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For the last few days the story of Carillion’s collapse has dominated the headlines. For those of you that don’t know, Carillion is an ‘integrated support services business’ that held governmental contracts that covered several areas of UK education, transport, justice and defence.
The contracts varied from school dinner supply to construction work on the new HS2 rail system due to be built in the UK. They were the second largest supplier of maintenance services to Network Rail and maintained 50,000 homes on behalf of the MoD. As you can see, they were deeply entrenched in the public sector.
But, they are a private company right?
Yes, Carillion is, or was, a private sector company that was involved in various PFI (Private Finance Initiative) or PPP (Private Public Partnership) projects. These projects, put simply, allowed private sector businesses to finance/run public sector services by shouldering the risk of the projects against the profits. Whilst these schemes are nothing new, much debate surrounds the merits of such schemes to the public purse.
So, what went wrong?
Whilst the full extent of what happened has yet to be uncovered, initial reports indicate that Carillion took major losses after 3 projects overran on costs. These projects were the £350m Midland Metropolitan Hospital in Sandwell, the £335m Royal Liverpool Hospital and the £475m Aberdeen Bypass project.
Even though their lenders allowed them more time to repay their debts, they were reluctant to lend any more money to the company. The losses from the 3 projects also caused Carillion to issue the first of 3 profit warnings in January 2017. Despite this, the government continued to issue contracts to the company. Mounting debt and a £587m pension deficit caused the company to go into liquidation in January 2018.
But they had contracts coming in, where’s the money gone?
That’s a good question, and one that will be answered in due course but questions are being raised about the management of Carillion’s finances. Some are arguing that Carillion overreached itself by taking on too much risk that ultimately became unprofitable. Others are pointing to questionable payment schemes to it’s bosses.
Richard Howson left the company on November 2017 but was due to be paid his £660,000 salary plus benefits until October 2018. Zafar Khan left the company in September 2017 but was due to receive remuneration to the value of £425,000 for 12 months following his departure. Keith Cochrane would have continued to receive his £750,000 salary until July 2018, despite being due to leave in February.
Further questions are also being asked about the restructuring of the bonus scheme to ensure the bosses kept them should the firm ever collapse. Luckily, the Insolvency Service have confirmed that these payments for bonuses or severance will not be paid. Even though this manoeuvre, on the face of it, is not illegal, it does raise questions over the ethics of their behaviour. Why would they ring fence their bonuses unless they knew something was going to happen?
So, what’s next?
No one can say for sure what will happen. Carillion employed over 40,000 people worldwide, 20,000 of which worked in the public sector contracts in the UK. Whilst the Government is taking every step to help those working on public sector contracts, those in the private sector face an uncertain future. Many of the companies for whom the workers are contracted to want them to stay, it’s just a question of figuring out how to make that happen.
Another issue now facing the Government is the knock-on effects of Carillion’s collapse. Roughly 30,000 businesses will be affected either directly or indirectly by this with some worried they will have to fold due to the monies owed to them by the now defunct company.
One things for sure, the fallout and investigation of this incident is going to last a long time and the Government are going to have to think long and hard about the benefits of private sector companies working within the public sector.
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