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Carillion collapse casts critical spotlight on rail project contracting and finance.

Posted by Luke Upton on Jan 16, 2018

Staff on the tracks - Carillion collapse casts critical spotlight on rail contracting and financing. (SmartRail World - pic courtesy of Carillion) Carillion, the multinational facilities management and construction company which yesterday went into compulsory liquidation putting 43,000 jobs at risk has a lineage stretching back to 1903 and the patenting of the road surfacing material tarmac. Their work has included a vast number of huge construction projects around the world, including many in the rail industry. They are part of the consortium that holds a contract to build part of the forthcoming HS2 high speed railway line in the UK, and it is the second largest supplier of maintenance services to Network Rail among other contracts in our industry. 

So what caused the collapse? Well, as always, with multinationals the reasons are multiple and complex. But one indicator can perhaps be found on the Carillion Careers Twitter account (@carillionjobs). Considering the fact that they have such a huge array of interests and specialist skills around the world, the most recent post (and probably the last) added 24 hours ago, was for a 'Zero hour Relief Security Officer required at three corporate sites in Edinburgh.' For our international readers, a zero-hour contract is a type of contract between an employer and a worker, where the employer is not obliged to provide any minimum working hours, offering little security or few benefits.

And the jobs posted before this? Another security guard, a cleaner, a caterer at a Papa John’s pizza restaurant on an army base, a gardener at a jail and so on. You have to scroll back a week before finding a full time position within engineering. It’s this focus on service contracts and not engineering and construction where one of the key problems behind the collapse can be found.

Carillion employs 43,000 staff globally, around half of them in the UK where it does most of its business and is headquartered. It also operates in Canada, the Middle East and the Caribbean. In 2016, it had sales of £5.2bn and until July of last year had a market capitalisation of almost £1bn.

To quote the About Us on their website: “We work in partnership with the public sector to deliver important services which offer value for money and make a positive difference to the lives of people in the communities where we work. This may be providing meals to school children in the UK, highways maintenance in Qatar or snow clearance in Canada. Our people do the everyday things which make a big difference.”

But yesterday, after a year of profit concerns and City of London concerns, it finally buckled under the weight of its debt pile. Despite discussions between Carillion, its lenders, banks and the UK government, no deal could be reached to save the company and the liquidators in the form of PWC were called in.

The precise reasons will come out in the next few weeks and months, but many commentators see the company as overreaching itself, taking too many risky contracts and were unprofitable, They also faced payment delays in the in the Middle East. £1bn was written down from existing contracts. This all made managing its 900m debt pile and £600m pension deficit.

Rail Industry Impact – short term

It was only in November 2017, that Carillion won two contracts with Network Rail worth around £320m over the next three years. These were to upgrade the track and infrastructure on the London to Corby route, and then to electrify the line.

Staff in happier times - Carillion collapse casts critical spotlight on rail contracting and financing. (SmartRail World - pic courtesy of Carillion)

Network Rail have responded this week with a spokesman stating they are working with the administrations to ensure the collapse has “has as little impact as possible” on its projects.

They also provides facilities management services to the London Overground network.

A spokesman for the Mayor of London, Sadiq Khan said: "The collapse of Carillion is a hugely worrying time for the thousands of staff and sub-contractors affected. A key priority for the mayor is to work with TfL and trade unions over the coming days to do what he can to protect their jobs and livelihoods.

"Part of TfL’s contingency planning has also included having a team of senior staff ready and prepared to step in and ensure maintenance on the London Overground continues, and services for customers on the Overground will not be affected."

Carillion are also involved in the partnership that is building HS2 a planned high-speed railway in the United Kingdom and secured two deals worth £1.34bn. It was contracted to design and build a 50-mile section of the line between Aylesbury and Royal Leamington Spa.

Carillion and the two other firms in the joint venture - Eiffage and Kier - were forced to give assurances that they could step in to deliver on the work if one of the partners collapsed.

A HS2 spokesman described Carillon going into liquidation as “clearly disappointing for them and the wider UK construction industry.” But added “We are continuing to discuss with Kier and Eiffage the implementation of contingency plans.”

Rail Industry Impact – long term.

The collapse of Carillion, and the emphasis now being put on the government (and tax payers) to bail out a private company , previously happy to extract hefty profits from their contracts, has put a sharp focus on the work of private corporations and contracting within essential services like rail.

The UK’s largest specialist transport union, the RMT have urged major changes. General Secretary Mick Cash said; "This is disastrous news for the workforce and disastrous news for transport and public services in Britain and RMT has been warning since Thursday night that we thought the collapse of the company was imminent. The blame for this lies squarely with the Government who are obsessed with out sourcing key works to these high risk, private enterprises.

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"RMT will be demanding urgent meetings with Network Rail and the train companies today with the objective of protecting our members jobs and pensions. The infrastructure and support works must be immediately taken in house with the workforce protected” continued Cash.

Jon Trickett MP of the UK’s major opposition party, Labour has come out forcefully on the issue; “Labour would reverse the presumption in favour of outsourcing. Public services should not be used in service of the dogma that private is always. We can actually provide more cost effective services and treat workers better by running many services in-house.”

“The risk posed to our public services by these huge outsourcing firms folding is huge, but the government has not even thought about how large that cost could be. It is often said the Tories know the price of everything but the value of nothing. But in the case of their reckless carving up of our public sector, they apparently don’t even know the price” added Trickett.

Whilst Alexander Hitchcock is research manager of the independent though right leaning think tank Reform offered a more measured opinion and focus on the contracts writing in CITY AM:

“More competition should be encouraged through better relations between government and business. Reports suggest Carillion’s problems were in part caused by cost overruns on building hospitals and roads. A focus on the quality of bids, not just cost, would help avoid future problems. This will help make the most of public-private partnerships. Technology can revolutionise public services, but only with the expertise of private companies. Strong markets, in technology or otherwise, are more resilient to company failure. Ministers should put business nous before ideology.”

Editor’s View

Our thoughts are with the hard working staff of Carillion who now face an uncertain future where jobs and pensions are at stake, and who are blameless in this corporate meltdown. And also for their suppliers and contractors, many of whom are small businesses. It’s is estimated that supply chain creditors are likely to lost £2.1bn. This will undoubtedly cost more jobs and pensions.

No doubt there will be plenty of commentary on this issue over the coming weeks.

But two things stand out to me. Firstly, a company normally can’t do it all. Carillion have moved out from beyond their core competencies – engineering and construction, of which they had a fine reputation, into the complex and sometimes unedifying world of services. One would strongly suspect that if they had remained true to their core, rather than chasing contracts beyond their strengths, they wouldn’t be in this situation.

And secondly, between 2012 and 2016, Carillion paid out £394m in dividends. Yet its accounts for the year to 31 December 2016 they had a pension scheme deficit of £805m. Should a company be allowed to pay such dividends when such a black hole exists in its own finances?

This story will continue to develop but there is no doubt that a change needs to happen to how these huge contracts are written, tendered and executed and also if private companies are really the best organisation to carry out these essential services.

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Topics: projects

Luke Upton

Written by Luke Upton

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