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So, it has happened – a lot quicker than I thought it would. Although I should really have been keeping abreast of the news, I didn't actually hear last year's profit warnings or know that Carillion had been awarded a contract by Chris Grayling for HS2 in what turned out to be their dying days. Because of this, I didn't know that they were in trouble, and so their collapse did come as a surprise to me – apparently many other people saw it coming. In the end, the UK government decided not to bail them out, resulting in Carillion's liquidation. I hope that this was for sound economic reasons, rather than purely ideological ones, although we may never know as what matters now is the consequences. No point poring over what might have been; there's quite enough to put right whatever decision they might have reached. It is worth exploring the type of work that Carillion was employed for: this will allow us to see just how many pieces there are to pick up.
Carillion is/was one of the largest construction firms in the UK, but you might not have even heard of them. You may find it alarming to discover how embedded they were in our public institutions. Their collapse is a big mess. They were last in the news with the current level of coverage way back in 2001 when there was controversy over the awarding of PFI (Private Finance Initiative) contracts to them and other large contractors. I have worked on numerous PFI projects, and based on the nature of the contracts, and how a contractor runs such a project, it does surprise me that such a large player as Carillion could end up here. In such agreements, a contract is drawn up for a new public sector building to be constructed and maintained for a period of time, usually 25 years. This would result in the government effectively leasing the building and its Facilities Management services from the company awarded the contract. This type of agreement was criticised for selling off national assets and outsourcing local government functions to private companies – “privatisation by the back door,” as Harriet Harman called it. On the face of it, you may not see the problem – the public wouldn’t see the difference, right? The same service is provided in the end, isn’t it? Well, not exactly.
The UK public sector has had a rich and tumultuous history over the 20th and 21st Centuries. What we now know as the public sector began as the result of the assessment of the overall state of Britain during WWII. Following the war, Britain was in a dreadful condition. The country’s infrastructure and towns were devastated from German bombings, and the population was hungry, impoverished and sick. The government implemented massive top-down reform of healthcare, education, and welfare.
Healthcare, education and other municipal services are not traditional profit-generators, and until relatively recently we did not even consider that we might use a business-led strategy to provide these services. The post-war reforms were paid for through taxation, and the government directly employed the staff needed to run these nationalised industries. These changes also joined together many services that had been provided by disparate providers, creating a joined-up and consistent service accessible to all. While privately-run companies operated in many industries prior to this reform, taking them into public ownership meant that the government could ensure that equal provision was available for every citizen. Formerly, private companies would only operate where it was profitable to do so, and if they went bankrupt or sold up there was nothing to replace them.
On the whole, the post-war investments in the public sector were a success. There were a few bumps along the road, and not all of the proposed policies could be put into action. But as a result of what they were able to achieve, unemployment was reduced, Britain was able to be rebuilt, and the health and prosperity of the nation went up. This all sounds wonderful, so how have we ended up where we are now? It’s tempting to blame Margaret Thatcher, and she does deserve a decent chunk of that blame. But the 1960s and 70s governments of both red and blue colours laid the foundations for many industries to return to private hands. Thatcher did, however, really go to town with this idea, marking the “end of society” and the rise of neoliberalism.
Many industries were still in the remit of the public sector by the end of Thatcher’s final term in office, and these were privatised during the 1990s, under the Major and Blair governments. Some of these measures have been acknowledged as successful, notably the deregulation of the telecoms industry, which drove innovation as well as revenue for the UK. One of the hallmarks of Blair’s premiership was the expansion of public services in conjunction with the private sector. It was this policy that saw the explosion of PFI, originally begun in 1992.
Carillion was set up in 1999, and the bulk of their work has been large, public-sector projects. Hospitals, schools, roads and rails, they’ve been responsible for structures that touch all of our lives. And they have some projects still in hand. The trouble with that (today) is that they have left us with a lot of unfinished business. This was one of the possible issues that was highlighted with the original criticism of PFI. That if a provider were to go bankrupt, it would be the taxpayer that ended up picking up the tab. That is even more pressing in the case of Carillion, because they are responsible for so much.
There were many other criticisms of PFI, raised at the time of contracts being awarded, that are gaining attention again today, because they have been proved right. The biggest selling point of such an arrangement is that it will transfer risk to the private sector, and deliver projects with less wastage. Critics disagreed, and someone with no financial training or knowledge of the construction industry might think their opposition sounded crazy – it’s a simple concept, right? Private firm does the work for a fixed fee, easy-peasy. Well, no. The structure of the work contracts and remuneration agreements were very generous to the suppliers, or rather, they were easily manipulated to game the system.
There are numerous Carillion projects in progress – be they at the design stage or on-site. It seems that for those at the coal face, it was “business as usual” up until the end. That's normal for any business about to go under; those at the bottom of the food chain are the last to find out. This allows the business to squeeze the last drops of money out before they have to cease trading. And so we have deserted building sites, reminiscent of the early 2000s, with towers half-built, wrapped up and waiting for the money to roll in again.
It's not just brick-and-mortar projects that were underway. Many completed PFI facilities are in the management period, and Carillion also had some standalone facilities management contracts with entities such as hospitals and schools. These are more pressing, because we need to deal with those right now; a new building can wait a year or two longer.
In order for a private company involved to finance the work they have been appointed to do under a PFI contract, they would take on debt via private finance (banks, shareholders), which would be underwritten by the government – so that tax revenue was offered as collateral. The idea of using private firms to construct and maintain public facilities is to harness the expected efficiencies that should arise from the model under which private companies run. This works well when the construction industry, and the economy as a whole, are doing well, but when it falters, as is the case now, the cost falls back on the government not just for the original contract fee, but to rescue a doomed project and/or a doomed company. That’s where the talk of Carillion being “too big to fail” came in. The government could have bailed out Carillion, but should they have? During the banking crisis it was recognised that if the government didn’t step in and put some money behind failing financial organisations, then it would wreck our economy. This caused much displeasure in the media and in parliament, but it was simply a pragmatic answer. Our economy relies so heavily on the banking sector that we had little choice. So was Carillion too big to fail? I guess we are about to find out.
Privately-run businesses are only going to take on work if they know it will be profitable to do so – except in the case of “suicide bidding,” a practice that plagues the construction industry during times of stagnation and low investment. The practice involves submitting an artificially low bid for a project, that you know will undercut your competitors and at least guarantee you some work to keep your employees in a job and your business running. It’s risky, and completely unsustainable, but during a downturn it often becomes the only option left. When PFI contracts are awarded, the government looks for the supplier that will provide the best value. Value is not the same as price, but let’s be honest, they want the lowest bidder. If you’re that company, desperate to get the work, you’ll look at all the ways you can minimise your costs, ranging from the proposed building materials and installation methods, to the level of service you will provide during the lease period.
This is where we have an important culture clash: the public sector has a need that is not governed by cost – the function needs to be performed, and sometimes it just can't be streamlined. The private sector wants to provide a service for the least possible resources – meaning the bare minimum they can get away with. This has become noticeable in contracts that give perverse incentives – the contractor is effectively rewarded for behaviour that goes against the interests of their client, the government & taxpayer.
In my experience, 90 percent of the PFI design phase is negotiating the cost down and “value engineering,” where the design is reduced in scope to bring in a leaner capital cost. This has led to criticism that the end product is of a lower standard than it would be if the work was kept in-house in the public sector (now where have we seen this before?), and the government sees none of the savings. Combine this with the possibility that the government might end up intervening to improve on substandard work, and/or to rescue projects that have failed financially, and the promised value does not seem to materialise.
Within construction, there has been a pattern over the last twenty years or so, for smaller firms to get swallowed by bigger ones buying them out, so that in each specialism there might be a big two or three that are the go-to names. This is just a consequence of the capitalist system; it seems to happen in just about every industry. Banking, telecoms, energy – you either go big or go home. But the government has given so much work to one of those big names, that if it were to fail, it could have repercussions far larger than it might seem at face value. Yes, a lot of money will be lost, and projects will need to be restructured, but who exactly is going to do it when one of the biggest players no longer exists? Is there capacity among other firms? Perhaps, but they in turn would need to expand and swallow up other smaller firms, and we’re back to square one, waiting for the next economic failure to disrupt the whole system again. There's no safety net – just the “invisible hand” of the market.
Another feature of PFIs is that the contract isn’t awarded directly to the main contractor, but a company is created to accommodate a consortium of the main investors. This would be headed by the main contractor (e.g. Carillion), and would include their financial backers and other firms with a financial stake, such as the M&E services contractor. Other design team parties and subcontractors would be paid a fee for their work from what is paid to the consortium. This in itself isn't that controversial, but the working pattern it generates can cause issues.
Other design team companies will bid together with a main contractor and seek to set up partnering agreements, which commit them to working together on a number of projects instead of bidding for work separately and on projects with other contractors. In some ways, this has benefits. The idea is that it will save money by streamlining the bidding process, and the parties in the design team should work together for mutual benefit, rather than antagonistically, as can happen in a traditional contract when each member of the design team reports directly to the client. That is what is supposed to happen. In practice, the design team reports to the main contractor, who has aspirations for the design that aren't all in the client's best interests – namely keeping costs down, often at the expense of quality. Another expectation that is so often unmet is that the cooperation of the design team will generate a product that is more efficiently designed, works as a whole, and will have sustainable long-term performance. The notion of wanting to keep operating costs down should make perfect sense – if the main contractor will be managing the facility for the next quarter of a century, you'd think this would be high on their agenda. There is also the expectation that a slight increase in capital expenditure in order to reduce lifetime costs would be not only desirable, but sensible. However, this has not been the case on any project I have ever worked on. Screwing down the capital cost by excessive “value engineering” has been the goal to the detriment of all others, and there's an explanation for this seemingly counter-productive behaviour.
The terms of a building contract are the coals over which you will be hauled when it's delivery time. All experienced negotiators in the construction industry know to look out for exactly the kind of clauses that could trip them up, but it's a game of cat-and-mouse. What the main contractor could do is get the overall project cost below a certain figure by “value engineering;” and then charge any necessary changes (perhaps from the client, or in order to make the design function) as additional cost. Or perhaps they'll get the project within budget by leaving out some elements, maybe part of the maintenance strategy, say, and the client will need to fund these separately. They could even ditch the running period by selling it off to another firm. Contractors are a wily bunch, and they wouldn't bid low to win public sector contracts if they didn't entertain sneaky ways of maximising profit. End users are tied to the service contract, and cannot replace them if they are unhappy with the service they get. Unsurprisingly, the service in many cases has been substandard, and even dangerously inadequate.
And there's more. Value engineering takes time and effort. It's time that costs money – money that's deducted from the overall fee. So any savings need to bring the total below a budget that is reduced by paying fees for consultants to whittle the design down from the original. A common phrase that was bandied about was that we were “spending a fiver to save a pound.” Maybe practices like these could have led to Carillion's downfall. Operating at low margins, with disproportionate resources dedicated to tinkering at the edges, means that those savings just wouldn't be enough to justify the effort.
PFI is not a perfect way of delivering public services, but it's the model we have, for now. Will it come under scrutiny as a result of Carillion's failure? Maybe, maybe not. It's one piece of the puzzle in their downfall, but there will be more to it. I don't have anything to say on that; as I said to start with, I'm a little surprised that this happened at all.
We need to think about what's left to sort out. There are problems all the way from the top (how do we procure, finance and deliver public services projects) down to the bottom (who is going to provide lunches for schoolchildren and the elderly). And there are some interesting and unexpected consequences in-between. So what now?
What was Carillion working on at the time of its collapse?
Carillion was involved in hundreds of ongoing construction projects in many sectors. Some of their more notable current work includes roadworks, several hospitals, railway projects, schools, and numerous Office & Residential projects. According to the Manchester Evening News, quite a lot of their current projects have an impact on the North West.
In terms of Facilities Management contracts, Carillion operated in most sectors: The NHS, Transport, Defence, Education, Prisons, Libraries & Energy.
What other projects will we need to find suppliers for?
Presumably, all of the above, although the ability and desire to do so will be case-dependent and reliant on whether they are government or private sector projects. Looking to the future, we are going to need to update our infrastructure and continue building public buildings – so we will need to find companies able to take on this level of work, or renationalise some things so that they are provided directly by the government. At present, HS2 looks like it will be picked up by another private company, and there’s no news as yet on any other projects.
What will happen to Carillion's employees and apprentices?
Carillion is no more, and around 20,000 people employed by them directly have lost their jobs. The good news in the short term is that many clients want maintenance and housekeeping operatives to continue their work, and are paying them directly to complete the tasks on their projects. After that, they’re left to the mercy of the jobs market, and who knows what that will be like by then, or how the Carillion debacle will impact the opportunities available. It’s not looking so good for workers on Carillion building sites, be they employed directly or otherwise. Work has stopped and they’ve been sent home, some of them without their tools. Apprentices have been told different things, and while some of them may be able to transfer to other training schemes, there is uncertainty.
But what does anyone do in the result of their employer going out of business? They’ll just have to look for new work and hope that the liquidators are able to extract any outstanding wages and benefits from the company. Here’s the government’s official position on the crisis, and information from the liquidators, who have a duty to ensure continuity of work for direct employees during the insolvency proceedings. So there is a grace period (of unknown length) for some.
What happens to their subcontractors?
They’re in the shit, basically. And their employees (of which there were thousands on Carillion’s sites), are in it up to their necks especially. As well as work ceasing on site and subcontracting firms being ordered off-site, they’re going to make large financial losses. The liquidator will be able to recoup some of the money owed to them, but it will be a tiny fraction. Many of these subcontracting firms will not be able to trade any longer, and will also go bankrupt. Some will have to lay off staff, some will now have huge gaps in their order book, and it’s chaos for all firms affected – even if they can make it out of this relatively unscathed. The loss of such an influential player in the market is hugely disruptive and it has implications for the future of just about all of those who work in the industry, directly or indirectly.
What about companies that partnered with Carillion?
There will be similar problems for these companies as for their subcontractors, although they may be affected less, adversely assuming that they had already been paid for work completed and ongoing. Carillion had an Early Payment Scheme set up with their banking providers that seemed to break down over the last few months and is now defunct. But consultancy fees are agreed and paid differently, so they could avoid losing money owed. Working for a design consultancy previously on similar projects, we never did any work that we’d not agreed a fee for, and it was paid upfront in stages, before the job was completed. However, if a firm relied heavily on Carillion for orders, they will have to find work from elsewhere to maintain their business.
Who are their creditors and what will happen to their money?
The obvious ones are all the subcontracting firms that had contracts with Carillion, and their money has mostly disappeared into the ether. Additionally, Carillion took out loans with the UK government and a number of banks, which they will default on. Some “good” news: their pension fund is £580 million in the red – but the Pension Protection Fund (an independent government body) should be able to ensure that all members of their pension schemes get what’s owed to them.
Have Carillion's directors actually done anything wrong?
There have been numerous reports of management shenanigans in the press (many of these we wouldn’t have paid much attention to, as Carillion was still afloat at that point), but while we may question how ethical these were, they may not be actually illegal or against industry regulations. But we will find out. The government says it is fast-tracking an investigation into the directors’ conduct, but that could still take ages – it’s all relative.
We do know that Carillion had a scheme that guaranteed the salaries and bonuses of their top executives in the event of bankruptcy. There is also their controversial payments scheme and delayed payments to subcontractors over the last six months or so. Their method of financing their operations reads a bit like a Ponzi scheme, taking on more work to pay existing subcontractors and shore up debt. There were changes at the top following their profit warning in July 2017. It looks bad, but it could all be above board.
What about Carillion's service contracts? Who will run those?
In the short-term, many of the support staff are going to be employed directly by the entities that need them, and in some other cases, emergency relief is available. In the long-term, those Carillion contracts with time to run will be wound down, and other companies will need to step in to fill the void. The question remains of whether we will continue using the outsourcing model, or if we will return to a more traditional method of directly employing people such as caretakers and hospital orderlies.
How might we do things differently in future?
Truthfully, we might not. We might just carry on as-is, and hope that nothing else goes wrong. There are a lot of companies involved in similar contracts and they are working effectively. Many of the end users of Carillion’s outsourced activities were unhappy with the quality of the service, but nothing changed when concerns were first raised. PFI is all about revenue, and those in charge of such contracts may not have the desire or expertise to manage the day-to-day work of the facilities in their care. This is an opportunity to change things, but it doesn’t mean we’re necessarily going to rip it all up and start again. There are calls from the Labour Party to end privatisation and bring industries back into state ownership, which would be a huge upheaval – although it may be the best option in the long-term. It might also be a huge mistake. It’s one of the options on the table, and I will be watching this one closely.
Will some of Carillion's subsidiaries & acquisitions survive?
The fact that the business is being liquidated means that the only things that remain of value are its assets. Carillion acquired a number of smaller, rival firms during it’s expansion, including some household names, such as McAlpine’s, Mowlem and Ask Real Estate. It doesn’t seem possible that these could un-merge and continue to operate – it looks like they have sunk along with Carillion.
What's the state of other, similar, companies?
At least one is facing financial difficulties similar to the pattern that Carillion followed. The government insists that they are not “the next Carillion,” so that’s pretty much a guarantee that they are. But other construction and outsourcing firms are doing OK-ish, so it’s more complicated than a simple downturn in the market. Carillion’s main rivals all have some blemishes on their record, but are these devastating enough to bring about more failures? Without insider knowledge, it’s hard to tell. However, those that had planned for a scenario like this will be best placed to pick up work and employees from Carillion’s downfall, so they could have a chance to escape a similar fate. Government intervention is a possibility, but there’s no news on this.
Meetings in the construction industry are peppered with clichés. And we will end on one: we are where we are. It’s an utter mess, but we will need to just sort it out. Schools and hospitals need building, meals need serving, railways need maintaining. It’s a little frustrating and a little exciting that there are no firm plans at the moment – it will be interesting politically and economically to see how it turns out. But it causes a lot of anxiety for those whose career has been put on hold, and for anyone presiding over a long-term service contract.
Although the government outsourced much of its public sector role to the private sector, what we now see is the presence of the private sector in every area of our public services, and with potentially damaging consequences. One company having too great an involvement (and there are only a handful that function in this capacity, so it could happen again) creates the risk of collapse of the public sector as well as that of a single company. Continuity is important, but we need to recognise the limitations of a private company’s ability to provide it when they are subject to the fluctuations of the market and “shrewd” business practices, as well as the requirements of the government.
It’s not just the role of the private sector in itself that we need to review, it’s the suitability of models such as PFI. Having worked on PFI contracts, and seen how the design is driven more by cost reduction than quality, I’d suggest that we need to bin them completely and return to traditional project teams with each party accountable directly to the client, even if we do choose to keep a large private sector involvement in the process. PFI is as transparent as mud, and that’s why contracting firms like it so much. PFI was supposed to save money and free up resources. Instead it has lined the pockets of big business and paid off the debts of failed firms, all while falling short on the projects it was set up to deliver. Private firms have no incentive to act in the best interests of the client or end users; and every incentive to scrimp on costs and perform accounting gymnastics. In such a biased arrangement, the public sector ends up short-changed.