Carillion on the brink as UK government prepares for firm’s collapse

Construction firm Carillion is on the brink of collapse, raising fears for the future of a host of major government projects and day-to-day services, from schools to hospitals, prisons and the army.

The Cabinet Office hosted emergency talks on Sunday aimed at mapping out a future for a company that employs 43,000 people – including nearly 20,000 in the UK – but the meeting broke up without a rescue deal being announced.

Q&A

What is Carillion?

What is Carillion?

The Wolverhampton-based firm is second only to Balfour Beatty in size.

It was spun out of the Tarmac construction business in 1999 and steadily took over rivals, such as Mowlem and Alfred McAlpine. It expanded into Canada and built a construction arm in the Middle East.

Carillion then diversified into outsourcing, taking on contracts such as running the mailroom at the Nationwide building society to helping upgrade UK broadband for BT Openreach. It took over running public service projects, ranging from prison and hospital maintenance to cooking school meals. Last year a third of its revenue – £1.7bn – came from state contracts. It employs 43,000 people, with more than 19,000 in the UK.

Notable construction projects

• GCHQ government communications centre in Cheltenham (2003)
• Beetham Tower, Manchester (2006)
• HS1 (2007)
• London Olympics Media Centre – now BT Sport HQ (2011)
• Heathrow terminal 5 (2011)
• The Library of Birmingham (2013)
• *Liverpool FC Anfield stadium expansion (2016)

Current projects

• Midland Metropolitan Hospital in Smethwick (due 2019)
• Aberdeen bypass (due 2018)
• Royal Liverpool University Hospital (due 2018, behind schedule)

Government contracts

• NHS – manages 200 operating theatres; 11,800 beds; makes 18,500 patient meals a day
• Transport – “smart motorways” to monitor traffic and ease congestion; work on HS2; track renewal for Network Rail; Crossrail contractor
• Defence – maintains 50,000 armed forces’ houses; a £680m contract to provide 130 new buildings in Aldershot and Salisbury plain for troops returning from Germany
• Education – cleaning and meals for 875 schools
•Prisons – maintains 50% of UK prisons.

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Accountancy firm EY has been drafted in to manage a potential administration process, which could be triggered as soon as Monday morning.

Trade unions branded Carillion a “textbook example of the failures of privatisation” and urged the government to step in to guarantee jobs and services.

Opposition MPs are expected to question the government on Monday on why it awarded Carillion lucrative public sector contracts, including £1.4bn of work on the HS2 rail project, even after it became clear the company was struggling.

The government has insisted it has contingency plans to protect vital public services provided by Carillion, such as cleaning and catering in NHS hospitals, the provision of school dinners in nearly 900 schools and prison maintenance.

Some of the Wolverhampton-based company’s partners on multimillion-pound projects have been primed to take over the firm’s share of their joint-venture contracts.

Thousands of staff could be transferred to new employers under transfer of undertakings (TUPE) regulations that preserve staff pay and conditions when a business changes hands.

The Pension Protection Fund (PPF) is also on alert to take on the multiple pension schemes, which have 28,500 members and a £580m deficit which, experts predict, could balloon to £800m if the firm collapses.

Carillion stunned the City of London by issuing a profit warning in July, an announcement that sent its shares tumbling 39% and prompted the resignation of chief executive Richard Howson, who earned £1.5m in pay and bonuses in 2016.

It has since downgraded its profit forecasts twice more. Four months ago, it reported a £1.15bn loss for just six months, after taking hits of more than £1bn on unprofitable contracts.

Its bank lenders – including HSBC, Barclays and Santander – are unwilling to inject more money without a government bailout for a company with debts of £900m and whose stockmarket value is just £61m. Three years ago, Carillion was valued at £1.6bn.

The Cabinet office minister, David Lidington, has been leading the crisis talks, assisted by the civil service chief executive, John Manzoni, a former board member at BP.

The shadow health secretary, Jon Ashworth, urged his opposite number, Jeremy Hunt, to make a public statement to guarantee that hospital services would not be affected.

Fellow Labour MP Stella Creasy said the affair raised concerns about other public-private contracts, which she said were a “way of transferring the risks arising from major projects to the private sector”.

Trade unions called on Downing Street to reassure workers and the public. “There are not only thousands of jobs on the line here,” said the GMB national secretary, Rehana Azam. “Crucial services that hundreds of thousands of people rely on every day are at immediate risk.

Q&A

Why is Carillion in trouble?

How did the company get into trouble?

Companies like Carillion have to keep projects on budget and keep winning new contracts. When one of those fail, problems loom.

Carilllion shocked the market in July with a massive profit warning, writing down its value by £845m, all related to key contracts. Two more profit warnings followed and the company admitted it needed cash quickly not to breach bank loan terms

At the start of 2017 shares were changing hands at 240p. This weekend they were 14p.

With debts of £900m it has been trying to arrange a £300m cash injection. However, lenders will not provide the cash without government guarantees.

What happens to the pension scheme? 

Carillion has a £580m pension scheme deficit. If it collapses the government-backed Pension Protection Fund would take over the scheme, although the liability would swell, to £800m. While the Fund provides a safety net for millions of workers, there are limits on what it can pay out. 

Who runs Carillion?

Chief executive Richard Howson quit after the July profit warning, with the new boss yet to start. It has been run by engineering industry veteran Keith Cochrane and the group’s chairman Philip Green, the former boss of United Utilities. Sally Morgan, who was director of government relations for Prime Minister Tony Blair, is also a director.

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“The prime minister must stop dithering and delaying, and immediately launch a taskforce bringing together employers and unions to safeguard these vital jobs and services.

The TUC deputy general secretary, Paul Nowak, said Carillion was a “textbook example of the failures of privatisation and outsourcing”.

As well as managing services across education, the NHS, the prison service – and working on transport projects – Carillion is a major contractor building the Midland Metropolitan and Royal Liverpool University hospitals. The new Liverpool hospital, a £335m flagship development which is unfinished and overdue, is among projects that have caused problems for the company.

One former banker with experience of similar public-private partnership contracts warned that the government may have limited legal powers to intervene to ensure these two projects were not severely disrupted. He said costs were now likely to escalate.

“My experience in work-outs of this kind is that the cost of completion spirals out of control,” he said. “Any replacement construction company will immediately declare that half of what has been done so far is defective and ‘you might as well start from scratch’.”

Independent pension expert John Ralfe said that the pension deficit was likely to swell to £800m when it is valued for the purposes of the PPF.

“The good news is that the 28,000 Carillion pension scheme members would receive PPF compensation – around 85% of the pension promise end-to-end – and the PPF surplus is big enough to cope,” he said.

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