Carillion collapse: How can one of the Government’s biggest contractors go bust?

What does Carillion actually do? How much state money has it been receiving? How did it come to this? And what will happen next?

Ben Chu
Economics Editor
@Benchu_
Monday 15 January 2018 12:23
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What is the Carillion fiasco? Economics Editor Ben Chu explains

Carillion, a private construction firm and provider of a multitude of outsourcing services to the UK public sector, went into liquidation on Monday.

But what does Carillion actually do?

How much state money has it been receiving? How did it come to this? And what will happen next?

What are its biggest projects and contracts?

Wolverhampton-based Carillion is the second-largest supplier of construction services to Network Rail, the publicly-owned company responsible for the UK’s rail infrastructure.

The private firm is commissioned to do work on signalling, laying new track and other more complex infrastructure projects.

Carillion last year won a contract to build tunnels in the Chilterns for the High Speed Two rail project, to connect Birmingham with London on a dedicated new line.

Carillion is also a major provider of services to UK schools, with tasks ranging from repairing buildings to providing school diners in 218 institutions through its catering arm.

​The NHS is also heavily reliant on Carillion. It is one of the largest providers of facilities management services to the health service, with its responsibilities stretching from fixing faults in hospital buildings, to cleaning to providing meals for patients. It is also building the new 646-bed Royal Liverpool Hospital.

Carillion does a similar job in the UK’s prisons, maintaining around half of the estate.

It employs around 20,000 people in the UK, plus a further 23,000 around the world. All of these jobs are now at risk.

How much is it paid by the Government every year?

In 2016, Carillion received around £1.7bn in total from public sector contracts.

This was equivalent to around a third of its total revenue of £5.2bn.

How did this collapse happen?

In July 2017, Carillion unveiled an £845m writedown on the value of its contracts, prompting the resignation of the chief executive, Richard Howson.

The company effectively conceded these contracts (of which £375m were for UK construction work) had been much less profitable than it had originally anticipated.

Its share price collapsed around 90 per cent in the following months, slashing its market value from around £850m to just £70m by the end of the year.

Carillion’s financial difficulties were compounded by the company’s relatively high level of borrowing (it now has £900m in debt) and a £600m deficit in its pension scheme.

What will happen now?

The company has entered liquidation, rather than administration. This means there is no prospect of another company buying out its assets.

The Government has said it will inject funding to keep the public services provided by the firm running and that all Carillion employees should continue to show up to work as normal.

But there is great uncertainty about the medium-term future of those public sector contracts. Another outsourced services provider could take them on. But the Government itself could also continue running them indefinitely, something that the unions are pressing for in order to protect jobs.

Employees of Carillion who are still in work will be transferred to the state’s Pension Protection Fund for collapsed companies, which means an instant 10 per cent cut to their future retirement entitlements.

Carillion employees who are already retired will continue to receive their full pension entitlements, but the annual increases may be lower than previously promised.

Carillion is a major contractor of services itself and industry experts have warned that the negative knock-on effects of its collapse on other smaller firms could be severe.

Another consequence of Carillion’s liquidation is that its lenders will also have to write down the value of their £900m loans to the company. These lenders include UK banks Barclays, HSBC, Lloyds and Santander.

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