Carillion’s Collapse Shakes UK Services and Construction
Carillion, the UK’s second largest construction and services company has announced that it will be going into compulsory liquidation with immediate effect. The stunning news came after the Cabinet Office hosted emergency meetings over the weekend, in attempt to secure short-term financial support for the business. The government refused to bail Carillion out with taxpayer funds, as had been done previously with banks, which allowed the company to collapse putting 43,000 jobs, infrastructure works, transportation, public services and even lunches for 218 schools at risk.
The company had been expected to file for administration, so the news that Carillion would file for voluntary administration was remarkable. Due to a high number of government contracts, Carillion’s liquidation will be handled by an Official Receiver, David Chapman, who is a civil servant working for the Insolvency Service, rather than go through the usual administration process. Accountancy firm PricewaterhouseCoopers LLP will act on Chapman’s behalf as special managers overseeing the liquidation.
Government funding for services
Philip Green, Carillion’s chairman has called today, 15 January “a very sad day for Carillion, for our colleagues, suppliers and customers that we have been proud to serve over many years.” He also stated: “We understand that HM Government will be providing the necessary funding required by the Official Receiver to maintain the public services carried on by Carillion staff, subcontractors and suppliers.” The government has confirmed that it will pay the administrative costs of the Official Receiver, guaranteeing public services will continue. Continuing to pay worker’s wages will be expensive, but less costly than an unplanned collapse would have been, the government has said.
While this will be somewhat reassuring for the workers, the government is under pressure to launch a full inquiry into why it awarded £2bn worth of government contracts to the company after it issued three profits warnings in the past six months. Labour has called for an investigation into the government’s actions prior to Carillion’s collapse. The firm’s collapse is also seen by British unions as evidence that privatisation in public services such as schools, hospitals and prisons put them in “the grip of shady profit-making contractors.”
Services staff attempt to carry on
The company’s many UK services include supplying school lunches to thousands of students in UK schools. Oxfordshire County Council said that it would be taking over the job of providing school dinners, saying they have “been planning for the possibility of Carillion’s collapse for some time, and schools have been closely involved.” They, like the government, are urging the company’s employees to continue working as normal.
The government funding will also keep services such as hospital cleaning, prisons managed and military base homes being maintained, running. This will effectively nationalise those services. The roughly 20,000 people employed by Carillion in the UK aren’t the only people being affected by the company’s liquidation, since the firm also relies on thousands of British subcontractors to provide services. They will be anxiously waiting for assurance that their invoices will be paid, and if not, clearly many small businesses will fall in a domino effect caused by Carillion’s demise.
Commuters using Network Rail were relieved to hear that rail service won’t be disrupted because Carillion isn’t involved in the day-to-day operations that keep the trains running. However, since the company is the second largest supplier of maintenance services to Network Rail, the collapse will mean that many train cars will not be cleaned today. This is because the company hired train cleaners who use fuel cards to pay for the petrol they use to drive company vans from job to job. From today, the fuel cards aren’t working so, if these maintenance staff wish to do their jobs, they will have to pay for the fuel in company vans out of their own pockets.
The company was working on the High Speed 2 (HS2) rail project which will link London, the West Midlands and the North by rail. The project was expected to be completed by 2033 and projected to cost at least £55.7bn, and the government has said the HS2 project will be delivered, since other contractors will take it on. However, now the cost may rise and the delivery date could be pushed back since the contract won’t be handled by Carillion. The rail project is the largest of the hundreds of major projects that will now be thrown into uncertainty as the aftershocks will be felt rippling out across the UK the rest of this year.
The UK’s Enron?
The Wolverhampton-based business was operating in the UK, Canada and the Middle East and had annual revenues of over £5bn in 2016. Their integrated business model involved them in the process of financing, designing and constructing projects such as hospitals, prisons and roadworks for which they would then provide ongoing maintenance and facilities management.
Payment delays from Middle East contracts and unprofitably low, competitive contracts being taken which led to projects running out of money are being blamed for Carillion’s debt and liabilities of around £1.5bn as well as a pension deficit of £580m. Only last July, the company had a market capitalisation of nearly £1bn, until share prices continually plummeted until the company was worth £61m. The hapless investors who still held shares in the company today will find they are utterly worthless.
Last year, the company’s CEO, Richard Howson resigned following the issuing of the July shock profits warning, but he was rewarded for his failure with another year of his £660,000 salary as well as £28,000 in benefits. The Institute of Directors expressed alarm that the company had relaxed conditions for executive bonuses in 2016 which suggest that the board and shareholders weren’t appropriately overseeing the firm.
Executives being grossly overpaid, the taxpayers having to pay to keep services going and the government’s role in continuing to give contracts to the company, are seen by Lord Andrew Adonis as similar to the US’s Enron scandal, which cost thousands of worker’s jobs in 2002. Adonis, the Labour peer who recently resigned from his post as the chairman of the government’s National Infrastructure Commission, said it would be better for the government to take over public sector contracts, since other companies would demand a “King’s Ransom” for them.
Lifeboats and pension cuts
The Pension Protection Fund (PPF), the industry lifeboat scheme for collapsed pensions, is taking over Carillion’s 28,500 pensions. Since the PPF has a surplus of over £6bn, it is strong enough to absorb the deficit of £580m. This guarantees that the more than 12,000 workers that are presently retired are, will continue to receive their full pensions. The situation is not so straightforward for workers who have yet to retire, and resolving the details of the pension scheme could take years. Experts suggest they will face a cut of 10 to 20% of their pensions, as well as other reductions that might include loss of inflation proofing and payout limits for higher earners.
Banks stand to lose around £2bn in debts the company won’t repay, but there will be many others who will also lose money. As new contractors must be found to provide services, local authorities will be spending a great deal of time and more of their budgets to maintain vital services. And then, there is the inevitable cost of the disruption to the construction sector, which will push up insolvency levels which are already the highest of any British industry. Taxpayers will be getting a “raw deal” according to Meg Hiller, chairwoman of the Public Accounts Committee. She also said the Government has serious questions to answer about its role in allowing taxpayers’ exposure to escalate to this point.”
It will take time to gauge the full impact of Carillion’s collapse on the UK’s construction sector, with some firms managing to take up the extra work and hopefully, hire Carillion workers to follow through on these projects. Construction firm Balfour Beatty was involved in joint ventures with the failed firm on three roadworks projects and has said they expect losses of as much as £45m in 2018, as a result of Carillion’s liquidation. Rival firms such as the Keir Group have said they have contingency plans in place for the High Speed 2 railway and Highways England projects and they don’t expect to incur financial losses.
Cabinet Office minister David Lidington said that the Government has been closely monitoring the situation with Carillion, since the first profit warnings came in July and had been in a constructive discussion with the firm about refinancing. “We remained hopeful that a solution could be found while putting forward robust contingency plans in place for every eventuality,” he said. Lidington will update MPs on the crisis again later today.
The government’s first priority, is to ensure that services continue. As for a second priority, regulating the public contracts more carefully, would be an excellent place to start. Carillion’s contracts were tendered at margins that were so low, the company could only have managed to survive on a massive volume of work. The company proved it was not too large to fail, and in doing so, it has put its own workers and other businesses across the UK at considerable risk.