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A crisis that may spell the end for PFI

The firm that runs schools, hospitals and roads for the British government has collapsed. The consequences may be far-reaching. Cris Sholto Heaton reports.

879-GCHQ-634
The headquarters of GCHQ, the UK's surveillance service, were built by Carillion

The firm that runs schools, hospitals and roads for the British government has collapsed. The consequences may be far-reaching. Cris Sholto Heaton reports.

What was Carillion?

A construction and support-services company that did everything from building railways to maintaining hospitals for the British government. The firm went into liquidation on Monday after lenders refused to provide further funding and the government rejected pleas for a bailout. Carillion was known to be struggling it put out a profit warning in July, causing its share price to drop by 75% in five day but its rapid collapse still came as a surprise.

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Efforts to put the business into administration, which would have allowed it to continue operating while attempting to restructure it, failed in part because there was so little remaining funding that potential administrators refused to act because they might not get paid, the Financial Times reports. The firm is thought to owe up to £2bn to 13 banks (exact figures vary), but had just £29m in cash on Monday.

Was it a big company?

Not a giant by modern standards. Before July's profit warning, it had a market capitalisation of under £1bn and even two years ago it was less than £2bn. Carillion's 2016 revenues came in at £5.2bn, but net profit was just £130m. However, it employed 20,000 people in the UK (43,000 globally), maintained 50 prisons, provided 11,500 hospital beds, served 32,000 school meals a day, had a large share of the £1.4bn contract to build the HS2 rail link, and much more.

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All told, Carillion had won around 450 contracts to provide services for the government and its fortunes were closely tied to the state: Britain accounted for around three-quarters of its business (£3.2bn) and more than half (£1.7bn) of that came from the government.

What went wrong?

For full details, we'll have to wait for the inevitable inquiries: ministers already want to fast-track a probe into the conduct of the firm's directors. But the outlines seem clear. Carillion ran a lot of big projects with low margins, which it gained through tenders that were predominantly won on price. When some of those proved more costly or troublesome to deliver than planned, it found itself in serious trouble.

Several years of ambitious debt-fuelled acquisitions may also have caught up with Carillion. The firm was spun off from construction-materials group Tarmac in 1999 and went on to buy several other similar firms, including George Wimpey, Mowlem and Alfred McAlpine, eventually growing into the UK's second-largest construction firm. The shopping spree peaked when it tried and failed to buy Balfour Beatty, its larger rival, three years ago.

What will the consequences be?

Thousands of Carillion employees may lose their jobs. Smaller firms that served as subcontractors will not be paid and will lay off staff or go bust. Larger firms such as Balfour Beatty and Galliford Try that participated in joint ventures with Carillion will have to cough up tens of millions more to complete the projects (although they may also receive payments that would previously have gone to Carillion).

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The pension-protection fund (PPF) will have to take on responsibility for Carillion's pension scheme and some members will see their benefits cut in line with PPF limits. Banks will lose money on some loans and shareholders will get nothing. The government will need to step in to make sure that services Carillion provided are still delivered and may have to spend more to make sure that happens.

Will there be political repercussions?

There are questions about why the government kept awarding contracts to Carillion (most notably the HS2 contract) even when it was clear that the firm was struggling. Perhaps it didn't understand quite how dire the position was. Maybe it thought awarding Carillion new contracts would help it keep going. Possibly the procurement process did not adequately assess the winner's ability to deliver.

None of these explanations are encouraging. What's more, Carillion's demise follows lesser problems at other outsourcing firms, including G4S, Serco, Mitie, Capita and Interserve. All these cases point to issues with public-private partnerships, private-finance initiatives and outsourcing of public services.

Why are they under threat?

These arrangements are supposed to be win-win deals for both the public and private sector but they often don't end up that way. Either the private firms make decent returns and are accused of profiteering from the taxpayer or they bid too aggressively and suffer losses.

It's not easy to agree deals that seem financially fair to both sides and also deliver good results or services. Labour, under Jeremy Corbyn and John McDonnell, is strongly opposed to these arrangements. Carillion's collapse has given it further ammunition.

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