As attempts to achieve the Interserve financial restructuring reach a conclusion, it is once again striking how bad the sector has been at managing risk, and at responsible governance of risk it takes on from its public sector clients.
In our report, After Carillion: Public sector outsourcing and contracting, we found that state organisations which let contracts were too ready to believe risks could be transferred at unrealistic prices, and that contractors were too ready to take on risks which were not fully understood by either party. In Carillion's case, this was driven by directors and shareholders with a far higher risk appetite than those accountable for the use of public money or for providing vital public services, and government had little understanding of how such risks could rebound on to the public balance sheet. We are revisiting this in our current inquiry into the government's management of major projects.
The readiness of Interserve to undergo pre-pack administration, at the expense of shareholders and directors' share interests, shows a marked improvement in the capability of the system to manage the legacy of excessive risk.
Lenders should be praised for taking on much greater responsibility. The government is no doubt ready to facilitate these discussions. It is to be hoped that shareholders will also choose not to hold the business to ransom, but rather recognise that vital public services cannot depend on a high risk-return business model. In the long term, shareholders in such companies need to learn that this market must be a lower-risk sector, with subsequently lower rewards. The provision of public services cannot be dependent upon risk-driven, leveraged companies making risky acquisitions. Such decisions may enrich directors and speculative investors, but leave public services too vulnerable.