By Mark Richards

Like all big companies, Carillion had a strapline: ‘Making tomorrow a better place.’ As everyone now knows, the company went into liquidation on Monday with debts of £1.5bn and a pension shortfall of at least £600m – so for Carillion, there is no tomorrow. For the handful of hedge fund managers who made millions out of betting against the company, tomorrow will certainly be a richer place. But for the thousands of Carillion staff, and hundreds of small businesses, tomorrow looks anything but a better place. In the first of two articles on Carillion’s demise, we look at what went wrong, whether it could have been avoided and who is to blame…

After a weekend of failed talks with Government ministers Carillion – the company that did everything from providing school meals to building the Yas Viceroy Hotel in Abu Dhabi and had 450 government contracts – went into liquidation. It had been coming for a long time – the company issued three profit warnings in 2017 and was ‘the most heavily bet-against company on the stock market.’ Carillion’s failure will have massive implications for the company’s employees, for its suppliers and for the Government. Let us try and untangle the mess…

What was Carillion?

Carillion was created in July 1999 by a demerger from Tarmac (which was originally founded in 1903). The new company included the former Tarmac Construction contracting business and Tarmac Professional Services. The company expanded rapidly and had its finger in any number of pies around the world – quite literally. Carillion supplied everything from 32,000 school meals a day to the management of schools and prisons to the construction of roads and public buildings and was even responsible for 11,500 NHS beds. With the governments of David Cameron and Theresa May continuing the Blair/Brown practice of using the private sector as the supplier of services to the public sector, Carillion was effectively the Government’s ‘go-to’ contractor.

What went wrong?

There are two answers to that question: the textbook answer and the anecdotal answer. We will start with the economics textbook…

The company was simply over-extended. It had so many projects on the go – from the UK to Canada to the Middle East to the Caribbean – that it could not manage them efficiently. In addition, the constant desire to expand had led to too many risky projects that had become increasingly unprofitable. Delays in payment in the Middle East put huge pressure on a cash flow already under pressure from the shortfall in the pension scheme (which experts estimate at anything from £600m to £900m). While the company managed to persuade its lenders to provide more cash in December, they could not do this in January, leading to the decision to call in the administrators.

And now the anecdotal answer…

I have not previously used the comments column of the Daily Mail as a source, but two replies to a recent piece on Carillion are worth repeating:

Carillion have been shaky for ages. We were asked if we would undertake a multimillion pound project [for them] as a sub-contractor. Based on some reliable info we said no – thankfully, or their crash and non-payment would have taken us down too.

[They] have been using ‘dodgy’ business practices for years. Undercutting on quotes to the point where competitors know the figure is unsustainable.

Writing that piece Mail City Editor Alex Brummer called Carillion a ‘giant Ponzi scheme…’

Hang on, what’s a Ponzi scheme?

It is a fraudulent investment scheme where the operator promises spectacular returns. These are generated for older investors by money from newer investors, with the operator focusing all his attention on attracting new investors. Ultimately the scheme – named after American ‘businessman’ Charles Ponzi – must fail as the supply of new investors dries up or the operator disappears into the sunset with the loot.

So Carillion was reliant on new contracts to subsidise the old ones?

Yes, that is the allegation and there were enough stories going about to make you think the Government really should have been aware of what was going on. Effectively Carillion was reliant on the cash flow from new contracts to subsidise the losses they had made on previous contracts. And ultimately – like Mr Ponzi’s investment scheme – that proved unsustainable.

Photo © Gordon Brown (cc-by-sa/2.0)

Were the Government to blame?

No, it is difficult to argue that the Government was to blame for Carillion’s collapse. But were Government ministers naïve? That is a very different question.

Last year Carillion issued three profit warnings – as a publicly listed company it had a legal obligation to warn the stock market if its profits were not going to be in line with earlier predictions. City investors and hedge fund managers took notice of these warnings – and the anecdotal gossip of suppliers not being paid on time – and started to sell the shares.

The Government, however, continued to award contracts to Carillion. For example, a week after the first profits warning the Department of Transport announced that Carillion would partner another construction company on a £1.4bn contract as part of HS2.

There was another profits warning in September of last year – swiftly followed by another key infrastructure contract, awarded at a time when Carillion’s CEO and finance director were both leaving. The Government may not be to blame for Carillion’s collapse but it has left senior ministers looking at best naïve and at worst incompetent.

So what happens now?

In the short term leading accountancy firms will be appointed to act as administrators and – ultimately – all of Carillion’s government contracts will need to be re-awarded. However, that is of little help to the company’s 43,000 staff or the thousands of small firms who face an anxious wait to see if they will get paid.

The BBC reported on Tuesday morning that firms working for Carillion on purely private sector projects will have only two days of Government support: one industry group estimates that up to 30,000 firms are owed money by Carillion, with the firm having spent £952m with local suppliers in 2016.

There will also, of course, be a political fall-out from Carillion’s demise: we are almost certain to see calls for all outsourcing in the public sector to end. Infrastructure projects such as roads and hospitals will face long delays while contracts are re-assigned and – as I write this – the Government has announced an ‘urgent investigation’ into the conduct of Carillion’s directors. So it does not look like tomorrow will be a particularly good place for them either.

There will be some winners from the debacle – but there are will be far more losers. And on Friday I will take a much more detailed look at those winners and losers and consider the lessons that might be learned from Carillion’s fall from grace.