The collapse of Britain’s second-largest construction firm has had an enormous impact in the UK. Thousands of people will lose their jobs, and many small businesses and sub-contractors who are owed money would never be repaid. Some might enter financial difficulty because of this; a few will go bankrupt. Furthermore, because Carillion is one of the UK’s most prominent government contractors (it had been responsible for building countless schools, prisons, hospitals etc.) many projects will come to a halt, or will at least be delayed. Right now, its debts are at £1bn (about 1.85 billion SGD).
Singapore’s civil servants should pay close attention to the circumstances surrounding Carillion’s collapse. Like the UK, our government outsources plenty of services to private companies (most notably, rail transport vis-a-vis SMRT, but also things like cleaning and maintenance of HDB infrastructure, waste disposal etc.). What can we learn from this incident?
First, it is necessary to maintain a rigorous bidding process for government contracts. Public-sector tenders are supposed to consider the quality of bids as well as the price offered. However, what happens often in the UK is that contractors have found that bidding at a low price is usually the best way to win government contracts. Hence, desperate for business, companies offer the lowest bid upfront, hoping to make some extra money through the extra charges that they can levy that will inevitably appear along the way. However, this means that their profit margins will be very small, and the moment some financial difficulty comes knocking, or if future charges do not arise, the contract suddenly becomes a liability rather than a profit opportunity. This was why Carillion collapsed – aggressive bidding, low profit margins, failed projects, all combined with the financial crash in 2008, had created a recipe for disaster.
This is just the UK, you might say. However, from past experience, we know that Singapore is not too different.
In July 2017, a viaduct in Singapore collapsed while under construction, killing one worker and injuring 10 others. Investigations revealed that the contractor that was awarded the project had offered the lowest tender, but had the worst safety record.
That incident prompted a review of the public tender process for construction projects, and reforms were introduced, which is a good sign. However, we should continue being wary of the need to look at more than just the price offered when we consider bids for government contracts.
Second, it is important to maintain a close eye on the business strategy of government contractors. In spite of its unprofitable contracts, Carillion had an aggressive expansion strategy, including an ill-fated attempt to diversify its business by acquiring businesses that it knew little about. For example, it paid £306m for Eaga, a green energy company, only months before the government cut subsidies for solar panels.
While this of course does not entail tipping off contractors with confidential information so that they do not make strategic errors, it does include maintaining an ongoing monitoring process of major government contractors to ensure that they do not undertake unnecessary or disproportionate business risks which might impede their ability to perform their existing contractual obligations with the government.
Third, it is important to monitor the behavior of government contractors with regard to remuneration and dividends. While Carillion’s business was failing and its profits were falling, the firm’s CEO had received a generous £1.5m ($2.78m) pay package, and shareholders continued to receive dividends. This has angered many employees and sub-contractors who are now jobless and possibly bankrupt, respectively – they will never be paid the money they are owed, because the shareholders and managers of Carillion had pocketed it first.
The fact is, if a major government contractor is under-performing, whether or not it is at the brink of collapse, it should be directing its profits (if any) towards improving its services, rather than generous remuneration packages at the expense of its consumers and the wider public.
Keppel O&M, which was recently fined heavily for corruption, has consequently reported a loss of $495m this quarter. It would be interesting to see whether its CEO and its other managers will be paid the same salaries that they were paid last year.
SMRT has also recently received substantial criticism for the level of train breakdowns and service incidents in the past year. One cannot help but wonder how much its CEO will be paid next year.
Companies that undertake major government contracts deserve special scrutiny due to the importance of the services that they provide, and the impact that they will have on the wider public if they under-perform, or worse, end up in financial trouble.
It is therefore important that the lessons from Carillion’s collapse do not go unnoticed in Singapore.
Written by Rio Hoe
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