HS2 builder Carillion's finances go from bad to worse – but it's too big to fail

These businesses keep getting into trouble, but they keep on winning contracts to do important work for the state

Poor stock: In spite of its unsound financial position, Carillion carries out a lot of work for the Government (Reuters)

The situation at high-speed rail contractor Carillion has gone from bad to very bad very quickly, to the extent that it has had to go cap in hand to its banks.

Having first issued a profit warning in July, the company says its financial situation has deteriorated still further. It has struggled with a disposal programme, margins have not been all they might be on some UK contracts, and a big Middle Eastern project has been put back.

Thanks to these issues debt will be higher and earnings lower than in the already grim picture the company painted in the summer.

Carillion’s lenders, who must be having a severe case of the shivers at this point, have agreed not to test its finances against the loan covenants the two sides agreed upon – because Carillion will be in breach of those conditions by the end of the year.

But if its banks have the shivers, ministers must be reaching for their valium tablets.

In addition to building railways and roads, Carillion transports patients to and from hospitals, looks after military housing, and is behind a string of public-private partnerships. And those functions are just at the tip of a very big iceberg.

The company’s tendrils extend deep into the British state. The Government needs those lenders to stay supportive because if they don’t, guess where its executives will rock up next?

Anticipating situations like this, the National Audit Office (NAO) issued a report four years ago warning that businesses like Carillion had become “too big to fail” – just like the banks, having become, in effect, quasi monopolies funded by the taxpayer.

Labour MP Margaret Hodge raised alarm about the issue while serving as a doughty chair of the House of Commons Public Accounts Committee.

But if her concerns, and the NAO’s report, were noticed by ministers, there isn’t much evidence they gave them anything other than a cursory overview.

Which leaves a very unhappy situation.

Normally you would expect the Government to have asked whether it really wanted to give a project of the importance of HS2 to Carillion given the state it was in.

But the obvious answer to that question is this: “We’d better because if we don’t keep chucking work their way we’re all up the creek.”

So Carillion won its HS2 work a matter of days after the first profit warning, and was able to report further contract wins after that. If it hadn’t, if the work dried up, its situation would be worse still, and the consequences of that are enough to make you shudder.

Companies like it are aware of this. They understand the milieu in which they operate, and the fact that they are too important to be allowed to get into real trouble.

Which raises another question: to what extent does this colour their decision-making? How big a role does the knowledge that they are too big to fail play in the development of the problems that have plagued companies in this sector over the years?

Financial mismanagement, poor performance on contracts, dodgy decision-making, these things keep on cropping up. It’s highly unlikely that Carillion will be the last company to find itself in a very tight spot as a result of these issues.

Yet when the people raise questions about why this keeps happening, they are greeted with a metaphorical shrug and a “yeah we know, but what’re you gonna do?”