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The Political Destruction Left Behind After Carillion’s Collapse

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Tuesday, January 16th, 2018
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Carillion Plc, the U.K. construction and services company that collapsed under 1.6 billion pounds ($2.2 billion) of debt, was hardly a household name. But its failure puts another big problem into Prime Minister Theresa May’s already overflowing inbox.

 While U.K. voters may not know the company, they relied on its products: It built hospitals and roads, maintained prisons and supplied school meals. So the government’s first problem is to ensure that those contracts — there are around 450 of them — continue to function. Then there are pensioners to protect, and suppliers and banks who are owed money. The company employs 43,000 people worldwide, almost 20,000 of them in the U.K.
 The government’s emergency committee Cobra was due to meet to discuss the company’s collapse at 6.30 p.m. in London. In Oxfordshire, firefighters have been put on standby to help deliver meals to the county’s schools. The government said Keir Group Plc would take on Carillion’s role in building the HS2 rail line.
 The longer-term issue facing ministers is that Carillion’s failure could lend weight to opposition Labour Party leader Jeremy Corbyn’s argument that such work should never have been given to the private sector in the first place. Rebecca Long-Bailey, the party’s business spokeswoman, urged the government to take over Carillion’s contracts.

“They must be prepared to bring public sector contracts back in house to ensure public services, employees, supply chain, tax payers and pension fund members are protected,” Long-Bailey said on Twitter.

Frenzied Expansion

Spun off from building-materials giant Tarmac in 1999, Carillion expanded over the past decade through a frenzied acquisition spree, branching out into more services along the way. As successive governments embraced outsourcing to cut spending, it became a leading provider of public services. This exposed it to riskier contracts with narrow margins and large debt financing requirements without ever fully insulating it from the cyclical construction industry.

Carillion tumbles

Carillion’s spectacular fall gathered pace in July after a series of construction contracts soured. The company issued three profit warnings in six months, causing its shares to plummet 93 percent since July 7, giving it a market value of 61.1 million pounds. That same month, it brought in Keith Cochrane as chief executive, who told investors “there is no such thing as a quick fix.”

The rapid demise will hand losses to banks, bond holders and suppliers, with more than half its borrowings, in the form of an 835 million-pound loan, from lenders including Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc.

Dole Out Blame

The political fallout is also gaining momentum. Criticism of the company wasn’t limited to the opposition Labour Party. Even the Institute of Directors issued a statement attacking Carillion’s “highly inappropriate” bonus structure.

Bernard Jenkin, the Conservative lawmaker who chairs Parliament’s Public Administration Committee, told the BBC that Carillion’s failure “really shakes public confidence in the ability of the private sector to deliver public services and infrastructure.”

May’s spokesman James Slack said the company’s management should not profit from failure. Cabinet Office minister David Lidington told parliament that the Offical Receiver, who will oversee the breakup of the company, had the power to impose “severe” penalties for mismanagement. He repeated several times that shareholders, not taxpayers, will bear the brunt of the collapse.

Red Flags

Carillion CEO Cochrane’s warned on Sept. 29 of what was to come, telling analysts the company succumbed to its race to add projects with too many layers of management, causing it to lose sight of the risks and costs involved. Four contracts stood out in the 850 million-pound writedown Carillion booked, including a property development in Doha, two hospital contracts in the U.K., and a road-bypass around Aberdeen.

Though the company held talks over the weekend, appealing to the government for a bail-out, these are rare in Britain: The most notable in recent years took place in 2008 and 2009, when then Prime Minister Gordon Brown rescued the country’s banks, on the grounds that their collapse could have wrecked the economy. Carillion, though big, was not too big to fail.

According to Alan White, author of “Shadow State: Inside the Secret Companies that Run Britain,” concern has been growing inside government for some time about how outsourcing was working.

“Carillion could prove something of a step change in terms of how the market is perceived,” he said in an interview. “There have been scandals before, but none of have brought into relief just how important these companies now are to our public services.”

— With assistance by Christopher Jasper, Thomas Seal, Tom Freke, and Tim Ross

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