Business news stories in January are often dominated by retailers and their performance during the all-important Christmas sales season, but this year the ups and downs of spending season has been dwarfed by the collapse of Carillion.
Noticed by 55% of the population, the failure of the construction and facilities management company is the highest profile business story in the past two and a half years. This makes it more noticed than the collapse of Monarch Airlines and on a par with the failure of BHS and the decision by EDF to build Britain’s biggest nuclear reactor at Hinkley Point.
What went wrong?
On 15 January banks pulled the plug on Carillion. A senior director at RBS said that the bank would not ‘throw good money after bad’.
The scale of the collapse is still being assessed, but it is clearly titanic. It puts 43,000 jobs at risk; tips the company’s pensioners into the Pension Protection Fund with a deficit of c£1bn; leaves banks about £1.3bn out of pocket; and punches a gaping hole in a swathe of government contracts from maintaining barracks for the Ministry of Defence to cleaning hospitals and running prisons.
Even more toxic is the, still unquantified, impact on up to 30,000 small firms in its supply chain which are owed money. Court documents suggest that creditors are likely to get only 1p in the £1. Even with banks committing to help struggling businesses in Carillion’s supply chain, many are expected to go to the wall. Andy Brady, MD Flora-tec, a company owed nearly £1m by Carillion said: “We’ve got a profitable business but we can’t trade out of a black hole of £1m.”
Andrew Adonis, the former Labour transport minister, said: “It is a bit like Lehman Brothers [the Wall Street investment bank that collapsed in 2008]. You don’t know what the impact will be. A very large part of Carillion’s work was project management where subcontractors do the work, but these subcontractors don’t know if they will be paid.”
Why has it touched a nerve with politicians?
Politicians are scrambling to keep ahead of this story because they know that the Carillion collapse impacts the day-to-day running of public services. The Carillion meltdown reflects badly on both company management, which is accused of crashing the business, and successive UK governments, which facilitated the company’s explosive growth with Private Finance Initiative (PFI) infrastructure deals and continued to award these deals even after it was clear that the business was in jeopardy.
The Carillion crash and subsequent profit warning from Capita, another major PFI-focused business, also make clear, what many have thought for some time – there is something rotten at the heart of PFI.
The UK has lead the world on public/private financing with more than 700 operational PFI deals. The country’s exposure to these deals is staggering. Annual charges alone amounted to £10.3bn in 2016-17 (0.5% of GDP). Over the next 25 years, assuming no further deals are launched, the charges will be at least £199bn. Yet none of these PFI deals are visible on the government’s balance sheet. It is what the Office of Budget Responsibility and the International Monetary Fund describes as a ‘fiscal illusion’.
For the past twenty years, the Treasury has argued that PFI contracts deliver better infrastructure and services for the population than the Government because private companies have specialist skills that government cannot replicate efficiently. It also says that binding contracts incentivise private companies to meet construction budgets, curb running costs and maintain services better than government departments.
However, the National Audit Office (NAO) published a report only days after the collapse of Carillion indicating that there is little evidence that handing public contracts to private organisations offers value for money for taxpayers. Meg Hillier MP, who chairs the public accounts committee, said: “After 25 years of PFI, there is still little evidence that it delivers enough benefit to offset the additional costs of borrowing money privately. Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change. We need more investment in our schools and hospitals but if we get the contracts wrong, taxpayers pay the price.”
The short answer – everybody.
The reputations of Carillion’s top managers are likely to be tagged with the phrase ‘asleep at the wheel’. Carillion’s workers are out of jobs. Carillion’s suppliers face hardship and many may go out of business. Carillion’s auditor faces an investigation by the Financial Reporting council about its role in the company’s failure. Politicians of all parties, who supported PFI, for the past twenty years will have to defend or dismantle a system of public financing that delivers questionable benefits to the UK population. And, of course, the taxpayer will have to pick up the bill, at least in part.
Minimising the damage
The damage to Carillion and its supply chain has been done, even though we will have to wait to see how many people it affects as the aftershocks role down the line.
The damage to politicians, already the least trusted profession in the UK, depends on how they react to this mess. Nothing will prevent the Carillion collapse from harming the reputation of the political class, but it can minimise the damage by showing real leadership. Politicians must lead by: