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Carillion woes hit construction sector

High Speed Rail, Construction

High Speed Rail, Construction

The collapse of construction giant Carillion was always likely to be used as a political football, particularly given its role in providing public services and infrastructure, along with the government’s role in overseeing its contracts. 

We’ve heard criticism from across political circles as to why a company that had issued three profit warnings in the space of a year was still being given large government contracts. This would certainly be a valid criticism until you start to think a little and look at the alternative scenario.

If the government had adopted such an approach and not given out contracts a few years ago when Balfour Beatty was undergoing a similar crisis, while it was undertaking a significant restructuring of its business, it’s highly unlikely the company would be trading today, as the resulting loss of confidence would have exacerbated the company’s problems, and probably brought about the very outcome ministers are now wrestling with respect to Carillion.

By the middle of 2015 Balfour Beatty had issued seven profit warnings over the course of a two year period, and during 2015 the company still manage to obtain orders to the magnitude of £3.1bn, which included a number of government contracts, including work on Crossrail and the Thames Supersewer.

Since that crisis riven time Balfour Beatty has managed to return to profit and reinstated the dividend proving that the government was right to continue to award the company contract work, albeit I would suggest with contingency plans if the worst were to happen.

Like Carillion, Balfour Beatty employs thousands of people across its business, not to mention the thousands of subcontractors all the way down the supply chain across the UK, and we are seeing the ripple out effect already with respect to other parts of the industry setting aside provision in respect of Carillion's collapse.

Balfour Beatty itself warned of a £40m impact yesterday, along with Galliford Try, while today engineer Van Elle saw a slump in its share price as it announced a £1.6m exposure for work done for Network Rail.

While Carillion’s problems are unfortunate, attention would be better spent in looking at the corporate governance of the company and why shareholders felt it was prudent to allow the payment of a dividend at a time when the pension deficit more than doubled from £317m in 2015 to £663m at the end of 2016.

There was also the fact that while long term debt remained fairly steady at between £508m in 2012 to £592m in 2016, the amount of short term debt started to rise quite sharply from £263m over the same period to £760m in 2016. This it turns out was as a result of the company accessing a government scheme called the “Early Payment Facility” in order to pay its suppliers on time as cash flow dried up due to some contractual disputes on a number of its contracts.  

This meant that rather than Carillion owing its suppliers its banks paid the suppliers and acted as a bridge for the slowdown in cash flow.

Now that the company has gone into liquidation the autopsy can begin, but the main focus needs to be on the corporate governance of the company, something the FCA is already looking into with respect to the transparency and timeliness of last year’s profit warnings.

The conduct of the auditors is also likely to come under scrutiny, along with the banks who must have known the scale of the problems facing the business, and now having to take large losses.

Certainly there will be a cost to the taxpayer from Carillion’s collapse, as the public sector roles are brought back under government supervision, but to use this as an excuse to bring back all public sector service jobs would be an even bigger cost, despite the problems across the sector.

It is true that Carillion management has shown itself to be completely inadequate, however government oversight of these contracts hasn’t exactly been optimal either.

Corporate governance, accounting standards, procurement procedures, tendering arrangements, service level agreements and oversight are all likely areas where an inquiry needs to focus, anything else is a distraction if we aren’t to have another Carillion in the near future.

Some of the warning signs were there, unfortunately you needed to dig deep to find them. That most of us didn’t spot them suggests there is plenty of blame to go around, when it comes to this sorry and sad tale.

On a separate point it does also suggest that maybe company accounts need to be made much more transparent, so that it is more difficult to mask these sorts of problems.

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