It was October 2012 and David Cameron was flanked by senior ministers — as well as Australian financier Lex Greensill — as he announced a new scheme designed to speed up payments to government suppliers.

The then British prime minister described the “supply chain finance” initiative as a “win-win” for industry, when the UK had only just emerged from recession. Under the scheme, suppliers’ bills were settled upfront by banks, for a small charge, rather than the typical 60 to 90-day wait with contractors. The aim was to ease their cash flow at a time when banks were wary of traditional lending.

Cameron had no idea he was helping create a central plank in Carillion’s later scandal.

The British construction group went into liquidation in 2018 after it could no longer service its £7bn of debt, becoming one of the biggest corporate collapses in recent British history. It had just £29m of cash at the time.

In the midst of the crisis around Greensill Capital, the finance firm that fell into insolvency in March, the connection between Lex Greensill and Carillion has been only a footnote. But the way the outsourcer used supply chain finance to mask its mounting debts — something that helped it to continue to pay bonuses and dividends even as it veered towards collapse — can be traced back to that Cameron announcement.

Cameron revealed a long list of companies that had agreed to use Greensill’s big wheeze, which helped larger businesses to manage payments. Some of those companies quickly realised that loans to cover suppliers’ bills would not show up in their reported debt, helping to flatter their balance sheet.

The collapse of Carillon

Carillion’s use of supply chain finance became contentious because shortly after the scheme was launched, the company extended its maximum payment times to suppliers from 65 to 120 days — in effect forcing subcontractors to use the scheme, even if they had to pay a price.

Cameron “absolutely pushed” the supply chain finance initiative and sent a letter to the government’s 20 biggest suppliers urging them to come to a meeting at 10 Downing Street, where they were pressed to use the scheme, according to one person close to Carillion.

Carillion never used Greensill but its finance team had several meetings with the entrepreneur, who was working as an unpaid adviser in the Cabinet Office — with his own desk and team of four civil servants. Executives had “stars in their eyes about him”, said one former employee.

According to people briefed on the plans, Carillion set up its “early payment facility” — its own version of the scheme Cameron announced — after meeting Greensill.

Senior executives at some of the government’s other big UK contractors were also called in to meet the entrepreneur.

“There was no real threat but there was a certain pressure put on because the government was a big client,” said the head of one then FTSE 100 contractor. “I thought it was odd that Number 10 pushed the scheme as Greensill was not a government official and interest rates were low at the time.”

“You aren’t going to bite the hand that feeds you,” said an executive at another contractor.

Outsourcers knew Greensill had the patronage of Cameron and Jeremy Heywood, then cabinet secretary, who used to work with the Australian financier at Morgan Stanley. Cameron went on to work for Greensill, lobbying ministers last year on behalf of the company.

Greensill also attended at least two meetings between Carillion and its subcontractors, where they were encouraged to use supply chain finance, said people close to the company. At a 2014 event at Wolverhampton Wanderers football club, next to Carillion’s headquarters, Greensill was billed as the key speaker.

The company’s use of 120-day payment times meant there was a “huge incentive” to use the scheme, said one subcontractor who attended a Carillion event at the stadium. The facility enabled suppliers owed money by Carillion to take their invoices to various partner banks — including RBS, Lloyds and Santander — to be paid in advance.

At the time Carillion told suppliers it intended “to provide this facility indefinitely as a key part of the UK government strategy to stimulate growth within the economy”.

Greensill told the Financial Times he was not directly involved in the creation of the Carillion early payment facility and refused to comment on the Wolverhampton event. He will provide his own version of events when he gives evidence to a Treasury select committee inquiry on Tuesday.

Carillion

In the six years before its collapse, Carillion reported a robust financial performance. From 2011 to 2016, its reported debt rose only slightly from £839m to £850m.

But in the small print of its annual accounts, borrowing was ballooning. A footnote under “trade and other payables” showed debt in the early payment facility almost tripled, from £263m to £760m.

As the debt mounted, Carillion continued to award generous pay packages and bonuses to directors and make payouts to investors.

In the five years from 2012 it paid out dividends of £376m even though its operations generated just £159m of net cash. Richard Howson, then chief executive, who was unavailable for comment, took £5.6m in remuneration and added £1m to his pension, even as the company racked up a £990m pension deficit, for which taxpayers and retired Carillion workers later paid.

Bob Wylie, author of Bandit Capitalism, a history of Carillion, said the company’s early payment system made the balance sheet look “much better than it was”.

A report by the business select committee in 2018 backed the view that Carillion used the facility to “systematically” shore up its fragile finances and present a “rosy picture” to the markets. Moody’s, the rating agency, argued that as much as £498m of debt was misclassified in the annual accounts. By labelling the early payment facility as “other creditors”, the figure was not incorporated in the company’s debt-to-earnings ratio, a key covenant test between Carillion and its lenders.

Cameron’s representative said it was wrong to single out Carillion given the wider, successful use of supply chain finance by many companies. “This is utter nonsense,” he added.

Noble Francis, economics director at the Construction Products Association, said Carillion was the “worst abuser of the scheme but many of the largest construction firms have supply chain finance built into their business models as one way of making up for contracts won by bidding at low or negative margins”.

Kier, the struggling UK building contractor, reduced holdings in its scheme at the end of 2020, but said it would continue to offer it as it was “much appreciated by those who use it”.

But Rudi Klein, an industry expert, is calling for supply chain finance to be banned. “It’s an absolute scam,” he said. “Carillion got free credit for about three months.

“Why should workers have to pay to get paid? I don’t think the construction industry and David Cameron are going to be forgiven for introducing it.”