Greg Wright: After Carillion's fall, local firms deserve a chance

WHEN it comes to delivering services, small and local should be beautiful.

The financial collapse of public sector contractor Carillion should be an opportunity for small businesses, argues Greg Wright.

Yorkshire is blessed with a vast collection of dynamic, well-managed and profitable SMEs – that’s small and medium-sized enterprises – who would be delighted to take on public sector work in their local community.

However, many of these firms feel they have been denied the chance to make their case because of large operators with sharp elbows.

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One of these giant contractors – Carillion – went into liquidation earlier this year, leaving in its wake a £900m debt pile, a £590m pension deficit and hundreds of millions of pounds in unfinished public contracts. Nobody could claim that Carillion’s collapse came out of the blue. Last year, it issued three profit warnings in five months and wrote off more than £1bn from the value of contracts.

Carillion flopped, its critics argued, because it made mistakes that no well-run SME would ever make. It took on too many unprofitable contracts and paid its top brass far too much money. Surely it would be wiser to award contracts linked to our education, justice, defence and transport systems to hundreds of SMEs, based within the areas they serve?

We would have local services provided by local people, who have a powerful economic stake in ensuring they deliver them profitably and efficiently.

Ironically, the reason large companies are appointed to these vast contracts is to reduce risk; they have the biggest covenant strength. Nobody believes they will be fired for taking the path of least resistance and awarding them another contract.

As businesswoman Laura Rafferty-Trow told me: “The problem is that size does not equate to profitability. Sometimes a simple scratch of the surface would show a more precarious position.

“Council procurement works on a framework system, which is largely a tick-box exercise and once you’re in it’s possible to behave quite badly – think of the profit warnings issued for Carillion in the year up to their demise – and still retain a place. If you’re not on the framework you may as well not exist.

“It’s possible to be a very big, very risky business, with 180 days payments terms and low profitability, and still tick all of the boxes, then use taxpayers’ money to credit roll the business.

“Smaller companies doing smaller chunks of projects would actually reduce risk, like diversifying an investment portfolio, but councils don’t want to manage the projects.”

The irony is that local companies often end up doing the work anyway as contractors for the big players.

Ms Rafferty-Trow said: “They end up getting paid less and taxpayers’ money is siphoned off in the process. The money would be better spent going directly to a local company, who could do a better job and be more accountable if they were being paid directly.”

Over the last 30 years, Britain has witnessed the creation of companies whose sole purpose is to take on outsourced council and NHS contracts.

This was hardly the vision of policy-makers who wanted to see the private sector step up to the plate and provide more public services in order to improve competition and reduce waste.

As James Fairchild, who serves as a finance director for a number of SMEs, observed: “Arguably we need councils to be empowered to bring roles such as refuse collector, school cook and parking attendant back in house, and for the taxpayer to benefit from the cost saving in not having to operate to a profit.”

In road building for example, an in-house team could deliver road projects while also filling in pot holes in their quiet hours. This type of flexible, pragmatic approach would reduce gridlock and save money.

Critics argue that some public sector procurement specialists simply do not understand the major issues affecting their local community. Many of them don’t have to face the consequences of their decisions because they head off to take up better-paid jobs in the private sector.

Business owner Catherine Shuttleworth said: “The public sector needs to invest in smart people, and pay them well, so they don’t lose all their talent to the private sector providers.”

We need a revolution in the way public sector contracts are awarded. Public sector bodies must be ordered to award the bulk of their work directly to profitable local firms.

This would provide a shot in the arm for the local economy and lead to a more diverse supply chain. Supporting local firms is simply good housekeeping because it will mean taxpayers get a much better deal.

Public sector work should be delivered by bosses who have a much deeper understanding of the quirks of the area they serve. These nimble firms would offer a much better service to taxpayers than the flawed giants who are burdened with colossal debts.

Greg Wright is deputy business editor of The Yorkshire Post.