comscore Collapse of U.K. construction giant rattles government | Honolulu Star-Advertiser

Collapse of U.K. construction giant rattles government

LONDON >> The British government scrambled today to contain the damage as the country’s second largest construction firm was forced into liquidation after losing money on a series of contracts and racking up around $1.35 billion in debt.

The bankruptcy of the firm, Carillion, one of the government’s biggest contractors, threatens more than 19,000 jobs in Britain as well as the solvency of hundreds of subcontractors and smaller businesses. A government-backed pension protection plan is taking over the company’s pension fund, which has an $800 million deficit that analysts say is likely to expand.

The spectacular collapse of what some call a “parastatal” company that has essentially helped the government run day-to-day operations — even managing school lunches and prisons — is raising questions about prominent contracts that continued to be awarded despite obvious red flags and warnings of lower than expected profits that began in earnest last summer.

More broadly, the company’s failure encapsulates a long-brewing debate in Britain over whether outsourcing public services to private enterprises is as effective as it has often been touted, and whether some contractors, like certain banks, have become too big to fail. After all, the government has had to step back in to keep public services that had been managed by Carillion.

The local council in Oxfordshire, a county northwest of London, announced that the Fire Department was “on standby” to deliver school lunches, a task once managed by Carillion.

“It’s a big mess, frankly, and it is a problem that has been coming for a number of years,” said John Colley, professor of practice at Warwick Business School. “The day of reckoning has come, and it is today.”

Carillion has had a tentacular reach in Britain, not just in the running of schools and prisons, but in building hospitals, railways and thousands of homes for the Ministry of Defense. It revamped the nation’s spy headquarters, GCHQ, and the Tate Modern museum, and is a major player in two of Britain’s bigger infrastructure projects, a nearly $2 billion contract for the HS2 high-speed rail link and the $1 billion Aberdeen bypass in Scotland.

Carillion also has a big construction project in Qatar related to the 2022 FIFA World Cup and has contracts in Canada. It employs about 22,000 workers overseas.

In Britain, the pace of privatization has steadily gathered steam over the past decades. In the early 2000s, the centrist Labour government pushed so-called public-private partnerships, but a project to upgrade the London Underground was fiercely criticized in 2007 after a row over soaring costs.

The failure of Carillion also puts pressure squarely on the transportation secretary, Chris Grayling, who kept funneling fresh contracts to the firm this fall even as its financial condition deteriorated. Grayling has also come under fire for allowing two companies, Virgin and Stagecoach, to wriggle out of a contract for the East Coast train line three years early.

It “really shakes public confidence in the ability of the private sector to deliver public services and infrastructure,” Bernard Jenkin, Conservative chairman of Parliament’s Public Administration Committee, told the BBC.

“You’ve got to treat yourself much more as a branch of the public service, not as a private company just there to enrich the shareholders and the directors,” he added.

Jenkin said on Monday that his committee would hold an inquiry into the overall issue of the outsourcing of public services.

David Lammy, a prominent Labour politician, wrote on Twitter: “Carillion becoming another tragic case study in what happens when we privatize profits when things go well and nationalize risks so the taxpayer picks up the bill when things go wrong. Vulture capitalism underwritten by the taxpayer.”

Carillion said Monday that despite last-minute talks with lenders and the government over the weekend, “those discussions have not been successful.” The board of Carillion, it said, “has therefore concluded that it had no choice but to take steps to enter into compulsory liquidation with immediate effect.”

The accountancy firm PWC was appointed administrator of the liquidation.

A spokesman for Prime Minister Theresa May said that the government priority was to “keep public services running.”

David Lidington, Minister for the Cabinet Office, told reporters: “All employees should keep coming to work. You will continue to get paid. Staff that are engaged on public sector contracts still have important work to do.”

Given that Carillion has a yawning pension deficit, huge debt and contracts with overly narrow margins, the company had little collateral for raising money and was probably unable to find a buyer and was therefore forced to liquidate, said Colley of Warwick Business School. Now, he said, some of the contracts are likely to be re-tendered and the government will likely need to underwrite some of the contracts to keep the services running.

Carillion’s demise was likely caused by a combination of rapid expansion and underbidding for contracts that have had low margins since the financial crisis, analysts say.

Those factors made the company run up huge debts, particularly on three public sector contracts, including two state-of-the-art hospitals and the Aberdeen bypass.

In all three cases the projects were delayed because of engineering problems and in the bypass contract Carillion and its partners were given a hefty fine for polluting two important salmon rivers.

“What appears to have gone wrong is that the company had expanded rather too fast in a way that left it heavily indebted to the point that it can no longer sustain its day-to-day business,” said Tony Travis, a professor of government at the London School of Economics.

Particularly in the wake of the financial crisis, contractors desperate for work and dependent on basically a single employer — the government — underbid for contracts just to get them at all, he said.

“The public sector has been quite good at driving hard bargains,” Travis said. “We’ve seen this in the social care sector. Municipalities in Britain have become so good at driving down contract costs that contractors are going bankrupt and are going out of the business.”

The underlying issue, he said, is that the British government is “under pressure to deliver a bigger state than people are willing to pay for.”

“The truth is that the government is slightly trapped these days into a position of trying to offer the scale of state that exists in Sweden or France,” he said, “but with taxes that are paid in the United States.”

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