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Carillion contracts to be taken in-house or re-tendered, says government
Following the collapse of construction and outsourcing group Carillion, the government said it will take on some contracts and others will be re-tendered to other contractors.
Debt-laden Carillion, Britain's second largest construction employer, appointed the Official Receiver to take over administration of the company after talks with creditors and the government failed to save the business.
Carillion's key contracts include parts of the massive HS2 rail project and dozens of other construction programmes for several government departments including building of schools, roads and healthcare facilities, as well as providing outsourcing services ranging from school dinners, cleaning and catering for NHS hospitals and prison maintenance, as well as some financial services.
"As we go forwards, some services will be taken in house, some will go out to alternative providers in a managed, organised fashion," Cabinet Office minister David Lidington told BBC radio on Monday. A 10 Downing Street spokesperson added that HS2 contracts would be taken on by the other joint venture partners, chiefly Kier.
"There will not be a fire sale of assets," he added, saying the government will pay the administrative costs of the Official Reciever so it can guarantee the supply of public services and pay staff.
He said the government and taxpayers could not be expected to bail out a private sector company, especially when Carillion's problems had not arisen directly from its public sector work. He noted that all joint venture contracts would require the companies working with Carillion to take responsibility for the full contract.
Carillion's partner on its 'C2' and 'C3' portions of the HS2 rail line, Kier Group, put out a statement assuring investors and suppliers that it had put contingency plans in place. Kier currently also operates joint ventures involving Carillion on the Highways England smart motorways programme.
"We have put in place contingency plans for each of these projects and are working closely with clients so as to achieve continuity of service," Kier said, adding that, "after a short period of transition for these contracts, we do not expect there to be an adverse financial impact on the group arising from these joint venture contracts".
Galliford Try and Balfour Beatty, which are in a joint venture with Carillion on the £550m Aberdeen Western highway contract, noted that they are obliged to complete the contract, as per the terms of the contract. Galliford estimated the additional cash contribution outstanding from Carillion to complete the project is £60-80m, of which any shortfall will be funded equally between the joint venture members.
Balfour Beatty, which is also partner with the doomed company on the A14 in Cambridgeshire and the M60 Junction 8 to M62 Junction 20 scheme, said its cash impact would be an outflow of £35-45m in 2018 as it continue to work to meet its contractual commitments.
HICL Infrastructure Company, the FTSE 250 investment company, noted that Carillion provides facilities management services for 10 public private partnership (PPP) project companies in which it is invested, representing approximately 14% of its portfolio value, expected to reduce to circa 8% as a result of Carillion's sale of its healthcare business to Serco. HICL said on Monday that it was carrying out its contingency plans, "with a number of potential replacement service providers", to ensure services would continue to be provides and that management were confident that permanent replacement providers will be secured "as soon as practicable".
International Public Partnerships issued a similar missive but advising that the effect from FM services provided by Carillion on its portfolio was nearer 3%.
Building services group TClarke, one of Carillion's subcontractors on project with KBR as part of the £1.1bn Aspire defence contract at Tidworth, Bulford and Perham Down, said it had been told by KBR that apart from a 'transition' for the contract it could expect "business as usual". Clarke calculated its other areas of activity have aggregate exposures of less than £100,000 in total and that it does not expect any adverse financial impact from any direct exposure to Carillion.
Shares in Speedy Hire were given a bruising as Carillion was one of the biggest clients of the equipment hire firm. The company said revenue in the last calendar year with all Carillion entities was around £12m, of which circa 55% represented core hire revenue and with outstanding debt at 31 December 2017 of £2.0m. Speedy said any drag on profit from Carillion's liquidation will be recorded as an exceptional non-underlying charge in its accounts for the year ending 31 March 2018, which it said is "not expected to be material".
It said a proportion of it revenue and debt relates to joint venture arrangements involving third parties which are expected to continue unaffected. Speedy said it had net debt at 31 December of £88.9m and remained on track to deliver a result in line with expectations for the full year.
Construction group Morgan Sindall reassured that it did not foresee a material impact from the small number of projects and joint ventures on which it was working with Carillion.
STAFF, SUBCONTACTORS AND SUPPLIERS
Carillion chairman Philip Green said he understood that the government will be providing the necessary funding required by the official receiver to maintain the public services carried on by Carillion staff, subcontractors and suppliers.
Lidlington urged Carillion staff to continue coming in to work. "The government will pay your waves, via the official receiver not via Carillion. That money that has been budgeted for, for your wages, for those public sector contracts is there, because we want that continuity to be assured."
Administrators will continue to manage public sector contracts as the firm is wound up, even if the company's assets do not meet its liabilities, though there will be no such protection for private contracts and the employees working on them. Private sector clients have been given 48 hours to decide whether to take the contracts in-house or find an alternative provider.
The fact that Carillion had opted for a compulsory liquidation rather than an administration was highly unusual said insolvency specialist David Birne of HW Fisher & Co. "It suggests there is little, if anything, of value within the company to be saved. Almost every big insolvency in recent years has been a move towards administration rather than liquidation."
"For Carillion's 43,000 global staff, liquidation means the immediate risk of redundancy. For Carillion it will mean huge breach of contract penalties that could dwarf anything demanded of it by creditors. And there will undoubtedly be a knock-on effect for companies that supply Carillion that will go all the way down the supply chain to the smallest firms."
Trade union Unite said it remained a grim time for the company's workforce and also was greatly concerned about the impact on the wider supply chain.
Jim Kennedy, Unite national officer for local government, said administrator PricewaterhouseCoopers "must put workers and suppliers at the head of the queue for payment, not the banks and certainly not the Carillion boardroom whose greed and recklessness has brought this giant company to its knees and imperilled so much of our public services."
He added: "One thing is evidently clear from this: there must be no business as usual for big business. There has to be an urgent inquiry into how a company that loaded itself with debt, which undercut competitors with unsustainable bids, which hoovered up vats of public money, and that had repeatedly alerted the government to its own financial shortcomings got its hands on so much of the public sector and taxpayers' cash."
Suppliers and subcontractors are at extra risk as most of them had been made to wait four months by Carillion to receive their bills, according to the Federation of Small Businesses.
Mike Cherry, chairman of the FSB, said: "It is vital that Carillion's small business suppliers are paid what they are owed, or some of those firms could themselves be put in jeopardy, putting even more jobs at risk besides those of Carillion's own employees.
"These unpaid bills may well go back several months. I wrote to Carillion back in July last year to express concern after hearing from FSB members that the company was making small suppliers wait 120 days to be paid. Sadly these kind of poor payment practices are all too common among some big corporates. Perhaps if they weren't it would be easier to spot the warning signs of a huge company in financial trouble.
"When the dust settles on this sorry saga, there is also a wider lesson to learn about the concentration of public contracts in the hands of a small number of very big businesses. Public procurement must be much more small-business friendly, in which it is easier for small firms to navigate the system and the Government should prioritise meeting its target of at least one third of taxpayer-funded contracts going to smaller firms."
INVESTOR INTEREST
The Financial Conduct Authority confirmed that it had suspended shares from the London Stock Exchange official list effective from 7:45 GMT following the company's announcement.
Investors in Carillion holding out for a turnaround are left in the lurch, said analyst Neil Wilson at ETX Capital. "This was a case of bad management and pitching for contracts at any price, but the government and banks could, or may be should, have done more.
"Given the government was already up to its neck in this, shareholders have every right to be disappointed. The FCA is looking at the timing of profits warnings but you could also argue that the number and value of government contracts being awarded following those warnings also misled investors by painting a false picture of health. They may also question why banks that were bailed out by taxpayers were among those who forced the company to the brink. A terrible mess and one that will take a long time to clean up."
Expectations for how the fall-out would spread led to indecision for investors. The likelihood that Carillion's contracts will be re-tendered saw shares in Kier rise 3.5% on Monday, though fellow construction groups Balfour Beatty and Galliford Try fell more than 3% and 7% respectively, while government outsourcer Serco jumped over 7%, G4S was up 1% and Capita flat. Speedy Hire fell 5.5%.
Russ Mould, investment director at AJ Bell, said while the recriminations are only just beginning, investors could immediately draw several lessons from Carillion's descent to apply to stocks from all geographies and sectors.
Chiefly, he highlighted the massive complexity and span of the group. "It is hard to find what operational synergy or overlap in expertise can be found between providing school meals, maintaining prisons, building hospitals or arranging project finance, yet Carillion did them all and it did so in several geographies, not just one," he said.
"The very best long-term investments develop a competitive edge - via a technological lead, a brand or market share, for example - and then deepen their core competence. Carillion was juggling complex, long-term contracts across a range of disciplines and geographies, a feat which ultimately proved beyond it, especially once a small number of big projects went wrong."