News broke yesterday in the UK that Carillion, a British multinational facilities management and construction services company which employs over 40k people worldwide, had issued a statement saying that rescue talks with stakeholders including the British government had collapsed.
Carillion employs 20,000 people in the UK and has debts totalling around £2bn and a shortfall of almost £600m in its pension fund.
Roughly three quarters of Carillion’s sales come from the UK, where it has hundreds of contracts with the government.
The company builds infrastructure for high-speed rail and power distribution projects and provides government services such as road maintenance, hospital management and school lunches. It also maintains approximately half of the UK’s prisons as well as roughly 50,000 homes for the Ministry of Defence.
Last year, the company alerted investors that it was short of cash and would sell assets to raise money and despite three previous profit warnings, the government gave Carillion three multibillion UK contracts last year.
The government had also been working on contingency plans since 2017 in preparation for a potential collapse. New government contracts with Carillion were structured as joint ventures in order to ensure that other partners would be able to step in to complete the necessary work.
The wider policy of using private sector firms to deliver public services has now come under the microscope as Carillion’s collapse leaves the UK government faced with questions as to why it kept giving the company contracts, even after three profit warnings.
The Conservative Party chair of the Public Administration Committee has stated that he is considering launching an inquiry into how the government procures services.
Even though the UK government has refused a bailout, which is good news for tax payers, it has promised to provide the funds to keep the company’s public services operational, including school lunches and prison management. In addition, the government will still be paying the cost of receivership, which will include the cost of re-tendering contracts.
The roughly 20,000 UK-based Carillion employees now face an uncertain future, although the government has promised workers that they will continue to be paid. These payments would come from the Official Receiver, an agent of the Insolvency Service, which is responsible for examining the causes of corporate failure. This will include investigations into directors’ conduct and, according to a government statement, “the business, dealings and affairs of the company.”
In addition, pensioners can now expect a reduction in their retirement incomes as Carillion’s 13 pension schemes are moved into the Pension Protection Fund.
There are concerns about a big ripple effect in the UK economy in the aftermath of Carillion’s collapse. Carillion’s failure will likely lead to disruption across the supply chain and create big problems for sub-contractors who relied on business from Carillion. The collapse could trigger a number of insolvencies across the construction sector, while this sector already experiences the highest levels of insolvency per year in the UK.
It is likely that Carillion’s suppliers will have automatically assumed that a company of that size would be rescued. As a consequence, many will not have prepared themselves for its collapse and they will struggle to find alternative contracts. Many Small Medium Enterprises are therefore likely to face collapse in the near future.
Carillion is now facing public scrutiny and questions regarding its conduct and management in the face of an impending collapse. However, whether there will be any real investigations into these matters remains to be seen.
What Carillion’s collapse highlights is an endemic problem in the UK economy, which has never gone away since the 2008 financial crisis. Whilst commentators and analysts will continue to blame such woes on Brexit, the reality is that QE and ZIRP have and will continue to wreck western economies. When a corporation such as Carillion is forced into liquidation, it is a signal that the wheels are beginning to fall off the UK economy in an overt way and which can’t be hidden by bloated stock markets and questionable economic statistics.