Carillion: A reminder of how and why a giant fell

 

Carillion's collapse led to the largest ever trading liquidation in UK history. We give a quick recap on the what, how and why behind it.

The collapse

  • On 10 July Carillion 2017 announced that its contracts were worth £845m less than stated in its accounts. Share prices collapsed.
  • On 29 September 2017 a further profit warning of an additional £200m meant that Carillion’s losses in 2017 wiped out the company’s previous seven years of profits. A further profit warning was issued in December 2017.
  • On 13 January 2018 the firm made a final request to the Government for £160m, including £10m immediately. The Government refused and two days later the company was in liquidation.

The size of the collapse

When it stopped trading Carillion had around 450 government contracts, in everything from roads to local authority civil engineering, to civil aviation and prisons. 

Its fall has cost the taxpayer in excess of £150m at least, and that is in direct costs, according to Unite.

Accountants PwC have been paid in excess of £50m to act as ‘special managers’ to break up the company, make workers redundant and transfer outsourced contracts to new providers.

At the time of its final collapse Carillion had total liabilities of £7bn,including £2.6bn of pension liabilities, and just £29m left in the bank

It directly employed 19,000 workers with an additional 35,000 people working for the company via sub-contractors and supply chain. Build UK, the leading representative organisation for the construction industry, has suggested that Carillion’s supply chain involved 30,000 companies. 

Failing contracts

Some have said the firm was effectively insolvent since at least 2016, as it continued to chase work at the lowest prices to cover existing problems, putting more risk onto its books. 

Unite has given the example of the Royal Liverpool Hospital project, which was projected to make Carillion a 5.5% profit. However a peer review of the project indicated a loss of 12.7%, making the company’s accounts £53m worse.

This contract fell behind schedule, cracks appeared in concrete beams and claadding was revealed to be unsafe and did not meet fire safety standards.

Some have suggested it could cost £100m to put the problems right - a sum the hospital trust has not rejected. The initial contract to build the hospital was for £325m.

Failing leadership

The accounting issues around the firm's failure have also raised concerns, with furious unions calling for a public inquiry and criminal investigations.

Putting the most forgiving interpretation on the situation, the board seem to have been paralysed by the fear of the frightening the market and therefore felt unable to take action. 

In 2013 a review of the firm's pension scheme found that the various Carillion schemes had deficits of £439m, and the triennial review for December 2016 was expected to identify a deficit of £990m. However the board declined to make substantial payments to bring down this debt.

Despite this, the firm continued to pay dividends to shareholders and pay increases, including major ones to bosses.

Chief executive Richard Howson received basic pay increases of 8% in 2015 and 9% in 2016 and chair Philip Green saw his fees increase by 10% in 2016, with his salary increasing from £193,000 to £215,000.

The workforce received a 2% pay increase of just in 2016.

In 2017 shareholders were awarded a record dividend of £79m, £55m of which was paid in June, just a month before Carillion’s first profit warning. This in a year when EY were brought in to analyse the precarious financial situation and suggest remedies.

In mid-December 2017, EY gave two options to the board.

1) break up the firm and sell off the profitable parts, placing the rest of the company into liquidation to generate £364m to pay into pension funds or debts

2) involuntary liquidation with little or no money for creditors, pensioners and administrators.

The board rejected EY’s advice and allowed Carillion to collapse.

Failing accounting

Unite reports that Carillion’s 2016 balance sheet was propped up by £1.6bn (35% of the entire company’s assets) of 'goodwil' - described as 'an intangible asset which includes a company brand and the workforce’s skills and experience'. 

Carillion’s accounts also included considerable amounts of construction revenue that was ‘trade not certified’ - revenue that clients had not yet signed off and so there was no guarantee it would ever be secured.

Companies could be paid earlier through Carillion’s early repayment facility (EPF) which was provided by the banks; however, this meant it did not receive 100% of what it was owed.

According to Unite, this amounted to an additional financial liability to the banks of £498m, placing further pressure on struggling margins. 

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