Carillion collapse could cause supply chain woes

BY Richard Summerfield

With debts of around £1.5bn – including a £600m pension deficit – construction powerhouse Carillion Plc has entered liquidation, threatening the jobs of around 43,000 people worldwide, including 20,000 in the UK, and thousands more in the firm’s global supply chain.

Critics have suggested that Carillion’s expansion plans in recent years were too ambitious and its overreliance on debt were the two the most telling elements of its collapse. According to Bloomberg data, net debt to equity doubled between 2012 and 2016, from 15 to 30. While Carillion did attempt to cut costs and dividends, the company’s efforts were too late, beginning in earnest in 2017.

The liquidation of the UK’s second biggest construction company on Monday has created a crisis in the UK’s construction industry, with the future of major projects, including as yet unfinished hospitals, currently in doubt.

Carillion’s collapse came after talks between the firm, its lenders and the government came to conclusion with no deal in place to save it. Companies working for the firm on purely private sector deals will only have two days of government support, according to Cabinet Office Minister David Lidington. In 2016 Carillon spent £952m working with local suppliers, and according to the trade body Build UK, anywhere between 25,000 and 30,000 small businesses are owed money by the company.

Carillion is responsible for hundreds of public sector projects in the UK and is a provider of a number of key public services, including the management of military bases for the Ministry of Defence, providing facilities management for hospitals, courts and schools, and is a key partner in a number of nationally important infrastructure projects, such as the new HS2 railway line.

The company had hoped to receive a bailout from the government in the region of £20m, a sum which it hoped would encourage banks to follow suit. However, the government was unwilling to intervene. As a result, Carillion was plunged into liquidation, rather than administration, as it had very few sellable assets.

PwC will be providing six ‘special managers’ to advise David Chapman, a civil servant working for the Insolvency Service, who has been appointed as the company’s liquidator. The company’s shareholders will receive nothing as a result of the collapse.

Carillion ran into financial difficulties last year after issuing three profit warnings in five months and writing down more than £1bn on the dwindling value of contracts in the UK, the Middle East and Canada. Yet, despite these warnings, the company continued to receive lucrative contracts from the government, prompting some serious questions of the government’s sourcing practices.

News: Britain's Carillion collapses

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