IT is always easier to see more clearly with hindsight. Now that the seemingly inevitable has happened and Carillion has collapsed into liquidation, the flaws in the contracting giant’s business model, as well as the broader process of how major public-sector contracts are awarded, are suddenly crystal clear.
As the liquidators begin to sift through the wreckage, the questions are coming thick and fast. What will happen to the vital services Carillion has been contracted to deliver to schools and the NHS? What will be the fate of the company’s 20,000 employees here in the UK (it has more than double that worldwide)?
And to what extent will the thousands of members of its pension scheme be left out of pocket, given its deficit of nearly £600 million? Although the Pension Protection Fund (PPF) will be expected to cover much of the benefits, analyst Tom McPhail of stockbroker Hargreaves Lansdown said that members who have yet to reach retirement age should be “prepared for a cut to their pension pay outs”. He added: “This will involve an immediate cut of 10 per cent, plus the loss of some inflation proofing; higher earnings may be affected by the PPF cap on payouts which currently stands at £34,655.05 [annually].”
There are broader philosophical questions to ponder, too, such as whether liquidation was the best course of action. There are those who argued that the UK Government should have stepped in to prop up the company to safeguard jobs and services, much like it did with Royal Bank of Scotland at the height of the financial crisis of 2008 and 2009. But others say the experience of bailing out the banks is precisely the reason not to have done this. These include Vince Cable, leader of the Liberal Democrats and former business minister, who ahead of Carillion’s liquidation declared it would be unacceptable if “profits were privatised and the government nationalised the losses”.
It is now also, justifiably, being asked why Carillion, which went under with an eye-watering £900 million of debt, continued to receive lucrative contracts last year, despite issuing a series of profits warnings and reporting hefty exceptional costs because of difficulties on major projects. These are believed to include work on the much-delayed Western Peripheral Route in Aberdeen, which Carillion has been constructing with Galliford Try and Balfour Beatty.
Organisations such as the Federation of Small Businesses (FSB), which has raised concern about Carillion’s sub-contractors on projects such as the Aberdeen bypass being left out of pocket because of the event, said the episode highlights the flaws in the public procurement system. The FSB and other business groups contend that the system should be reformed so that work on massive public-sector contracts is shared out more widely, and not concentrated in the hands of a few giant contractors. This is surely a point worthy of consideration.
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