The fall of Carillion: what happened?

It’s a business story that will dominate the headlines for weeks, if not months, to come. One of the nation’s biggest construction firms, with a hand in everything from Wembley to HS2, has this week announced that they intend to go into liquidation and potentially take up to 20,000 jobs with them.

The fall of Carillion: what happened?

The news has prompted chaos in government as a number of infrastructure contracts now look vulnerable to collapse, and a number of government ministers come under intense scrutiny after revelations emerged that they continued to award government contracts to the company even after it looked as though it may be in terminal decline.

The Labour Party, The Liberal Democrats and other opposition figures have begun to ask urgent questions of the government and, in particular, those in charge of tax payer funded infrastructure projects. Business leaders too are asking questions regarding the tendering process and wondering how a company that was seemingly obviously in trouble continued to win huge contracts.

As the story broke journalists scrambled to figure out just what had happened to the multi-million pound business that had seemed in rude health as recently as 3 months ago. As it turns out industry insiders have suspected that the company has been in trouble for almost two years, with hedge funds apparently offloading Carillion shares for at least that amount of time.

With the UK housing and new-build property market booming, much of the activity that Carillion had agreed to undertake had been underpinning that achievement in areas such as the Northern Powerhouse, with Manchester, Leeds and Liverpool sharing in the success of infrastructure improvements.

Many seem shocked that a British construction institution could fail this way but, ultimately, it was killed by years of mismanagement and underperforming leaders.

In simplistic terms Carillion went under due to the fact that its debts had gotten too high, its income couldn’t cover the repayments and it couldn’t get any more credit from the banks that seemed to have had enough of throwing good money after bad. These simplistic terms, however, do no justice to some of the staggering figures.

Reportedly the company had debts of £900m, with a further pension shortfall of over £500m, taking the total to somewhere in the region of £1.4bn. According to Sky News, however, the total exposure faced by British banks and creditors could be over £2bn. They also report that smaller contractors and self-employed contractors are set to receive a fraction of what they’re owed, and many will receive nothing at all.

A more detailed analysis of the situation may tell you that the company had a chronic and terminal attitude to the way that it priced its contracts and forecasted its profits. It often was overoptimistic about how much it would make on large projects such as hospitals, where the profit margins are often thin and subject to change, as they discovered when asbestos was found in Liverpool at a construction site, delaying the project and nearly eradicating its profit completely.

The mismanagement proved fatal and when the company, in July last year, announced that it no longer expected to receive over £500m of income it had previously expected, the alarm bells started to ring. They rang everywhere except the corridors of Westminster, that is, as ministers continued to award them large contracts.

The government has guaranteed the ultimate completion of the projects that company was undertaking and, as previously stated, they are profitable contracts under the right management.

Take a city such as Manchester, which is currently under a construction boom with new residential buildings, apartment blocks and roads being built all across the city, its plain for all to see that the economy in the north of England is doing extremely well.

Quarterly Report vertical - April 2019

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