Carillion collapse: Government contractor enters compulsory liquidation 'with immediate effect'

Company employs some 20,000 people in the UK and holds contracts for HS2, prisons, the NHS and the armed forces

Josie Co
Business Editor
Monday 15 January 2018 08:02
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Cabinet minister David Lidington says Carillion workers will get paid

One of the Government's most important contractors has collapsed into liquidation, raising fears about the future of hundreds of major projects and thousands of jobs at an already challenging time for the British economy.

Following several days of tense negotiations, the board of construction giant Carillion early on Monday said that it had “no choice but to take steps to enter into compulsory liquidation with immediate effect’’.

The company had been plagued by substantial debt as a result of a slowdown in many of its markets. It was forced to issue a string of profit warnings last year and is battling a gaping pensions deficit.

For the first half of its financial year, it recorded a more than £1.4bn loss and the departure of its chief executive in July 2017 also contributed to an investor exodus, sending shares plummeting from around 230 pence at the start of 2017 to just over 14 pence at Friday's market close.

Carillion employs some 46,000 people worldwide, of which 20,000 are in the UK. It holds major contracts for prisons, the NHS and the armed forces. Only in July last year, it won major contracts to build the new High Speed 2 rail line, to connect London with the north of the country.

On Monday, the company said it had made “considerable efforts” to retain financial support, including from its creditors, like RBS, Santander and HSBC, but that crisis talks over the weekend had "not been successful".

Carillion reportedly has total debt and liabilities of around £1.5bn and Neil Wilson, a senior market analyst at ETX Capital, described the situation as "a terrible mess and one that will take a long time to clean up”.

“This was a case of bad management and pitching for contracts at any price, but the Government and banks could, or may be should, have done more,” he said.

Fiona Cincotta, senior market analyst at City Index, added that the developments, which put thousands of jobs at risk, are “yet another huge embarrassment for the UK Government, which appears to be moving from mishap to mishap”.

She also pointed out that the fact that Carillion had gone into liquidation rather than administration “screams volumes over the state of the financials at the firm”.

“There were no assets to sell so no administration,” she explained. An administration keeps options open for the company to avoid total insolvency, whereas liquidation leads to the complete dissolution of a company and the selling off of all its assets.

The news will deal a particularly sharp blow to the NHS, which is already battling a debilitating winter crisis.

Up until late last year the NHS was a major source of income for Carillion, generating around £200m a year in revenue.

Late last year the beleaguered company said that it had inked a deal to offload a significant part of its healthcare facilities management business to outsourcing group Serco, helping it to trim its debt pile.

But the transfer was set to run throughout 2018, meaning that Carillion was still responsible for providing a significant proportion of essential services – like cleaning, catering and maintenance of dilapidated wards – to at least 15 NHS hospitals.

Philip Green, Carillion's chairman, said the Government would now pick up the bill to maintain the public services Carillion currently runs.

Ministers had been under fierce pressure to intervene to prevent the collapse of the company, largely because of its heavy involvement in key infrastructure projects, and on Monday the Government attracted widespread criticism.

Labour said that it would question the group about how the situation was allowed to become so serious. Unions called for an inquiry into the crisis.

"The fact such a massive government contractor like Carillion has been allowed to [go into liquidation] shows the complete failure of a system that has put our public services in the grip of shady profit making contractors,” said Rehana Azam, GMB National Secretary.

"There is no place for private companies who answer to shareholders, not patients, parents and service users in our public services. What’s happening with Carillion yet again shows the perils of allowing privatisation to run rampant in our schools, our hospitals and our prisons," she added.

Tim Roache, GMB general secretary, said that Prime Minister Theresa May “must act right now to bring Carillion contracts back into public ownership”.

“That is the only way to safeguard the jobs and services this mess has put at risk.”

He accused the Government of spoon-feeding the company taxpayers’ money by awarding them contracts even after it had issued profit warnings.

“Ministers should be hanging their heads in shame today - it’s a complete shambles.”

General Secretary of the TUC, Frances O'Grady, meanwhile, described the collapse as a “textbook example of the failures of privatisation and outsourcing”.

Chairs of the Carillion pension schemes called the news as “very disappointing”.

They said that they would now work with PwC, the professional services company appointed to manage the liquidation, and the Pension Protection Fund to “deliver detailed information to members about how their benefits will be affected, and provide them with all the support that we can”.

“We are in the process of issuing an initial communication to all members, and we will make further information available as soon as possible, including by establishing a dedicated web page,” they said.

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