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Can lessons be learned from Carillion’s collapse?

Terry smiling headThe collapse of Carillion, one of the biggest corporate failures of modern times, has understandably prompted concerns over the implications for all those caught up in its extensive web of contracts.

Some work appears to have halted, including the Edinburgh Waverley platform extension, though this may be temporary. The word from both the UK and Scottish governments is that contracts such as the Aberdeen by-pass and HS2 will be fulfilled by other companies, even if this means a re-tendering exercise.

That’s the good news. Ensuring there is a smooth transition is another matter and there can be no guarantees for all 20,000 UK employees of Carillion.

Shareholders who bailed out on the profit warnings may have cut their losses, including the Scottish investment firm Kiltearn which is understood to have reduced its holding just before Christmas. Some may not have been so quick and will have suffered a wipe-out of their investments.

Almost every big insolvency in recent years has been a move towards administration rather than liquidation so it is extremely rare for a company of this size to head straight into a liquidation. As David Birne of HW Fisher & Company says, this suggests there is little, if anything, of value within the company to be saved.  It will also mean huge breach of contract penalties.

The political knives are now being waved in the direction of government ministers who not only continued to award £2bn of contracts to this company knowing it was in trouble, but also failed to act in response to warnings from the Commons Work and Pensions Select Committee over the company’s spiral of debt.

Calls for nationalising the company are a bit of a red herring. While comparisons are being made to the banks and their “too big to fail” mantra, the construction industry is notoriously cyclical and, sad as it is to see any company fail, it is also the case that, unlike the banking system, the functioning of the economy is not jeopardised by building companies going bust.

However, it will raise more questions about the public-private partnerships used to fund major public sector projects. Carillion was a major recipient of such funds. This however, is a policy which has produced some successes and cannot be wholly blamed for the crisis. More immediately, governments need to look at their procurement policies and why Carillion was still receiving contracts after issuing a series of profits warnings.

This failure should stand as a symbol of how trust in big firms should not be taken for granted. Stephen Kemp of the Scottish Building Federation neatly sums it up by saying that when it comes to awarding public sector work, big is by no means always best, and can also create big risks for government when something like this happens.

He argues that it may require the procuring authority to do more work to manage the contract across multiple contractors. Spreading the work and associated risk across multiple smaller companies would not only be good for the industry – it should deliver better outcomes for the taxpayer.

So, why did Carillion fail?  One cause could be the result of its acquisition strategy into delivering a range of services with little fat that could be cut to provide operating efficiencies. As Russ Mould of AJ Bell says, Carillion was juggling complex, long-term contracts across a range of disciplines and geographies, a feat which ultimately proved beyond it, especially once a small number of big projects went wrong.

Carillion also failed to heed the warnings over taking on too much debt. While some sectors can cope with it because of strong cash flows, construction firms tend to avoid it because of the potential for contract over-runs, bad weather hold-ups, etc. They also bid on tight margins, providing little interest cover.

The company seems to have been setting itself up for a fall by taking on debt and paying a chunky dividend to shareholders. As one analyst said, this “drew a lot of income-seekers to their doom”. 

Attention will also turn to why in 2016, former chief executive Richard Howson received a £245,000 bonus and £346,000 in long-term performance incentives which helped to take his total package to £1.5 million. That’s a big reward for a company going nowhere.








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