What Went Wrong for Carillion, and Why Does it Matter?

Carillion Plc, giant in the construction industry, have now entered compulsory liquidation. So, what went wrong for Carillion, and why does it matter?

The firm have been in trouble for some time, but many smaller suppliers are now facing the deficit in millions of pounds of debt that they Carillion have left unpaid.

A few of these firms have indicated that they were following the government’s lead despite Carillion’s share price falling; they had secured government contracts worth billions even within the last year.

Carillion supplied the public sector with services to the tune of £5.7b from 2011 to 2017, between 208 government bodies. These include railway maintenance, and school, motorway and prison management.

In 2017, their latest government contract (worth £274m) was with the Ministry of Defence towards the maintenance of 50,000 homes.

These contracts will still be upheld using government funding, but the private sector agreements will now cease, leaving hundreds of smaller companies in the red, and several thousand individuals redundant.

Carillion’s private services included outsourced landscaping, the Battersea power station re-developments and the Anfield stadium expansion.

 

Why is the company going into a compulsory liquidation?

If you know a little about insolvency, it may seem confusing that the company directors have decided to enter a compulsory liquidation, as this seems paradoxical.

The decision was made by the directors to serve a winding up order on their own company (whereas most directors would opt for a voluntary liquidation to retain some control over the process); this is because of the company’s involvement in the public sector.

The government need to take over these contracts so as not to disrupt several public services, and an Official Receiver is the only liquidator that can oversee this process.

The civil servant David Chapman has been appointed as liquidator for this case; he will be delving into what went wrong for Carillion over the coming months.

 

The build up

Although it is likely that the company’s problems stem from a date far prior to this, the first public sign of Carillion’s sharp downfall came with the profit warning announcement in July 2017. This statement was issued by the company advising the stock market that profits will be lower than expected.

Since then, Carillion’s share price has collapsed from nearly £2.50 each to less than 10 pence (of course now they are worth 0p due to the liquidation).

Subsequently, although the company had been valued at £1bn, this figure plummeted to £61m within the space of 6 months.

During this time, the company’s directors had been holding crisis talks and negotiating better terms with creditors, lenders and the government.

These were unsuccessful, however, and the company’s banks (including Santander, HSBC and Barclays) were unwilling to lend the company any further funds.

The reality is that the Carillion staff working on private sector jobs faced having their wages stopped completely on Wednesday the 17^th January, after receiving 2 days’ worth of government  support.

 

What went wrong for Carillion?

The £1.5bn debt accrued seems to have spiralled from several smaller issues, including;

• Payment delays from the middle east damaged cash flow
• The fact that there is now a £600m pension deficit indicates that these monthly payments weren’t unnoticeable
• Too many risky contracts were taken on, many of which turned out to be unprofitable – for example:
  • The Midland Metropolitan Hospital contract, which was worth £350m – the building’s opening was scheduled for October 2018, but issues with the heating, lighting and ventilation systems delayed the launch to Spring 2019
  • The £335m Royal Liverpool Hospital contract was delayed repeatedly amidst reports of cracks in the building, despite the fact that it was due to be finished in March 2017
  • The Aberdeen Bypass contract which was worth £747m (a joint venture with Aberdeen Roads Ltd,Balfour Beatty and Morrison Construction). This was due to open in Spring 2018, but initial earthworks lead to delays, then last month Carillion was penalised by environment watchdogs for river pollution to the tune of £280,000

 

Why does it matter?

For a start, Carillion employed more than 43,000 employees worldwide (around half of these are based in the UK). Although those employed under public services will not have to deal with redundancy, they still face uncertainty and there will no doubt be changes to their employment contracts.

The government are being urged to safeguard the thousands of employees that face unemployment, but their priority will of course be to negate any disruption to the public services that will be effected by the closure.

The Labour MP Jon Trickett told Parliament a while ago that if the worst happened, public services would suffer ‘massive damage’. In fact, the Labour party has been very vocal over the course of the fallout – Jeremy Corbyn also blames the Tories;

“Tory underfunding has caused a crisis”, he said. The liquidation was described as a “watershed moment”, and “rip off privatisation policies” are apparently to blame.

Corbyn cited Virgin and Stagecoach as further evidence of the flawed model, due to their £2bn bailouts last year.

It is undeniable that the effects of this will be spread across the entire country. As the fallout progresses, it is likely that further private companies will be employed to fill in the gaps.

The lesson to small business owners here is not to take companies with government contracts as a given;

Rudi Klein of the specialist engineering contractors’ group indicated that

“The domino reverberations as it travels down the supply chain could be unprecedented”.

Andy Bradley, Flora-tec MD has now had to face the fact that Carillion will not be paying their £800,000 debt (for landscaping services) any time soon, if at all. He said:

“The government actively encouraged businesses like mine… to make sure the little guy got a slice of the pie. When Carillion started to get into trouble last year we were considering that we would scale back out involvement with them.

“However… the government continued to give them billion-pound contract after billion-pound contract and that said to me… that the government had done their due diligence.

“I had to make 10 people redundant yesterday. That’s 10 people with mortgages, car loans, all that stuff. It’s an absolute disgrace.”