Monday, 18 December 2017

HS2 in the Limelight

The final post today looks at the company behind the massive HS2 infrastructure project that will see some of the U.K.’s largest cities connected by a new high-speed railway system. We have looked fleetingly at the project before when we focused on the travails of Carillion, just one of the firms tasked with seeing this large-scale project realised. However, whilst Carillion is experiencing a period of difficulty at the moment, the HS2 Company itself has this week been thrust into the limelight because of its organisational structure, and its compensation to key individuals. So, in this post, we will look at the developing story and assess the development of this integral project.

High Speed Two, or HS2, is the name given to the large-scale infrastructure project that aims to connect Britain’s largest Cities by way of modern high-speed rail links and is coordinated by the HS2 Ltd Company that is funded by grant-in-aid from the Government. The project will see eight different cities connected, with the stated aim being to ‘[rebalance] our economy long before the trains start running’; the Company predicts that HS2 will create around 25,000 jobs and fuel economic benefits totalling over £103 billion. However, ever since the project was first declared, there has been a number of criticisms and objections, relating to such aspects as the trains running through certain areas, the structure and plans of the project, and the spiralling costs, and recently the focus has turned to the financial side of the project, with remuneration being chief amongst those. It was reported last week that MPs were growing increasingly concerned certain staff members being vastly overpaid by the Company, with some going as far to call for legal action to be taken by the Government. So far, the most contentious element in this regard has been the fact that the Company has paid out £2.76 million to 94 individuals in relation to redundancy payments, despite there being a statutory cap of £1 million, something which has been labelled by MPs on the Public Accounts Committee as ‘a shocking waste of taxpayers’ money’. Yet, over the past week, the plot has continued to thicken.

Last week it was reported that the National Audit Office (NAO) found that the Company’s former Chief Executive, Simon Kirby, had been expressly forbidden from allowing the redundancy payments, or even just proposing them in furtherance of the cap. Yet, the story goes that the email in question, forbidding the payments, was not forwarded to the relevant members of the Board and, upon investigation by the NAO, it was found that documents were tampered with after the fact to cover up these ‘mistakes’. The Public Accounts Committee were damning in their judgement, declaring that the Company ‘lacks basic financial controls [which] heightened the risk of fraud and financial errors’; today, that damning email came to light. The Guardian reported that Kirby was warned that even to propose the pay-outs ‘would cause enormous reputational damage to the company’, and that, for the Department of Transport, ‘this is an absolute RED LINE for us. Company employees are not civil servants. They have to take the rough with the smooth’. So far, Kirby has suggested only that he ‘did not recall’ whether that email was forwarded to the Board, and that decision to make employees redundant was taken after he had left; yet, these revelations are extraordinarily damning for Kirby, and his destination post-HS2 raises further concerns.

In one of the first posts here in Financial Regulation Matters, we looked at what seemed to be a culture of fraud, bribery, and essentially financial negligence within one of the world’s most recognisable brands – Rolls-Royce; in September 2016, Simon Kirby joined Rolls-Royce as its Chief Operating Officer, with the firm declaring that the appointment was designed to ‘drive operational and financial performance across the business…’. With MPs concerned that Kirby ‘has not been held to account for his actions’, the pressure is continuing to build for Kirby and his new employer, as the smell of financial negligence will certainly be unwelcome given that the firm is currently operating under the largest ‘Deferred Prosecution Agreement’ ever appropriated by a British agency (the Serious Fraud Office) for bribery, fraud, and all-around financial negligence. Nonetheless, whilst Kirby waits to find out whether that pressure results in action, the knock-on effect for HS2 is severe.

In reality, the HS2 project is an extremely expensive and precarious project, being executed at precisely the time were increased expense and precariousness are not at all desired. In this era where austerity continues and the country is facing an increasingly uncertain economic future, projects such as HS2 need to be delivered with the utmost integrity, and today’s latest developments represent a hammer blow to that ideal. If, and one suspects it is more than likely, investigations continue and find systemic issues, it should be the case that the organisational elements of the Company are thoroughly re-examined and altered accordingly; however, the reality is that the Company will likely need much more than the £55 billion that it requires, and this is the cause of the Government’s push to encourage foreign investment from the likes of China – the question then is do the Government dare tackle what may be systemic fraud and financial negligence in light of the proposed reality that the project will need even more money from the public fisc and/or foreign governments? The likely answer to that question is a resounding ‘no’, and it is for that reason that Simon Kirby may not have escaped the clutches of justice on this occasion; simply put, his actions regarding the damning email make him the perfect ‘fall guy’ for what may be systemic issues within the HS2 project.

Keywords – HS2, Fraud, business, politics, investment, negligence, Department for Transport, Rolls-Royce, @finregmatters

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