Carillion, or the travails of corporate Britain in the wake of the Brexit vote - Politics Forum.org | PoFo

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#14879142
Apart from the fall in the pound, the meltdown of the property market was the most visible signs of impending doom that occurred immediately after the Brexit vote. A number of property funds suspended trading immediately and the real estate market and construction business went into decline. Government changed its procurement policy.

Here now is an update on what happened to one of Britain’s most important building companies. Immediately after the referendum, the company started to issue profit warnings which were followed last year by a dramatic fall in shares together with company restructuring and resignation of a whole series of directors. Today, the company faces bankruptcy. A large network of suppliers and joint venture companies may come down together with Carillion, which could have repercussions on the whole sector. In addition, large public works projects like the high-speed rail may be put into limbo and the tax payer will be made to pick up a huge bill by the Tory government. The government, which has to put all of its resources into the impossible Brexit task, needs to find a quick fix for the bailout.

The only good news is that this gigantic cluster-fuck will make Corbyn’s ideas of renationalisation a sensible choice in the eyes of the electorate.

You may never have heard of Carillion. There’s no reason you should have. Its lack of glamour is neatly summed up by the name it sported in the 90s: Tarmac. But since then it has grown and grown to become the UK’s second-largest building firm – and one of the biggest contractors to the British government. Name an infrastructure pie in the UK and the chances are Carillion has its fingers in it: the HS2 rail link, broadband rollout, the Royal Liverpool University Hospital, the Library of Birmingham. It maintains army barracks, builds PFI schools, lays down roads in Aberdeen. The lot.

There’s just one snag. For over a year now, Carillion has been in meltdown. Its shares have dropped 90%, it’s issued profit warnings, and it’s on to its third chief executive within six months. And this week, the government moved into emergency mode. A group of ministers held a crisis meeting on Thursday to discuss the firm. Around the table, reports the FT, were business secretary Greg Clark, as well as ministers from the Cabinet Office, health, transport, justice, education and local government. Even the Foreign Office sent a representative.

Why did Chris Grayling give the HS2 contract to a company that was already in existential difficulties?

That roll call says all you need to know about the public significance of what happens next at Carillion. This is a firm that employs just under 20,000 workers in Britain – and the same again abroad. It has a huge chain of suppliers – and its habit of going in for joint ventures with other construction businesses means that a collapse at Carillion would send shockwaves through the industry and through the government’s public works programme.

To see what this means, take the HS2 rail link, where Carillion this summer was part of a consortium that won a £1.4bn contract to knock tunnels through the Chilterns. If Carillion goes under, what happens to the largest infrastructure project in Europe? What happens to its partners on the deal, British firm Kier, and France’s Eiffage? The project will need to be put back and the taxpayer will almost certainly have to step in.

Imagine that same catastrophe befalling dozens of other projects across the UK and you get a sense of what’s at stake. Jobs will be cut, schools will go unbuilt (just a couple of months ago, Oxfordshire county council pulled the plug on a 10-year schools project) – and the government’s entire private finance initiative (PFI) model for building this country’s essential services will be shaken to the core. The dirty secret of PFI and all government attempts to pass public services into the private realm is that the shareholders make profits while the taxpayers remain on the hook for any losses.

After all, this isn’t the only case where the public sector’s reliance on one giant private-sector player endangers the provision of basic services. As my colleague Rob Davies reports in today’s paper, crisis-hit Four Seasons Health Care has run into yet another roadblock in its rescue talks. If those negotiations fail, then the big question will be who will look after the 17,000 elderly and vulnerable people in its care.

Or look at rail, where as I wrote this week, transport secretary Chris Grayling has come to a disastrous deal (sorry, “pragmatic solution”) to allow Virgin Trains to get out of their contract to run the East Coast mainline three years early. The public will have to step into the breach with some makeshift arrangements and will forego hundreds of millions in lost franchise payments. The train operators will be able to go about their business and even take on new franchises.

Should Carillion go down, there will be another truckload of questions for Grayling. He awarded the firm its £1.4bn HS2 contract last July – by which time the writing was already on the wall. That job from the Department of Transport may have helped tide Carillion over for a bit – but why did the transport secretary give the work to a company that was already in existential difficulties? A firm known to have grown too quickly by borrowing hundreds of millions. A firm that just a few months later came under investigation of the Financial Conduct Authority. I have long thought that Grayling is less serious minister and more an unexploded landmine. I just wonder what the trigger will be.

But what happens to that minister is just one debacle of many as far as Carillion is concerned. Today you may never have heard of Carillion. Soon you may wish it had remained that way.

The company that runs Britain is near to collapse. Watch and worry
#14879153
Tip of the iceberg.

For the sake of an uninformed American, why was this related to Brexit? Is it because of Carillion's overseas associations which might collapse with the end of EU membership? How specifically did this happen?
#14879158
This seems to have little or nothing to do with Brexit. Carillion simply seems to have borrowed huge amounts of money to expand too rapidly, and now can't service its debts. This gave them the appearance of huge success for a few years, at the cost of flaming out in the medium to long term. It's the old, familiar story of capitalism - hubris followed by nemesis. The problem is, when they finally implode they'll probably blast a huge hole in the British economy.
#14879183
Potemkin wrote:This seems to have little or nothing to do with Brexit. Carillion simply seems to have borrowed huge amounts of money to expand too rapidly, and now can't service its debts. This gave them the appearance of huge success for a few years, at the cost of flaming out in the medium to long term. It's the old, familiar story of capitalism - hubris followed by nemesis. The problem is, when they finally implode they'll probably blast a huge hole in the British economy.


Companies always do borrow money in the expectation of profits from future business, which will allow them to pay the money back. They do it because it is a tested methods that normally works. It only goes wrong when something unexpected like Brexit happens, which triggered a downturn in the property market and the changes in government procurement. That led to a loss in business.

July 6, 2016
Carillion wary over Brexit impact

December 7, 2016:
Carillion sees slowdown in pace of new orders post-Brexit

July 10, 2017
The chief executive of construction and support services company Carillion has stepped down as the firm warned on profits and scrapped its dividend following a Brexit-related slowdown in orders, news which sent its shares plunging almost 40%.

December 13, 2017
Serco CEO on Carillion Deal, Restructuring, Brexit
#14879184
Drlee wrote:Tip of the iceberg.

For the sake of an uninformed American, why was this related to Brexit? Is it because of Carillion's overseas associations which might collapse with the end of EU membership? How specifically did this happen?


It is unrelated to Brexit.

In the British press each and every story is now tied to Brexit as a kind of hook to get more people reading. Also people who voted remain like to claim that each and every bad thing that happens in the UK is a direct result of to vote to leave the EU (and the same with good economic stories being tied to the vote to leave by the few bastions of Euroscepticm allowed to exist in the media). It is very tiresome but any story about economics reported in the UK is now reported like that.
#14879224
You are certainly not alone in that. The conservatives in the US could not stand to give Obama credit for the road map back to prosperity and can't wait to give Trump credit for it. Neither of which is substantially true.

Our media is obsessed with Trump and we are seeing stories like, "Flu in the Age of Trump" and "Fiber and the Wall. The Hardening of Trump's America".
#14879297
Drlee wrote:You are certainly not alone in that. The conservatives in the US could not stand to give Obama credit for the road map back to prosperity and can't wait to give Trump credit for it. Neither of which is substantially true.

Our media is obsessed with Trump and we are seeing stories like, "Flu in the Age of Trump" and "Fiber and the Wall. The Hardening of Trump's America".


I suppose you could argue that his views on healthcare means flu in the age of Trump might possibly be a legitimate article. It's reaching a bit though. ;)
#14879526
The usual big corporation using tax payers money to pay and reward its incompetent executives while the normal workers take the biggest hit on their jobs, pay, pensions etc.
Where are the consequences for the leaders who are supposed to be responsible for all of this?
Its an absolute outrage. Criminal.

Speaking of criminals; It is unreal that the banks refused the governments pleas to lend to Carillion especially after the banks were bailed out (and some even bought out) by the government using tax payers money.

Arrogance, greed and stupidity. Where is the punishment?? Isnt it about time the government started demanding things and standing up to these corporate vampires? Where is the leadership?
#14879539
Potemkin wrote: It's the old, familiar story of capitalism - hubris followed by nemesis.

So is this somehow different from Feudalism, Slave societies, the Soviet Union, Mao or Pol Pott? Communists are constantly blaming things on "Capitalism". But the claims don't seem to stand up to the most cursory analysis.
#14879567
Decky wrote:every story is now tied to Brexit

Fixed price materials contracts set against the falling pound fucked up profitability on low margin government projects.

Telegraph, 31 August 2017 wrote:The pound has hit an eight-year low against the euro, falling to near parity with Europe's single currency.

... a pound now buys €1.0763 - down 0.31pc today alone.

Such levels are approaching the all-time lows seen at the height of the financial crisis in late 2008 and early 2009.

The pound has slumped against the euro over Brexit uncertainty and concern that the U.K. is headed for a ‘hard Brexit’.


:lol:
#14880341
Private Financing Initiatives (PFI) look like a clever way of making government debts look smaller. Unfortunately, future generations of tax payers will have to foot the bill, while the government is selling off its table silver and private operators can fleece the public to their heart's content now.

The Tory government is daily sinking deeper into a swamp of its own making. By now, Corbyn must be heaving wet dreams like a teenager.

Taxpayers to foot £200bn bill for PFI contracts – audit office

Taxpayers to foot £200bn bill for PFI contracts – audit office
Cost of privately financing projects ‘can be 40% higher’ than using public money


Taxpayers will be forced to hand over nearly £200bn to contractors under private finance deals for at least 25 years, according to a report by Whitehall’s spending watchdog.

In the wake of the collapse of public service provider Carillion, the National Audit Office found little evidence that government investment in more than 700 existing public-private projects has delivered financial benefits.

The cost of privately financing public projects can be 40% higher than relying solely upon government money, auditors found.

They also disclosed that the government has a £35m equity stake in one of Carillion’s major projects – public money that is now at risk.


There are currently 716 operational private finance deals with a capital value of around £60bn, the report said.

Annual charges for these deals amounted to £10.3bn in 2016-17. Even if no new deals are entered into, future charges that continue until the 2040s amount to £199bn, it said – money that could finance the entire NHS for 20 months.

The findings come hours after Theresa May claimed the government was merely a “customer” of Carillion, which collapsed on Monday following involvement in dozens of major public projects.

The prime minister also told the House of Commons that the government could claw back some of the bonuses that have been paid to Carillion’s executives, such as £1.5m dished out in 2016 to the former chief executive Richard Howson.

Employees on most private sector contracts held by the failed construction company will continue to be paid, it emerged on Wednesday, as the government urged banks to deal “swiftly and sympathetically” with small firms caught up in the crisis.

Unions reported cases of workers being laid off across the country as a number of construction projects were stopped, with no certainty over when work would restart.

Following publication of Thursday’s report, Meg Hillier – the chair of the public accounts committee, launched a scathing critique of the private finance deals.

“After 25 years of PFI, there is still little evidence that it delivers enough benefit to offset the additional costs of borrowing money privately,” she said. “Many local bodies are now shackled to inflexible PFI contracts that are exorbitantly expensive to change.

“I am concerned that [the] treasury has relaunched PFI under new branding, without doing anything about most of its underlying problems. We need more investment in our schools and hospitals but if we get the contracts wrong, taxpayers pay the price,” she said.

Auditors examined PFI deals drawn up over 25 years under Tory and Labour governments, as well PF2, introduced as improved public-private financing deals set up under David Cameron’s premiership.

They did not comment on the merits of the PFI and PF2 systems, which raised funds to build schools, hospitals and roads in return for regular payments.

But the report found that overall cash spending on private finance deals is higher than publicly financed alternatives.

An analysis of costs for building one group of schools “found costs are around 40% higher than the costs of a project financed by government borrowing,” auditors said.

Whitehall has no means of measuring whether PFIs are value for money, the report said. “There is still a lack of data available on the benefits of private finance procurement.”

Under PF2, the government will gain a smaller proportion of profit if deals are refinanced – a cut from 50% of gains to 33% – which could cost taxpayers millions of pounds.

This was done, the report said, to keep PF2 projects off the balance sheet. “HM treasury acknowledges that these changes could have a moderate negative impact on [value for money],” the report said.

The report examined six PF2 deals to finance schools and hospitals. It disclosed that the then chancellor George Osborne considered bringing historic PFI debt on to the government’s books in 2012, but rejected this, partly because of a risk to the UK’s AAA credit rating.

Months later, Britain’s rating was downgraded to AA1 following an economic slump.

The report, which was written before the collapse of Carillion, said the government has a equity stake in the delayed £350m Midland Metropolitan Hospital in Smethwick. “The government holds 10% of the equity and Carillion, the primary contractor, holds the other 50%.”

Research by auditors found that private investors who charge public bodies for insurance on each project, have not passed on 15 years of lower insurance costs.

“Public bodies are paying more for insurance than the actual cost, providing a gain to [private] investors,” it said.

The report also reveals that bringing the largest PFI deals back in to public ownership would cost more than £2bn with other costs on top – on average an additional 23% on top of the outstanding debt of these deals.

Labour and the unions have called for an end to risky public-private deals. Jeremy Corbyn said: “These corporations need to be shown the door. We need our public services provided by public employees with a public service ethos and a strong public oversight.”

Rehana Azam, the national secretary of the GMB union said the report showed PFI to be “a catastrophic waste of taxpayers’ money”.

She added: “Carillion is just the latest example of how bad things go wrong when public services are left in the hand of profit-hungry companies.”

A government spokesman said vital infrastructure projects like roads, schools and hospitals are paid for by PFI and PF2, stimulating the economy and creating jobs.

“We have reformed how we manage PFI contracts, and through PF2 have created a model which improves transparency and offers better value for money,” he said.

“Taxpayer money is protected through PFI and PF2 as the risks of construction and long-term maintenance of a project are transferred to the private sector.”
#14884742
Is the next domino about to come tumbling down?

Capita: more than £1bn wiped off value of UK government contractor

Whatever it does to the economy, this is bound to bring Corbyn closer to Downing Street. Compared to the Tory's ill-fated privatization programs, Corbyn's economic policies must start looking appealing even to conservative voters.

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