Labour has called on the government to explain why it awarded contracts worth nearly £2bn to Carillion even after it became clear the company was in financial distress.
The construction and outsourcing group issued the first of three warnings about its financial health in July, in an update that sent its share price tumbling and forced its chief executive to step down.
How did the company get into trouble?
Companies like Carillion have to keep projects on budget and keep winning new contracts. When one of those fail, problems loom.
Carilllion shocked the market in July with a massive profit warning, writing down its value by £845m, all related to key contracts. Two more profit warnings followed and the company admitted it needed cash quickly not to breach bank loan terms
At the start of 2017 shares were changing hands at 240p. This weekend they were 14p.
With debts of £900m it has been trying to arrange a £300m cash injection. However, lenders will not provide the cash without government guarantees.
What happens to the pension scheme?
Carillion has a £580m pension scheme deficit. If it collapses the government-backed Pension Protection Fund would take over the scheme, although the liability would swell, to £800m. While the Fund provides a safety net for millions of workers, there are limits on what it can pay out.
Who runs Carillion?
Chief executive Richard Howson quit after the July profit warning, with the new boss yet to start. It has been run by engineering industry veteran Keith Cochrane and the group’s chairman Philip Green, the former boss of United Utilities. Sally Morgan, who was director of government relations for Prime Minister Tony Blair, is also a director.
The shadow Cabinet Office minister, Jon Trickett, pointed to regulations showing Carillion could have been designated “high risk” at that point, and he called on the government to explain what measures it had taken to check the firm was ready for more taxpayer-funded work.
Trickett said: “Alarm bells have been ringing for over six months about the state of Carillion’s finances, so the government must come forward and answer questions on exactly what due diligence measures were undertaken before awarding contracts to Carillion worth billions of taxpayers’ money.”
Carillion issued its first profit warning on 10 July, issuing a statement that sent its shares tumbling 39% and triggered the resignation of its chief executive Richard Howson.
A week later a joint venture between Carillion, its construction rival Kier and the French civil engineer Eiffage won a £1.4bn contract to work on the HS2 high-speed rail link.
The day after that, on 18 July, Carillion won a £158m contract from the Ministry of Defence to provide “catering, retail and leisure, together with hotel and mess services” at 233 military facilities.
A second profit warning in September was followed five weeks later by the award from Network Rail of a contract to electrify the London-to-Corby rail line. A week afterwards the company put out a third profit warning, only to be awarded a £12m schools building contract three days later.
The interim chief executive, Keith Cochrane, said the award showed “we continue to retain the confidence of key customers despite the group’s current challenges”.
If a supplier to the government shows signs of financial distress, which include issuing a profit warning, the Cabinet Office can deem the company high risk. At that stage, according to government documents, a “crown representative” should be appointed to work with the company on improving its performance.
Government policy also states that officials “should reduce where possible the extent to which the strategic supplier is given additional work under the terms of an existing contract [...] so as to contain the risk to the taxpayer”.
Cabinet Office records show that no crown representative had been appointed as of September 2017, two months after Carillion’s first profit warning.
What was Carillion?
The Wolverhampton-based firm was second only to Balfour Beatty in size.
It was spun out of the Tarmac construction business in 1999 and steadily took over rivals, such as Mowlem and Alfred McAlpine. It expanded into Canada and built a construction arm in the Middle East.
Carillion then diversified into outsourcing, taking on contracts such as running the mailroom at the Nationwide building society to helping upgrade UK broadband for BT Openreach. It took over running public service projects, ranging from prison and hospital maintenance to cooking school meals. In 2017 a third of its revenue – £1.7bn – came from state contracts. It employs 43,000 people, with more than 19,000 in the UK.
Notable construction projects
• GCHQ government communications centre in Cheltenham (2003)
• Beetham Tower, Manchester (2006)
• HS1 (2007)
• London Olympics Media Centre - now BT Sport HQ (2011)
• Heathrow terminal 5 (2011)
• The Library of Birmingham (2013)
• *Liverpool FC Anfield stadium expansion (2016)~
• Midland Metropolitan Hospital in Smethwick (due 2019)
• Aberdeen bypass (due 2018)
• Royal Liverpool University Hospital (due 2018, behind schedule)
Government contracts
• NHS – managed 200 operating theatres; 11,800 beds; made 18,500 patient meals a day
• Transport – “smart motorways” to monitor traffic and ease congestion; work on HS2; track renewal for Network Rail; Crossrail contractor
• Defence – maintained 50,000 armed forces’ houses; a £680m contract to provide 130 new buildings in Aldershot and Salisbury plain for troops returning from Germany
• Education – cleaning and meals for 875 schools
•Prisons – maintained 50% of UK prisons.
Trickett will ask the government to explain what due diligence it applied to Carillion after its first profit warning and which ministers were involved in decisions to keep awarding contracts despite its financial problems.
Labour called on the government to be ready to take back public contracts awarded to Carillion to ensure workers do not lose their jobs and that public sector projects involving Carillion – such as the Midland Metropolitan hospital and Royal Liverpool hospital – are not interrupted.
Trickett said: “In the meantime – as emergency meetings take place between officials – employees of Carillion, pension holders and taxpayers will want assurances that financial protections are in place in the event the supplier experiencing further financial difficulties.
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“Labour urges the government to stand ready to intervene and bring these crucial public sector contracts back in-house. The government cannot outsource its responsibility and duty of care to these workers and vital public sector projects.”
Labour is also expected to highlight the links between the government and the Carillion chairman, Philip Green, who is an adviser to the prime minister on corporate responsibility. In 2015 he signed an open letter advising people to vote Conservative.
Stella Creasy, the Walthamstow MP who has campaigned against PFI (private finance initiative) contracts where private firms are contracted to carry out public sector work, hopes to raise the case of Carillion with the Treasury in the House of Commons on Monday.
She expressed particular concern about the firm’s contracts to build hospitals in Liverpool and Smethwick.
While the Cabinet Office has been coordinating the contingency planning for a possible collapse of the company, Creasy insisted the Treasury should not escape responsibility.
“Carillion is one of a handful of companies who have taken on private finance contracts with the public sector for major infrastructure projects,” she said. “The Treasury has previously argued that using these contracts, which are a more expensive form of credit for the costs of building and maintaining infrastructure than public sector borrowing, are a way of transferring the risks arising from major projects to the private sector.
“The problems facing Carillion therefore also raise concerns about the financial stability of the other contractors and whether the public sector may face risks from this as a result.”
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