that could arise for UK contracting authorities due to poor management of the systemic risk created by the accumulation of contracts on Carillion's hands, including some awards completed after Carillion published information of its financial difficulties (for example, a 4-year £84mn contract for energy maintenance and repair services for public housing in the Belfast region in November 2017). The UK Government should not be able to decline all responsibility, as it was informed and monitoring the situation. Indeed, The Guardian reported three months ago that "The government, one of [Carillion's] major customers, said it was being kept informed. 'We remain supportive of their ongoing discussions with their stakeholders and await future updates on their progress,' the Cabinet Office said". 

Domestic public procurement law (in particular, reg. 58 of the Public Contracts Regulations 2015) empowers contracting authorities to monitor the economic and financial standing of tenderers before they award contracts. It is explicitly stated that "Ratios, for example that between assets and liabilities, may be taken into consideration where the contracting authority specifies the methods and criteria for such consideration in the procurement documents, but such methods and criteria shall be transparent, objective and non-discriminatory" (reg.58(10) PCR2015). It has been long standing UK Government policy to assess the financial risk implicit in the award of a contract due to the economic and financial standing of the would-be contractor. Currently, the relevant guidance to that effect is in the Procurement Policy Note on 'Supplier Financial Risk Issues' of 2013, which requires contracting authorities, as part of a regular procurement exercise, to "Assess the risk to public sector business and/or public money which would result if a potential provider bidding for a contract were to go out of business during the life of the contract, or have inadequate financial resources to perform the contract".

There is no question, then, that contracts recently awarded to Carillion should be under suspicion of potential shortcomings in the assessment of its economic and financial standing. Of course, this may be complicated due to the certainly complex corporate structure in which the industrial conglomerate is organised, but the fact that self-certification has been operative in the UK since 2016 (at least in theory), raises important questions as to the ability of contracting authorities to carry out effective monitoring of tenderers' capabilities and the financial risk implicit in contracting.

On that note, it should also be recognised that the monitoring of the contractor's economic and financial standing is largely limited to procurement phases prior to conclusion of the relevant contract. This raises a more important point concerning the difficulties in managing systemic risks that derive from the accumulation of public contracts in the hands of a single supplier (however it is divided internally), which require a more complex and decentralised policy requiring effectiveness of the policies facilitating SME participation in procurement, which certainly remains an unresolved issue in the UK and in other EU jurisdictions. Given that large public sector contractors subcontract very significant volumes (if not the majority) of the works and services to SMEs, important questions should be raised as to the effective value for the public sector of allowing for the intermediation of such 'public contract brokers'.

In my view, this is reflective of the continued erosion of public sector capability to manage and oversee contracts (big and small), which requires 'ready-made' bundled contractual solutions. If the situation is to be reversed, in my view, governments should make a clear commitment to invest in the required skills and resources to ensure that the provision of important public services and the development of strategic infrastructure is not affected by systemic risks that go unnoticed or are unmanageable once realised. This is not a legal problem, but mainly a political issue that requires committing the required level of funding in rebuilding the capacity that the public sector has lost. Given pressures in other areas (such as direct NHS funding), this is certainly a big ask. But, unless the public sector re-skills itself, not only the management of crises, but the regular operation of public services will continue to be dependent on the ups and downs of the private market--where undertakings, however big, are not too big to fail.

Becoming true #EUcitizens: The only way out of the #crisis (and beyond)?

Citizens of the European Member States seem to be resorting back to Euroscepticism and show clear signs of cold feet regarding the single market / single currency project (reality?).

According to the December 2012 Eurobarometer, 40% of the population of the EU Member States is against the European economic and monetary union with a single currency (with an additional 7% showing scepticism or, simply, lack of knowledge about the project).

Source: Standard Eurobarometer 78, December 2012, p. 16.

Moreover, 29% of the citizens of the EU Member States have a negative image of the EU—and the breadth of disenchantment with the EU project may be increased to 68% if one adds those that have a neutral image (surely, neutral means that the project does not match their expectations and can easily change into negative, particularly if the economic crisis continues to worsen).

Source: Standard Eurobarometer 78, December 2012, p. 15.

These are very worrying data and some are using them to support anti-EU movements. I think that is both opportunistic and dangerous. Talks about taking steps back and pulling out of the Eurozone and/or the EU usually do not follow a thorough consideration of their ultimate implications (some of which are unknown because the construction process has always been considered irreversible).

In my view, the only way out of this accelerating vicious circle is to stop being citizens of a Member State of the European Union and start being EU citizens. Only when most (all) of us realize the massive space of personal freedom and liberties created by the EU project will we be in a position to understand the fundamental importance of remaining involved and to continue working (and sacrificing) to further the EU and finally consolidate it.

The European Commission is working clearly in that direction and has declared 2013 the European Year of (EU) Citizens. A series of informative materials have been published to try and raise awareness of our rights as EU citizens, in the hope that a better informed citizenship will appreciate the benefits of the EU project and will be in a better position to accept the sacrifices it demands at certain times.

However, as stressed by some analysts like Kellner, if one wants to prompt (short term) action, taking a positive approach may not be as effective as exploiting the ‘fear factor’. Indeed, citizens are more likely to react and vote or demonstrate out of fear (or rage) than fuelled by optimism, compromise and good intentions. Extremist parties know this far too well and tend to take advantage of it (as will be discussed in full in a relevant and much needed event).

So maybe the EU project is doomed after all, because it goes against its very essence to use threats and dark horizons as a tool to promote integration. The situation is starting to look like a street fight were the polite citizen just does not know what to do to escape from the raider with a flicknife. And the answer seems to be the same as always, he can only be rescued by a group of neighbours walking by the dark alley and scaring off the assaultant.

That is why I think it ultimately rests on each of us becoming a true EU citizen and to actually get involved in the EU project. I think that this applies specially to younger generations (those of us below 40 now), since we are taking the existence of the EU for granted—much as we take for granted peace and development in this continent, or our constitutional and fundamental rights (given that most of us are ‘post-constitutional children’ and consider that our liberties and personal freedoms are grandfathered and nobody can take them away from us). It would be a disaster if we were proven wrong and, at some point, we had to start telling bonfire stories about the long-gone EU.

This contribution is also published at the interesting blog

La crisis como oportunidad de reforma: ¿nos atrevemos a racionalizar la universidad?

Es francamente desalentador leer las últimas noticias acerca de los recortes que afectan a la financiación del sector educativo, especialmente en lo relacionado con la universidad (que apenas alcanza a concentrar el 1% del PIB; véase, por ejemplo,, porque ponen de manifiesto el escaso compromiso de nuestros dirigentes con un verdadero cambio del modelo productivo y con una apuesta cierta y atrevida por la sociedad del conocimiento y por la potenciación de sectores vinculados a la investigación e innovación. Además, el problema real de la fuga de cerebros (en una sociedad global, parece que las puertas de salida están más abiertas que nunca) y de la creciente irreversibilidad de una (todavía mayor) pérdida de calidad en la educación universitaria española no generan el alarmismo que deberían--y, sin embargo, son cuestiones que pueden determinar el potencial real de crecimiento y desarrollo de España (no sólo de nuestra economía) en los próximos 25 años.

Quizá esta crisis de financiación (que viene a agravar una crisis institucional y de modelo muy anterior y de raíces muy profundas) sirva como revulsivo para un verdadero rediseño de la universidad española. Cada vez más, parece inevitable entender esta crisis como una oportunidad de reforma, tanto en el fondo como en la infraestructura de nuestra educación superior. Hay que tomarse en serio las propuestas de clusterización o especialización de los centros que han venido susurrándose desde el Ministerio, minimizando la estructura a lo necesario para impartir una enseñanza de calidad (fusionando Facultades o, incluso, Universidades, por difícil que sea su deslocalización o reubicación) y, por otra parte, hay que llenar esas (menos) aulas con estudiantes  que quieran aprovechar los recursos que se ponen a su disposición.

Por tanto, es necesario redimensionar un sector claramente ocioso en algunas zonas y sobreestresado en otras (pero no aplicando criterios de tabula rasa o de medición dudosa de la productividad docente e investigadora), dignificar la profesión de investigador y profesor universitario y dotarla de un marco jurídico claro y estable y de unas posibilidades de carrera reales, implementar una política efectiva de becas al estudio y a la movilidad, y desarrollar un sistema de acceso y permanencia que se ajuste a la realidad (políticamente incorrecta) de que no todos estamos capacitados para completar unos estudios universitarios en cualquier campo de nuestra elección.

Mientras no nos planteemos reformas radicales al respecto, la inercia de la universidad que tenemos, unida a los cada vez mayores recortes de financiación, nos abocarán a una decadencia que empobrece nuestra sociedad civil a una velocidad y en unos niveles que no creo que alcancemos a ver objetivamente.