What can Italy learn from Carrilion collapse?

Carillion

The collapse of Carillion points to a fundamental flaw in the way the Governments throughout Europe procure suppliers for public sector projects.

In UK, Ministers have allowed Government procurement to become a cartel. Carillion's demise is devastating evidence that this policy is failing both the public sector and UK taxpayers.

This happened because the UK Government did not support its Small and Medium Enterprises (SMEs). Instead it decided to channel public-sector procurement through what is effectively a cartel of 30 or 40 prime suppliers.

SMEs are the core of every economy. Their health and their ability to grow is fundamental all - and this will determine UK success post Brexit.

Governments everywhere have ignored calls to provide SMEs with low cost working capital taht does not require SMEs to pledge security and assets and personnel guarantees. Similarly, no one has addressed the issue of supplier abuse in procurement, especially late payment after contracts have been fulfilled. 

Does this sound familiar to Italian readers?

In UK Carillion's failure illustrates, heightened risk of putting all the Government's procurement eggs in one basket. It would make far more sense to spread risk by directly procuring services from a multitude of UK SME suppliers but the public sector has always had concerns about the financial viability of SMEs.

Most Governments rely on these major suppliers to sub-contract work to SMEs so it can meet its SME procurement policy. This process can result in the abuse of SME suppliers as they delay in first approving and then paying invoices.

On top of this bank lending to SMEs has fallen - in UK by some 40% since the 2008 financial crisis. In addition, before lending UK SMEs have to pledge security and their owners need to provide personal guarantees.

Over 50% of all new business are "New Work" or services run by people under the age of 35. These business don't have traditional assets to pledge as security, the "assets" are what is either on the web, in IP or in the head of the entrepreneur. Also, young business people do not have the resources to provide personal guarantees.

Again, does this resonate with my Italian readers?

There is a way out of this mess. It's a solution that would increase direct government procurement from SME suppliers and provide unsecured working capital to cash-strapped SMEs. This would not just reduce the risks of another Carillion but set more of the UK's SMEs on the path to success - with substantial knock-on benefits for the economy, essential post Brexit.

Right now, everywhere in Europe, particularly in Italy, we're seeing far too many SMEs go bankrupt. The vast majority of these failures are caused by lack of day-to-day working capital.

Affordable and available low cost flexible working capital is essential. Too often start-ups either go bust or the successful ones are forced to sell because they are unable to finance growth because of a lack of available working capital. Those remaining, just exist without growing. 

So what is the solution? It's the creation of a Purchase Order Finance scheme to provide flexible low-cost working capital to cash-starved SMEs that operates on an IT web based platform that tracks all contractual, physical and financial aspects of a contract. It stores all relevant documents, including delivery and acceptance notes of goods and services. There are no excuses for delaying either invoice approvals or payments. Procurement becomes accountable and transparent.

Purchase Order Finance provides low cost non-banking working capital to the supplier when the contract is signed. The buyer decides on a percentage of the final invoice value it is willing ot insure against non-delivery and non-fulfilmnet of the contract. This 'promise to pay at some point in the future' becomes the instrument against which finance is provided by a third party non-banking source. The scheme comes with an insolvency and other insurance designed wraps for public sector suppliers who passed the Government's due diligence tests. It would reduce risks in the public sector supply chain by lessening the chances of suppliers becoming insolvent because of cash-flow shortages. The buyer receives compensation if the insured supplier fails. 

Better still, it doesn't cost the Government a penny. It would fall outside the suppliers' existing Banking and Alternative Finance credit limits so it is net new finance. It would cost suppliers between 5% and 6.5% for a 12-month facility. It complies with EU state aid rules and would help the public sector get value for money for the services it procures.

Suppliers would first have to apply to the commercial insurance market for supplier insolvency insurance - a bulletproof way of helping the Government control procurement risk. If commercial insurers won't insure a supplier then the public sector should reject that supplier. If they can get insolvency insurance, the Government is still covered against another Carillion-type situation even if they go under.

Carillion disaster demonstrates that existing internal public sector risk assessment processes require immediate and significant reform. My solution instantly corrects these deficiencies by incorporating proven external commercial risk assessment mechanisms.

If this solution had been adopted by Cabinet Office, it is probable Carillion would not have been approved as a supplier - last year, the commercial insurance market was already expressing concerns over some major government suppliers, including Carillion. And even if it had been approved, then any bail out would have been paid for by the insurance companies - not by the UK's taxpayers.

The collapse of Carillion has put the construction of crucial public services - including a major new hospital - under threat. This solution would make sure all public services were protected. 

Yet again, - familiar?

Italy can avoid a Carillion type demise. It can significantly reduce the number of SMEs going bust and prevent domino reaction right through supply chains as reaction to one bankruptcy pushes its suppliers, who it cannot now pay, to the brink. 

Purcharse Order Finance provides low cost affordable and available working capital finance and would track all contract and invoice procedures. It's adoption will prevent another Carillion-type situation.

Today lack of Italian banks lending to SMEs is legendry.

Despite this Carillion collapse, at least 1 billion pounds of finance is still available for UK. I am sure I can find additional funding to provide similar solutoin for Italian SMEs. At the same time, I believe the purchase order finance solution and insolvency wrap is quickly adaptable for Italian procurement and Italian SMEs. 

Chris Poll avatar
Chris Poll

Chairman of Doing Business Together and DBT Capital – http://www.dbtcapital.com/ 1980 created UK’s Alternative Investment Market (AIM) - to provide new sources of finance to young businesses. 1985-1997 developed Micropal Fund idea into 17 global offices, then sold to Standard & Poors. Set up Doing Business Together to improve relationships between providers of finance & credit raters and SMEs