MSc.

/ MBA Global
The Carillion Collapse
2018

Carl Singleton
Carillion History
• 1999 – Tarmac spins off construction arm to form new company,
Carillion

• Its core competences were in facilities management and rail

maintenance as well as construction

• It was formed to specialize in Private Finance Initiatives

• PFI – “a means of the state financing the construction of new public
infrastructure – whether that is schools, hospitals, prisons, rail lines, or public
buildings - without the Government having to raise the money itself up-front”
Key facts
• 43,000 employees worldwide, 20,000 in UK

• UK’s second largest construction firm with turnover in 2016 of £5.2 billion

• Public sector/PFI contracts worth £1.7 billlion

• 900 schools
• Hospitals – building 2 new hospitals and managing over 200 facilities
• Maintaining and preparing 50 prisons – half the total number
• 50,000 MOD homes

• 38% of Carillion’s 2016 turnover was public sector related

What happened?
• January 2018 – Carillion board announces that company is to enter into
compulsory liquidation owing £1.5 billion

• Decision announced by Board who said that company had no alternative

• Liquidation not adminstration because company had insufficient assets of only
£29m which were nowhere near enough to cover liabilities

• At the time of collapse, Carillion had £1.5bn of debt and liabilities which
included an estimated £800m of borrowing
 Chronology of Key Events
• December 2016 – Company reports slowing pace of orders and share price falls significantly

• March 2017 – KPMG signed off accounts and gave Carillion clean bill of health despite growing debts

• July 2017 – Profit warning issued

• July 2017 – Awarded 1.4bn HS2 contract

• August 2017 – Carillion representative leaves crown monitoring body of UK government’s 29 largest suppliers

• September 2017 - Finance executive Zafar Khan leaves but keeps £450k salary for a year

• November 2017 – Awarded £130m contract for rail electrification from London to Corby despite share price
falling 34%

• Jan 2018 – Carillion bosses meet creditors to seek rescue plan but this eventually led to liquidation
Chronology of Key Events in relation to the Carillion share price
Why did Carillion collapse?
• Underperforming contracts
• £350m Midland Metropolitan hospital in Birmingham,
• £335m Royal Liverpool University hospital
• £745m Aberdeen bypass.

• Payment delays on middle-east contracts

• Company had a strong cash operating cycle but this may have disguised the fact
that the business was not making profits

• Ineffective monitoring by UK government

The Aftermath
• As of February 2018, 6,600 jobs were saved, 1,048 made redundant and 11,800
uncertain

• New service providers found for much of Carillion’s public sector contracts

• Carillion pension fund members who have yet to retire will see 10%-20% cuts in pension
values. The Government funded PPF will take over the £800m liabilities

• The Construction Industry Training Board will secure the future of 1,400 apprentices

• The Insolvency Service launch inquiry into collapse

• Carillion Leaders faced questions from joint select committee of MPs in February
Carillion Stakeholders Impact/Involvement Analysis
External Stakeholders External Stakeholders
Executives Suppliers
 Large salaries, bonuses and severance payments  30,000 sub-contractors
 FT predicted that many SME’s, supplying on 120
days payment terms will go out of business

Shareholders Customers
 Healthy dividend payments  Include schools, hospitals, prisons and MOD
 HS2

Pensioners UK Government
 Pension liabilities deferred before collapse - £587m  Crown government body monitors relationship
pension shortfall with 29 largest suppliers to public sector

Employees Taxpayer
 Uncertainty, unemployment  Direct costs - £1bn winding up fees to PWC
 Indirect costs - Unemployment benefits, SME
bankruptcy costs
Stakeholder Power Matrix
Low Influence /Power High

Meet Needs Key Player

High Pensioners Executives

Suppliers Customers
Employees Shareholders
UK Government

Interest

Least Important Show Consideration

Low Taxpayer
The Mismanagement
Accusations
• Carillion sold assets of £217m to continue to pay shareholder dividends of
£367m between 2012 and 2016

• Paying dividends on the basis of expected profits rather than operating profits

• A construction industry source suggests that it operated adversarial style

relationships with suppliers
• Many complained about late payment

• Bidding for work at unachievable pricing levels just to obtain the work
 Carillion Executives
• Howson earned 1.5m in 2016. Even
after he left, Carillion agreed to pay
him the £660k salary until Oct 2018

• Zafar Khan was also allowed to keep

his salary for 12 months after leaving

• A similar deal was struck with Keith

Cochrane

• The insolvency service cancelled all

severance payments when the firm
collapsed
Societal Impact
• Biggest collapse since MG Rover in 2006
• 43,000 employees (MG Rover employed 6,000 direct employees)
 Estimated £150 million in support provided by UK Government

• Supply Chain - Employees of 30,000 SME’s

• EG. Landscaper from Cambridge owed £1m, 10% of annual turnover forced to make 10 people redundant on
collapse

• Left wing sources call for more regulation of such companies with strong links to public spending
• Even Brummer of the Daily Mail calls it a “shame” on capitalism and points to the “unconscionable” payouts of
bonuses and dividends

• Taxpayer cost
• Redundancies
• Unemployment benefits
• Re-Training
• Insolvencies of suppliers and contractors
The State Impact
• Should the UK Government have bailed out Carillion?

• Carillion collapse questions the viability of PFI contracts and the policy
of outsourcing

• Arguments that the UK Government should have more say in the

running of firms so closely connected to the State?

• Creates a strong argument for not entrusting the management and

operation of public services to market forces
Theoretical View
• Friedman V Freeman

• Carillion collapse highlights the dangers of Friedman’s theory

There are many victims in the Carillion collapse and not only shareholders

• Carillion collapse argues for Freeman stakeholder theory

Particularly for an organisation with such close links to the State
It argues that an organisation so close to the state should not only have a
robust CSR policy but should be regulated by the government to ensure that
it’s run in the interests of ALL stakeholders
Summary
• Carillion was set up partly to serve the public 19 years ago.

• Even though the government monitored the running of the company, this was
ineffective

• Despite poor financial performance, stakeholders with high power and influence were
rewarded at the expense of other stakeholders

• Despite the financial state of the company, high value / high profile contracts were
awarded to the company

• The many costs associated with the collapse of Carillion will be funded by the taxpayer
References
Cox, J. 2018. Carillion collapse: Government contractor enters compulsory liquidation 'with immediate effect'. [ONLINE] Available at:
https://www.independent.co.uk/news/uk/home-news/carillion-latest-compulsory-liquidation-contractor-prisons-hs2-united-kingdom-a8159326.html.
[Accessed 23 April 2018].

West, K. 2018. The Observer Carillion in crisis as outsourcing operation crumbles under debt. [ONLINE] Available at:
https://www.theguardian.com/business/2018/jan/13/carillion-in-crisis-outsourcing-operation-debts-rescue-talks. [Accessed 23 April 2018].

Minton, A. 1999. Tarmac spins off construction arm as Carillion. [ONLINE] Available at:
https://www.independent.co.uk/news/business/tarmac-spins-off-construction-arm-as-carillion-1100147.html. [Accessed 23 April 2018].

Chu, B. 2017. What is the Private Finance Initiative? And do Labour's plans to take it back 'in-house' make any sense?. [ONLINE] Available at:
https://www.independent.co.uk/news/business/analysis-and-features/labour-pfi-john-mcdonnell-scheme-government-hospitals-private-finance-initiative-pa
rty-conference-a7966521.html
. [Accessed 23 April 2018].

Thomas, D. 2018. Where did it go wrong for Carillion?. [ONLINE] Available at: http://www.bbc.co.uk/news/business-42666275. [Accessed 23 April 2018].

Cecil, N. 2018. Carillion news: Taxpayer picks up bill as Government scrambles to stop construction giant's collapse causing chaos in schools and hospitals.
[ONLINE] Available at:
https://www.standard.co.uk/news/politics/carillion-news-taxpayer-picks-up-bill-as-government-scrambles-to-stop-construction-giants-collapse-a3740191.htm
l
. [Accessed 23 April 2018].
References
Alderson, L. 2018. Carillion: The collapse and the chaos. [ONLINE] Available at:
https://www.constructionnews.co.uk/companies/contractors/carillion/carillion-the-collapse-and-the-chaos/10027099.article.
[Accessed 24 April 2018].

Brummer, A. 2018. ALEX BRUMMER: A giant Ponzi scheme that deserved to go to the wall... even though Carillion's collapse
shames capitalism and puts the wind in Labour's sails. [ONLINE] Available at:
http://www.dailymail.co.uk/debate/article-5273135/ALEX-BRUMMER-Carillion-deserved-wall.html. [Accessed 1 May 2018].

Blackhurst, C. 2018. Carillion collapse: A flawed system is to blame more than management excess. [ONLINE] Available at:
https://www.independent.co.uk/news/business/comment/carillion-collapse-public-sector-partnerships-pfi-managers-pay-i
ncome-a8168086.html
. [Accessed 1 May 2018].

BBC News. 2018. Carillion: Six charts that explain what happened. [ONLINE] Available at:
http://www.bbc.co.uk/news/uk-42731762. [Accessed 24 April 2018].

Kollewe, J. 2018. Carillion casualty: landscaper owed £1m that could go bust. [ONLINE] Available at:
https://www.theguardian.com/business/2018/jan/16/carillion-casualty-landscaper-owed-1m-could-go-bust. [Accessed 24
April 2018].

Plimmer, G. & Ford, J. 2018. Carillion ran up debts and sold assets to fill £217m dividend gap. [ONLINE] Available at:
https://www.ft.com/content/f5bbf3a2-01e0-11e8-9650-9c0ad2d7c5b5. [Accessed 1 May 2018].