Carillion has been put into compulsory liquidation, leaving debts of over £1 billion and a pensions deficit of £1 billion. 20,000 people may lose their jobs directly, and tens of thousands will be put at risk indirectly as suppliers write off millions of pounds.
How did the darling of PFI, with millions of pounds of government projects on the books, fail so spectacularly? The select committee who took evidence call the directors "a series of delusional characters maintain[ing] that everything was hunky dory until it all went suddenly and unforeseeably wrong." They said, "Everything we have seen points the fingers...to the people who built a giant company on sand in a desperate dash for cash."
The directors must have known something was up. Until last year their bonuses could be clawed back - in 2017 they changed the rules to make that almost impossible. They also stopped paying into the company pension fund. This was the year that they and the auditors, KPMG, signed off the company with a clean bill of health, despite knowing of £180 million in unpaid bills and that £1.57 billion of the companies total assets was 'goodwill'. Astonishingly, even though Enron took its auditors with it (Arthur Andersen, one of the 'big five' global accountancy firms), KPMG (one of the four now left) seem to have learned nothing - they are now being investigated.
How could this collapse happen? In part it is due to the government's obsession with PFI. When large contracts are put out to tender the bids will include an internal bid. However figures are skewed to favour the contractors - often the assumed risk is adjusted until the external bid comes in under the internal one. If this wasn't done then the public sector bid would always win, as the government can borrow at a much lower rate than private companies.
For example, one evaluation projected risks of £105 million if the public sector took the contract, but only £18 million for PFI - handily making the PFI option £0.6 million cheaper than the public alternative. In another contract the PFI bid was given a 15 percent "optimism bias" adjustment, which handily took it a sliver (0.03%) under the public sector bid.
In part Carillion's collapse is due to the company's culture, seemingly unable to take lessons from Enron's collapse. Believing that simply moving money around is the same as earning it, using the income from one contract to pay the bills outstanding from the previous contract - and the directors creaming off a nice chunk for themselves.
The government has clearly been complicit in allowing this to happen. To ministers' credit, when the collapse came they stood aside and didn't try to rescue the company. Carillion's directors had put together a last-minute 'rescue plan', demanding a bailout of £160 million from tax-payers' pockets, they were rebuffed.
Will ministers be able to tough it out again if Virgin Care goes belly up? Virgin Care has most of the NHS PFI contracts (worth £1 billion last year), but is running at a loss and most of its assets are 'intangibles' (e.g. software).
What about the outsourcing specialist, Capita, which has 50,000 employees and 292 public service contracts? It has expanded in exactly the same way as Carillion, with its own increasing pension deficit - even as dividends and bonuses are being handed out. Capita has just lost 48% of its value after announcing a second profit warning, its capitalisation is down by 75% since 2013 (a loss of £5.7 billion).
Of equal concern are the knock-on effects of Carillion's meltdown. Someone will have to take over Carillion's contracts, the UK economy will have to absorb a debt write-down of £1 billion, and Carillion's ex-employees will need to adjust to losing their pensions. All this and Brexit is only months away with no trade agreement in sight.
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