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HS2 signed £1.3bn Carillion contracts after profit warning

hs2 train

HS2 Ltd signed two contracts worth £1.3bn with Carillion some 21 days after the firm issued a profit warning, the National Audit Office (NAO) has confirmed.

A report into the government’s handling of the Carillion Collapse has confirmed that the government-funded project completed two civil engineering contracts despite a profit warning being in place.

The report reveals that HS2 Ltd signed off on the works after appointing Ernest Young (EY) to carry out its own investigation into the financial stability of Carillion.

Last month transport secretary Chris Grayling was grilled over a potential “conflict of interest” in the appointment of EY to advise HS2 over Carillion’s financial health.

The report read: “On 12 July, two days after Carillion’s first profit warning, HS2 commissioned consultants to re-run the financial tests carried out during the bidding process.

“Carillion continued to pass the tests based on the latest published accounts (the 2016 accounts published in March 2017, before the profit warning).

“The contracts were awarded to a joint venture requiring the other parties to step in if Carillion failed, which HS2 told us was part of their strategy to manage risk in the supply chain.”

In total, four public contacts worth £1.9bn were signed with Carillion after the profit warning was issued.

As well as the HS2 contracts, the report confirms that variations to existing Network Rail electrification contracts were approved in November 2017.

“Both electrification programmes had just completed the design phase and were ready for construction to begin,” the report added. “Not awarding the contracts would have meant re-procuring the project, re-doing the design phase, increasing costs and delaying the work.

“Financial due diligence on Carillion had been carried out in 2014-15, when the contract started. In two of the three variations, Carillion had a joint venture partner obliged under its contracts to take over Carillion’s role in the event of Carillion’s failure. In the other case, the contract has been re-let, in line with its contingency plans.”

The report also highlights how the government performed a U-turn on a proposed decision to raise Carillion’s risk rating from ‘red’ to ‘high risk’.

The report reveals that on 29 November 2017, the Cabinet Office told Carillion that it proposed to increase its rating.

However, Carillion objected on the grounds that the level of engagement between the Cabinet Office and Carillion was already higher than that required by a ‘high risk’ rating; employees were concerned, having heard that government bodies were contingency planning; if government customers reacted by denying further business opportunities (particularly if this was to become public), this would make Carillion’s financial position even worse, with consequences for its government customers; and discussions with lenders were ongoing and were constructive.

Subsequently, at its 15 December Board Meeting Carillion representatives decided not to increase the firm’s risk rating for fears that it would “unnerve Carillion’s lenders at an important point in the restructuring process and could precipitate financial collapse”.

After it became apparent that Carillion was going to fail in its restructuring, the company asked for a government bailout.

The report reveals that Carillion asked for a £160M loan or guarantee of bank lending from the Cabinet Office and a £6M temporary deferment of tax.

The report added: “Carillion also requested help with the longer-term financial restructuring including: asking the Cabinet Office to provide up to £125 million towards the completion of Midland Metropolitan Hospital PFI scheme in return for an equity stake; favourable settlement of claims with public sector customers; and support in arranging a solution for the £2.6 billion pension liabilities with the Pension Protection Fund, Pension Trustees and Pensions Regulator.”

The report added that the Cabinet Office told Carillion that it “could not legally” grant the requests.

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