Carillion: the sudden demise of a mighty name raises many questions

The dramatic demise of the giant British facilities management and construction services company Carillion has left many thousands of people unemployed, a large number of suppliers potentially out of pocket, and many projects unfinished; a dire and troubling situation by anyone’s standards.

Before the dust had even settled harsh questions were being asked concerning the various red flags that had been ignored, and the wisdom of letting one company service so many public sector contracts. Meanwhile over 40.000 workers around the globe – just under half of them based in the UK – plus thousands of retired staff, face the stress of losing not only their jobs, but potentially their salaries and pensions too.


Carillion’s climb to dizzy heights
The company was founded in the summer of 1999, a breakaway from the very well established Tarmac group which was left to focus on producing building materials only. The twenty-first century saw Carillion, now with John McDonough in the CEO seat, grab public service contracts in rail maintenance, school meal provision, support services for prisons and motorway traffic control, to name just a few.

At the same time the company was making multi-million pound deals acquiring a good range of other businesses both at home and abroad; some were rivals or from familiar sectors, others were new and unknown. It seemed like nothing could satisfy this company’s thirst for growth, but the first faint rumblings of trouble were building, soon to become a full blown thunderstorm.


The mighty start to fall
Apart from a couple of relatively minor allegations around worker blacklisting and compensation schemes things seemed to run pretty smoothly for Carillion, at least until summer 2017 when a nearly £900 million charge was made against the construction arm, triggering Richard Howson to give up his director status and shift from CEO to operations director. Other directors and officers quit, amidst further revelations of massive losses in other sectors of this giant company.

Keith Cochrane, acting CEO, looked to blame contracts which had been fulfilled, despite it quickly becoming clear they were actually unprofitable. For this he accepted an over complicated management system, poor planning and being too trusting were to blame for such shortfalls, compounded by their throwing endless cash at the problem to fulfill promises made. However, other evidence suggests this generally disorganised approach had been pretty standard behavior for several years.


Warning signs ignored
Selling part of a company portfolio is hardly unusual, but when it involves taking a huge hit on value in order to raise cash to stay afloat, which was the case when shedding both domestic and international assets in the autumn of 2017, surely alarm bells should have started ringing; especially, perhaps, as contracts with very healthy budgets were still being added to their books throughout the year before.

Several profit warnings and rapidly tumbling share values continued through the rest of the year, and union workers expressed concerns about the company’s financial future. Less than a month later the crisis point hit. Carillion was reported to be just about broke, the government declined the pleas to bail the ailing company out, and hundreds of thousands were left to fret about wages, pensions, and outstanding invoices. Ultimately the debt owing is at least £900m, with around another £600m in pension debt on top.


Where does the blame lie?
There are plenty of potentially guilty parties, from the directors, who enjoyed top level salaries both in post and for several years afterwards, to the UK government departments who generously sent so much work Carillion’s way, arguably regardless of signs that this may not be such a good idea. The third wheels in this story are the auditors.


Regular audits hadn’t revealed anything to worry about, even in the final set of accounts which covered the year ending December 2016. KPMG had been on board as auditors for nearly 20 years, so it’s fair to assume their findings and reports were trustworthy, yet a few months into 2017 the first sign of trouble emerged with a surprise profit warning. Peculiarities such as ‘goodwill’ being listed as a billion plus pound asset to be used as security against loans suggests things were not exactly straightforward.

Financial recklessness, say borrowing more cash when pension payments are not being serviced is another possible reason for the end result, but there could be legitimate blame allocated to the officials who continue to push government work contracts Carillion’s way, regardless of the now documented concerns that the business was in trouble.


The future is unknown
It seems likely that Carillion’s situation will leave the government facing many searching questions, and perhaps even change future strategies when allocating work to private companies. In the short term, the future looks pretty bleak for creditors who are unlikely to recover very much of the money they are owed, and could easily face financial ruin as a result; and while the public sector employees are likely to be paid by the government, others, including apprentices, are still in limbo. Whatever lies ahead, it is likely there have been some lessons learned here, and more than likely more to come.


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