Recriminations fly after Carillion collapses

Recriminations flew on Monday after Carillion, one of the UK government’s biggest contractors, collapsed, threatening the jobs of more than 43,000 employees as well as hundreds of subcontractors and smaller businesses.

The Wolverhampton-based company, which had racked up more than £900m in debts and a £587m pension deficit, had held last-minute talks with the government and bankers at the weekend but failed to negotiate a deal.

A spokesman for prime minister Theresa May said the collapse was “extremely regrettable” and the priority was “to keep public services running”. All Carillion staff should still come to work, the government said.

Philip Green, the company chairman, said he understood the government would provide funding to maintain public services carried on by Carillion staff, subcontractors and suppliers.

The collapse will have implications throughout the UK, where Carillion is the biggest manager of military bases for the Ministry of Defence as well as providing facilities management for hospitals, courts and schools, and work on key infrastructure projects.

Construction experts have warned that the collapse could hit thousands of subcontractors owed money by the group and hundreds of smaller businesses could collapse.

“The fallout from this could be horrendous,” said Rudi Klein, chief executive of the Specialist Engineering Contractors’ Group. “The domino reverberations as it travels down the supply chain could be unprecedented.”

Whitehall has been preparing to take contracts in-house or ask Carillion’s joint venture partners if they can take them on. Kier Group has already said it has contingency plans to take on Carillion’s critical work on the new HS2 railway line and on Britain’s motorways.

Amey, which is in a joint contract with Carillion to provide housing for military servicemen and women, said it would take over management of the contracts.

Balfour Beatty, which is in a joint venture with the company on three projects, said it would continue the work but would need to inject £35m to £45m in cash in 2018 to cover Carillion’s share.

But questions will be raised as to why the government kept awarding contracts even after the company’s problems came to light. The Public Administration and Constitutional Affairs committee of MPs said on Monday it would hold an inquiry into government sourcing practices.

Carillion’s rising debt. Average net borrowing

Rebecca Long-Bailey, shadow business secretary, said the government should step in and take contracts back into public control where possible.

She said there were “extreme concerns” about why the government issued contracts worth £2bn after Carillion issued a profit warning last July. She called for a “full and transparent” investigation.

Steve Webb, a former pensions minister, asked why the company had continued to pay dividends as its pension deficit grew.

“[The] 2016 Carillion annual report says dividend ‘has increased in each of 16 years since formation of company’,” he tweeted. “Is this really acceptable alongside a pension fund deficit over half a billion pounds?”

Mick Cash, general secretary of the RMT union, said: “The blame for this lies squarely with the government, who are obsessed with outsourcing key works to these high-risk, private enterprises.”

Carillion had been fighting for its life since July when it warned it was losing cash on key contracts and debt was rising. It said then it would have to write off £800m and suspend its dividend, moves that helped lead to the departure of former chief executive Richard Howson.

Mr Howson ran the company from 2012 until last July and received £1.5m in pay and bonuses in 2016. He left in autumn. Carillion is continuing to pay his £660,000 salary and £28,000 benefits until October.

By Friday, the company’s share price had fallen 90 per cent and its market capitalisation from £2bn in 2016 to just £61m, meaning its debts — £586.5m in 2016 — and its pension liability far outweighed its equity value. With the company haemorrhaging cash and the scale of the problems unknown, banks refused to extend an urgently needed £300m payment.

Shares in Carillion were suspended from trading on Monday.

The company’s problems were caused in part by cost overruns on three construction contracts for the government: the £350m Midland Metropolitan Hospital in Birmingham, the £335m Royal Liverpool University Hospital, and the £745m Aberdeen bypass.

About 28,000 members of Carillion’s 13 UK pension schemes will now be transferred to the Pension Protection Fund, the lifeboat for collapsed companies. Pension scheme members who are transferred to the PPF and not yet retired will receive 90 per cent of the pension they were expecting, up to a cap.

Members already receiving their pensions will continue to receive 100 per cent of their benefits but may receive lower annual increases. The pension that a surviving spouse could inherit may also be smaller.

The Carillion pension scheme will be one of the largest the PPF has had to take over. In 2017, the company estimated its pension deficit at £587m but on Monday, Carillion’s pension trustees estimated the scheme’s “PPF deficit” at up to £900m.

A PPF spokesperson said: “We want to reassure members of Carillion’s defined benefit pension schemes that their benefits are protected by the PPF.”

David Lidington, Cabinet Office minister, said: “It is regrettable that Carillion has not been able to find suitable financing options with its lenders but taxpayers cannot be expected to bail out a private sector company.”

The approach to the High Court for compulsory liquidation of Carillion was made on Monday morning and the accountancy firm PwC was appointed administrator.

This article has been amended to reflect that Carillion has an estimated pension deficit of £587m

This post originally appeared on Financial Times

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