Major construction firm Carillion has officially collapsed, leaving financiers rushing to explain what went wrong and subcontractors wondering whether the company’s major projects are still salvageable.
Carillion was forced into liquidation yesterday after accruing debt and pension liabilities of £1.5bn.
Chairman Philip Green said: “"In recent days we have been unable to secure the funding to support our business plan and it is... with the deepest regret that we have arrived at this decision.”
The demise of the company has largely been blamed on over-ambition: Carillion had taken on several massive government projects as a contractor, including the £350m Midland Metropolitan Hospital at Smethwick and a £745 bypass in Aberdeen. It had also been working on prisons, schools and even defence-related projects.
While these might sound lucrative, there are a few drawbacks. We all know that the bigger a job is, the longer it will draw on for, so it pays to make sure that your money is secure. However, with projects like these the estimations of generated revenues are essentially, well, estimates.
In other words, the company took on several huge projects but didn’t have a guarantee of the money it would make (I’m sure an economist could make better sense of it).
In July last year, Carillion issued the first of three profit warnings, saying that tenders “have been accepted with a high degree of uncertainty about key assumptions…”
That is a nice way of saying that the company had to forget about £599m which it previously thought it would be receiving for jobs, delivering an overall provision of £845m.
As bad as this was, it only got worse - Carillion had other commitments in Canada as well as the Middle East which it either struggled to get out of or desperately tried to secure payment for. Meanwhile, several of its big projects encountered expensive drawbacks, including a case of asbestos being found on a work site in Liverpool.
Now, did the people in charge take action against this downward spiral? Not exactly - in fact, the government offered Carillion more contracts after it issued the warning.
While Carillion racked up more debt, banks and shareholders became less sure of its prospects. This led to digging, which led to even greater alarm about the finances involved. Eventually, Carillion told suppliers that its pension terms were being increased to 120 years, which was a pretty clear sign of how bad things were getting.
So finally, after 200 years of business, Carillion was broke, overstretched and quite lacking in any confident supporters. In the end, the government chose not to bail it out.
This will have quite a few knock on effects, with many people fearing that the business’s largest projects will encounter huge setbacks as a result of the collapse. The Financial Conduct Authority will also be looking into whether Carillion kept its shareholders and the general market properly aware of its failing health.
Luckily, Carillion’s employees have been told to keep going, assured by the government that they will be taken care of. In Britain alone this amounts to 20,000 workers, with a further 23,000 overseas.
It mainly goes to show you: bad financial decisions can ruin you no matter how much money you have to play with!