Carillion: Santander evidence to MPs highlights scandal of late payment

Carillion is a name you’re going to be hearing a lot this week as MPs gear up to publish a potentially explosive report on the outsourcer’s demise on Wednesday.

The Work & Pensions and Business select committees, which have been conducting a joint investigation into the scandal, offered a taste of what is to come by this morning making public, and commenting upon, some of the evidence from one of the company’s banks: Santander.

As well as being a Carillion lender, the latter offered a scheme through which the company’s suppliers could automatically get their hands on their money rather earlier than the appalling 120 day payment terms it imposed in July 2017. They did this by selling their invoices to Santander at a discount.

Credit agencies Moody’s and Standard & Poor’s have said the Early Payment Facility it offered was used by Carillion to conceal its true level of borrowing. They have argued that by paying so late, the company was in effect borrowing a lot more either from its suppliers or via the payment facility than appeared on its books.

The extent of this can be seen by the bank’s exposure the scheme: it amounted to £109m.

Now, Santander was one of the banks criticised by Carillion CEO Keith Cochrane in the wake of its collapse. He rounded on the bank for withdrawing the facility.

But Santander, in evidence to the committee, said it didn’t quite go like that. At the end of December 2017 it terminated the “automatic part” of the scheme. The reason? Santander was understandably concerned about Carillion and wanted to keep a close eye on its exposure to the company's invoices.

Its evidence described a series of events which “undermined Santander’s confidence in Carillion’s financial position” including “lack of progress with the restructuring plan” that Santander had provided new bridging finance for, and the expected “detailed business and restructuring plans” being further delayed.

But even after that, it said it still would buy Carillion suppliers’ invoices on an “ad hoc” basis and I am told that all of those that had been using the automatic facility where able to get paid via the ad hoc facility right up until close to the end.

Frank Field, chairman of the Work & Pensions Committee, said of the bank’s evidence on the scheme: “This knocks down for good the stance of the Carillion board that whingeing and blaming others can be any defence.”

Quite.

But what it should also do is again throw the spotlight on the issue of late payment.

Factoring services, like the one offered by Santander, ought not to be needed. They are because the UK remains one of Europe’s worst laggards when it comes to small businesses getting paid.

According to the Federation of Small Businesses as many as 50,000 firms die every year because of poor payment practices in this country.

Because getting their hands on money they are owed can be a matter of survival, and because waiting is risky as the Carillion debacle proves, firms are often willing to accept less through schemes like the Santander one. I stress that the blame here lies not with the bank but with the paying company.

A report by Intrum Justitia, a Swedish credit management company found that some 4.7 per cent of UK small businesses revenues have to be written off through late payment every year, the worst of 29 European nations considered. The figure for the second worst (Bulgaria) was 4.1 per cent. The UK also came 24th in the report’s “Payment Risk Index” behind the likes of the aforementioned Bulgaria, as well as Slovakia, Bosnia and Croatia.

It bears repeating that Carillion was a signatory to the Prompt Payment Code which calls for firms to be paid within 30 days of contract completions and for terms not to extend beyond 60 days, when it imposed the 120 terms, a fact highlighted in a letter to the company by Fed chairman Mike Cherry. It also continued to win Government work after its July profit warning and the extension of its payment terms in 2017.

This is but one of a can of worms opened up by its collapse, but it is an important one and the implications need to be addressed.