If its not broken, don’t fix it?
Updated: Jan 12
The collapse of Carillion one of the government’s biggest contractors early this week sent shock waves throughout the country. The construction and services conglomerate went into compulsory liquidation with estimated debts of roughly £5bn (Sky news https://news.sky.com/story/revealed-carillion-collapsed-with-5bn-of-financial-liabilities-11213303 ) on Monday 15 January 2017 with £29m in cash in its coffers after several contracts went sour and rescue talks expected to provide a solution to its huge debt and huge £590m pension deficit failed. At its formation, its market value was £2bn.
Carillion was created as a construction company in July 1999 following a demerger from another well-known company Tarmac. Carillion went on to acquire the construction divisions of Wimpey, Alfred McAlpine, Mowlem, Van Bots construction in Canada and other companies.
Scale of Work
Over the years Carillion turned itself into a leading international facilities management and construction services conglomerate employing around 43,000 people with 20,000 in the United Kingdom and operating in the UK, Canada and the Middle East.
The scale of its public services work for the NHS, the Prison Service and the NHS. was huge. Carillion constructed buildings, maintained and operated schools and managed hospitals for the NHS. It provided outsourced workers to major British firms including Arriva Rail, Centrica and the Nationwide Building society to help run their businesses. It employed about 8000 people in the health care industry, its maintenance teams carried out thousands of maintenance tasks for the NHS, it was responsible for about 200 hospital operating theatres, it prepared about 18,500 patients meals each day and handled more than 1.5m telephone calls per year via its NHS helpdesks… ………. the list goes on and on.
At the time of its collapse, Carillion was working on various key projects including the high-profile HS2 rail project.
The signs were there earlier on. The company had announced losses on key contracts over the past 6 months (from July 2017) and had borrowed heavily from its main lenders – HSBC, Barclays and Santander UK.
Carillion’s collapse was partly due to losses it sustained on three key public finance initiatives which are late and over budget – i.e. the £745m Aberdeen bypass originally due to be opened in Spring 2018 but now delayed due to slow progress in completing initial earthworks, the £350m Midland Metropolitan hospital PPP project in Birmingham due to complete in October 2018 but now delayed to Spring 2019 and the £335m Royal Liverpool University hospital due to complete in March 2017 – the latter’s completion date has been repeatedly pushed back amid reports of cracks in the building. The conglomerate’s Chief executive Richard Howson stepped down as Chief Executive in July 2017 after the first (10 July 2017) of three profit warnings in a four-month period.
Carillion’s collapse is a disaster for the government and us all. Its shares were changing hands at about 300p two years ago but closed on Friday last week at a mere 14.2p.
Like many other service and outsourcing companies involved in PFI deals, Carillion relied on long-term contracts. As is well known, PFI deals involve a lot of risk and expense especially at the initial construction stage. Contractors borrow heavily to ensure they can fund the works. The profits come from the 20 or 30-year management and maintenance deals that follow the construction stage. However, if something goes wrong with a particular contract and it does not make as much money as expected or it loses money it becomes difficult to service the borrowings. This is what happened in Carillion’s case.
Carillion’s collapse did not come as a surprise to many, including myself. As a construction lawyer, I have followed the company’s fortunes over the years. The company ventured into areas it should not have done and entered into loss-making contracts. Carillion’s collapse is a warning and a lesson to all contractors who overstretch themselves.
Appointment of Liquidators and Impact
PricewaterhouseCoopers (PWC) has now been appointed as the liquidators of Carillion PLC, Carillion Services Ltd, Carillion Integrated Services Ltd, Carillion Services 2006 Ltd and Planned Maintenance Engineering Ltd. The liquidators have announced that there is no prospect of any return to shareholders. Carillion’s creditors have been warned that they are likely to receive less than 1p for every pound owed.
The impact of the liquidation will be huge. It is likely that many of the firm’s workers will lose their jobs. At the moment the firm’s workers have been asked by the liquidators to attend work as normal and will be paid by the liquidators.
However, some companies involved including subcontractors owed money by Carillion have begun laying off workers and employees. Carillion’s joint venture partners will now be liable for additional cash contributions of millions of pounds on their joint venture projects with Carillion.
The government has ruled out a bailout and has announced that it would only be covering funding for some of Carillion’s public-sector work which continues despite the compulsory liquidation. Carillion’s collapse raises questions about the company’s pension scheme even though it has now been accepted that the pension rights of Carillion’s 20,000 UK-based employees would largely be preserved thanks to the Pension Protection Fund (PPF). The PPF is a private scheme funded by a levy on its member companies. Carillion is a member company of the PPF.
The collapse has revealed some unsavoury details about Carillion, its operations and the government e.g. senior Carillion managers placing low bids to win contracts, the company’s cumbersome management structure, its acceptance of too many projects which turned out to be unprofitable, its lack of proper contractual risk assessment, its poorly managed contracts, monies withheld by clients, its treatment of suppliers and contractors, prolonged delays to works, the government’s decision to award Carillion the HS2 contract after its first profit warning, and the fact that Carillion still kept bidding for contracts and was awarded contracts by central government and local authorities after the profit warnings.
Bonuses and Investigations
The government has blocked bonuses that Carillion’s directors awarded themselves before the company went into liquidation and has now ordered a fast-track investigation into the conduct of Carillion’s directors. The Financial Reporting Council has been instructed to examine the role of Carillion’s auditor KPMG. KPMG audited Carillion’s audits in March 2017 and gave the company a clean bill of health.
Where do we go from here?
It is difficult to make a full analysis until the investigations have all been carried out.We do not want another British Homes Stores fiasco!
But three questions come to mind. Carillion’s problems were well known for several years.
Why was no action taken earlier by its management and the Government?
Were investors fully aware of Carillion’s problems?
Is it now time for the pensions regulator to be stricter with companies and prevent them from accumulating huge pension deficits?
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