Collapse of Construction Giant with 43,000 Employees Globally Sparks Fear and Mayhem

“The company that runs Britain”: profits were privatized, costs will be socialized.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The decline and fall of 200-year old UK infrastructure group Carillion was as spectacular as it will be costly. It was forced into compulsory liquidation this morning, following the breakdown of crisis talks with its banks and the government. The company, with global sales of £5.2 billion in 2016, has 43,000 employees, including 20,000 in Britain and 10,000 in Canada. It’s saddled with debts and an underfunded pension plan.

Its shares had plunged by 95% over the past 12 months, from £2.40 ($3.53) in January 2017 to as low as £0.12 ($0.17).

“We have been unable to secure the funding to support our business plan, and it is therefore with the deepest regret that we have arrived at this decision,” the company said in a statement. And the government is now forced to guarantee public services, ranging from school meals and hospital maintenance to roadwork.

Carillion’s problems began after a spate of contract delays and a decline in new business left it at the mercy of its lenders and battling a burgeoning debt pile. The rot became irreversible once the hedge fund community, scenting fresh blood, began shorting the stock en masse in November 2016.

In July 2017 a partial review by auditors KPMG identified £845 million of contract write-downs, sparking a massive rout in the shares. The finance director who helped unearth those problems, Zafar Khan, was duly fired by management in September, but the damage had already been done: Carillion shares were down 70% and the stock was the most shorted in Europe. As a leading City analyst told City A.M, the extent of the problems was “gobsmacking.”

Last week, senior government ministers held a crisis meeting to discuss further steps. The choice was stark: either bail out the firm or it let it fail, with ugly ramifications for its project partners, employees, creditors, including three lenders, HSBC, RBS and Santander UK, and UK public services as a whole.

The government chose the latter.

This is a company that builds and maintains schools, roads, hospitals, prisons, police stations and army barracks — or at least used to. It was also meant to play a major part in Britain’s High Speed Rail 2 project (or HS2), Europe’s biggest infrastructure project. In total, the firm participated in over 450 public-service projects. The fate of some of those projects and of the jobs associated with them is up in the air.

The UK government has pledged to take over Carillion’s public service projects, meaning a further drain on public spending. Nonetheless, jobs will be cut, schools and hospitals will go unbuilt and big questions will be asked about the wisdom and sustainability of the UK government’s almost 30-year old private finance initiative (PFI) model for building essential services. As Aditya Chakrabortty writes in The UK Guardian, “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.”

PFI deals were invented in 1992 by the Conservative government and then enthusiastically rolled out by the subsequent Labour government. The schemes usually involved large scale public buildings such as new schools and hospitals which were previously funded by the UK Treasury. Under PFI they were put out to tender with bids invited from developers who put up the investment to build new schools, hospitals or other schemes and then leased them back.

The schemes allowed ministers to harness big sums of private capital to invest in public projects, such as new schools and hospitals, without paying any money up front — and thus keeping the level of current public debt relatively low. Repayments are made over a long time scale, usually between 25 and 30 years but occasionally as long as 60 years, but often at an exorbitant rate of interest.

For the developers involved, the returns are generous and relatively safe, backed as they are by the UK taxpayer. But if the developer doesn’t want to hold on to the asset, there’s always the option of “flipping,” or selling on to some other investor, invariably one based in a tax haven, so not even UK corporation tax is paid on the profits. Carillion was one of four companies (the other three being Balfour Beatty, Interserve and Kier) that pocketed over £300 million flipping PFI schools and hospitals to the highest bidder. And that was before the company’s existential problems began.

In other words, many of Carillion’s PFI assets are already in the hands of foreign-domiciled investors, meaning that while the government will have to take over many of the services Carillion can no longer provide, it may still have to pay leasing costs to the foreign-owned firms that Carillion sold out to. Otherwise, those firms may sue the government for lost profits.

This is all happening as the true cost of PFI is becoming apparent. In April 2017, a bombshell report by the National Audit Office warned that the price tag for paying PFI firms would reach £8.6 billion in 2018 alone. In total, taxpayers owe a mind-watering £121.4 billion on public projects that are worth just £52.9 billion. And the compound interest continues to grow.

An investigation by The Daily Telegraph revealed that young people starting work in 2017 would end up paying taxes for the Government’s Private Finance Initiative until they are nearly 70. In return, they get to use increasingly costly and shoddy services.

As for the companies involved, they will continue to pick up billions in easy, virtually guaranteed profits — unless, of course, they go bankrupt, in which case the shareholders get wiped out, management walks away with well-filled pockets, and taxpayers get to foot an even bigger bill for public services the private sector can no longer provide. By Don Quijones.

The “Non-Imperial Empire” wants to get bigger. Read…  EU “Empire” Plans to Grow Even Bigger Despite Brexit & Difficulties Keeping Eastern Members in Check

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  60 comments for “Collapse of Construction Giant with 43,000 Employees Globally Sparks Fear and Mayhem

  1. Joan of Arc
    Jan 15, 2018 at 3:14 pm

    Why doesn’t the ECB buy up all of it’s debt, bail out the lenders, then forgive the debt and make the company whole again. I think the company should file a discrimination law suite since others have been bailed out.

    My new motto is, “Bail out the rot and keep the junk afloat.”

    I am cancelling my old motto, “QE must stop, junk must drop.”

    • Realist
      Jan 15, 2018 at 3:32 pm

      I suppose this is in the bailwick of Threadneedle Street, ie BoE

    • Eric Smith
      Jan 15, 2018 at 3:38 pm

      That may very well happen, but not without a significant cost to the UK. That cost will be the EU demanding that Brexit be declared null and void and Britain rejoin the EMU. You can bet that Draghi won’t let an opportunity like this pass, so it’s most likely that the ECB has already approached May about this.

    • Frederick
      Jan 15, 2018 at 6:05 pm

      The ECB? But but but What about Brexit?

  2. Paulo
    Jan 15, 2018 at 3:15 pm

    This is where folks have to check campaign contributions and Board memberships for Govt and ex-Govt MPs.

    This is what happened where I live, BC Canada, where right wing ‘Liberals’ fondly touted PPPs. Our new, supposedly socialist Govt has now outlawed political contribution from Corporations and Unions.

    Look for the PPP model when the Repubs put out their infrastructure plan. (PPP= Private/Public Partnerships). In other words, private profits and public costs/losses.

    • Alistair McLaughlin
      Jan 15, 2018 at 3:49 pm

      And let’s not forget Justin Trudeau’s “Infrastructure Bank”.

    • JB
      Jan 15, 2018 at 4:14 pm

      good point paulo , the US is headed down the same path is the UK with Trump’s infrastructure vision. Don’t know why we can’t build something cost effectively without public incentives/subsidies.

      http://www.newsweek.com/2017/09/15/donald-trump-infrastructure-plan-mike-pence-privatization-658403.html

      • Jan 16, 2018 at 4:57 pm

        As Max Keiser has said, as interest rates were dropping the government could have borrowed money cheaper than anyone to fund necessary projects. Apart from the political angle of seeming to keep our debt down and growing the economy, this reeks of corruption. Who benefited from this plorigraphy of tax payers money?

    • kam
      Jan 15, 2018 at 7:02 pm

      Paulo
      Didn’t your corrupt former government sign contracts for private electric power at 2 to 3 times the price they sell the same power to the consumer?
      Best return on investment always is buying a politician, no matter where you live.

      • Paulo
        Jan 16, 2018 at 8:00 am

        Yes they did, and rewarded disgraced ex-premier Gordon Campbell a lifetime gig in London as some kind of rep to the Queen.

        It is sickening it was so blatantly corrupt. If we have elctoral reform, it should keep out such blatant theivery going forward. What was disgusting is all this stuff is always done under the meme of “Financial Prudence” because, “We are a business Govt”. Sound familiar? It should, it is common around the world.

    • OutLookingIn
      Jan 15, 2018 at 9:01 pm

      Paulo –

      Carillion is responsible for maintenance and upkeep of 40,000 kilometers of roads in Ontario and Alberta, Canada. Those jobs are not your everyday minimum pay, but high wage. The resultant unemployment shock and loss of tax revenue, may very well be the proverbial straw.

      • Javert Chip
        Jan 15, 2018 at 9:44 pm

        Carillion managers are (were?) a bunch of jerks.

        They forgot to change the name to Carillion-Blockchain.

      • Paulo
        Jan 16, 2018 at 8:03 am

        There is always a new contractor ready to assume road maintenance chores.

        Of course, I remember when we used to actually have BC Highways. Our roads were plowed then. Where I live we now have a contractor called Emcon. Their work is spotty, to say the least.

  3. Phil Collins
    Jan 15, 2018 at 3:23 pm

    I noticed that they had a rescue plan where they were going to sell off 300 million in assets but they were hardly able to make a dent……

    Perhaps the market is not so liquid as we think!

    • d
      Jan 16, 2018 at 2:06 am

      “Perhaps the market is not so liquid as we think!”

      NO they valued the “assets” at 300m and the Market valued them at 30 M or something similar to that. So no sales occurred. A bit like club-med Banking NPLS.

      The Banks want 90% of the face value and the market wants to pay 10%.

      So the banks are still sitting on their worthless NPLS, and will do so until somebody forces them to face reality. As they will never make enough profit to be able to afford to write them off against taxes.

      That somebody, is frequently the liquidator.

      Carillion has a date with him.

  4. Steve clayton
    Jan 15, 2018 at 3:54 pm

    Our local hospital cost 300 million to build. PFi means it will cost 2 billion overall. Complete scandal. As for carillion, I believe with government support went low on quotes to get the business. A lot of genuine companies went under because of that. Karma.

  5. Maximus Minimus
    Jan 15, 2018 at 4:08 pm

    Something doesn’t pass the smell test. How were the government contracts signed if the winner is able to flip the contract without the government approval – to offshore companies? That’s odd, or is the rot so deep?

    • Steve clayton
      Jan 15, 2018 at 5:13 pm

      Very good question maximus, it stinks. It wouldn’t surprise me if a lot of ex prime minister’s and mps are making money from these deals

    • MC01
      Jan 16, 2018 at 4:43 am

      The Private Finance Initiative (PFI) is a complicated beast and that came about on purpose.
      The UK government agency handing out a contract doesn’t merely hand it out to some chap. They have to hand it out to a consortium of private sector firms, known as a Special Purpose Vehicle (SPV).
      The SPV is practically speaking nothing more than a Chinese box (boite à secret), an empty legal society created to fulfill very narrow and temporary purposes, such as running a very specific PFI until the twenty years contract is up.
      SPV’s are invariably created and registered in tax havens and, here’s the really funny part, this is not merely legal but effectively incentivated by EU legislation to insulate the founding companies from financial risks.

      To make things even more bizarre and convoluted, most tax havens commonly used in SPV’s throughout Europe are incorporated in either Crown dependencies (the Isle of Man and Channel Islands) or British Overseas Territories (such as the British Virgin Islands and Gibraltar), which are technically defined as “territories for which the United Kingdom is responsible” despite being effectively self-governing. The peculiar nature of Dutch and especially French overseas territories makes them far less well suited as tax havens.
      This allows several sleights of hands (again: all 100% legal albeit not exactly cheap) to reduce financial risks and, less importantly, tax rates: while, say, the Cayman Islands, are technically not part of the EU they are part of the UK and there are all sorts of treaties regulating the financial and fiscal relationships between London, and by reflection the EU, and her “colonies”.

      Of course one may wonder: the Italian police treats me as a smuggler when I cross the border from Switzerland and the less I say about Belgian authorities the better but if a large company forms an SPV in Gibraltar to bid in a government contract in Scotland or Spain nobody bats an eyelid… I have no problem with tax havens but I’d like them to be affordable for people like me as well.

      • JR
        Jan 16, 2018 at 11:27 am

        Great comment! Somehow this scheme has family traits recognizable from the “Double Irish arrangement” (wikipedia title) birthed famously by tech in the EU. Well no matter. I am sure that the firms now employed to finish the Berlin Airport will be more than ready to bid the work left unfinished by soon-to-be-nationalized zombie.

        • MC01
          Jan 16, 2018 at 1:58 pm

          Indeed: then people keep on falling for politicians frothing at the mouth, flexing their muscles and threatening to “destroy tax cheaters”. I suspect most people think a Dutch Sandwich is either a delicious snack or something born in Amsterdam’s thriving De Wallen district (don’t look it up if your significant other is looking and cancel your browsing history afterwards)… willingly kept in the dark by those same propagandists agitanting for “tighter rules”.

          And I am pretty sure as well there will be plenty of firms ready to pick up where Carillion left and perhaps do it better and for less money.

        • Flying Monkey
          Jan 18, 2018 at 8:06 pm
      • d
        Jan 16, 2018 at 11:47 pm

        “I have no problem with tax havens but I’d like them to be affordable for people like me as well.”

        Reality injection required.

        If you cant afford to join, you don’t belong.

        In private banking, it IS, that simple.

      • Kiers
        Jan 19, 2018 at 2:57 pm

        the SPV aspect, it helps keep project debt off the books for the gov as well, no? Result: gov has no “deficits” to show for, Tories happy.

  6. Gershon
    Jan 15, 2018 at 4:11 pm

    Markets riding high on the central bankers’ financial crack cocaine mainlined to their oligarch pals, while the looted, debt-ridden physical economy moves closer to outright collapse.

    Heckova job, central bankers.

    • Frederick
      Jan 15, 2018 at 6:08 pm

      It’s going to be VERY ugly Hope you have a good stack there Gershon

  7. michael Engel
    Jan 15, 2018 at 5:20 pm

    JNK & HYG : big red candle, big gap, big red vol. Lately more big red vol. ==> the invisible volatility.
    Europe JNK refugees will seek legal shelter in UST10Y ==> $USD strong !
    ==> stocks + commodities change of romantic story into a broken
    hurt and pocket.
    Yesterday SF indirex red alert !

    • Nicko2
      Jan 15, 2018 at 5:26 pm

      Hmmmm rising interest rates, rising energy, strong USD?…. stock market probably wont’ like that.

      • Frederick
        Jan 15, 2018 at 6:10 pm

        Who cares what the stock market likes It’s nothing but an unsustainable bubble of epic proportions anyway It’s WAY overdue for a reality check

        • James Levy
          Jan 16, 2018 at 7:21 am

          More and more I see the stock market as a kind of bank where rich people park their money. It really has nothing to do with the broader economy; as Doug Henwood has pointed out for years, the stock market doesn’t create capital for firms, it destroys it as a soak of funds and via buy-backs. Unlike a bank, you get a potentially appreciating asset when you park your funds in stocks, but given the attitude of central bankers, you get the added bonus of de facto FDIC protection in the form of virtually guaranteed asset bailouts if the stocks plunge. In either case, if you are rich enough (say, top 7 or so percent of Americans) to significantly cash in, it’s a dream. If you are in the vast 90+% who can’t, it’s a nightmare.

  8. Rob
    Jan 15, 2018 at 5:26 pm

    If govt contracts were that profitable it would not be going bust would it.

    • Jan 15, 2018 at 7:36 pm

      There are plenty of way to siphon money out of a company. Also make sure you understand from article how the off-shore entities got the good stuff.

      • kiers
        Jan 15, 2018 at 10:31 pm

        I guess this is a good intro to GAAP accounting shenanigans: the Gov’s “books” show an item received, “the project”, and an equal present value of liability to pay for it by means of a 30,40.50 year lease payments. It should be treated like an “investment” (on the books), but it’s not, clearly.

        How do they keep it off gov’s books?

    • Frederick
      Jan 15, 2018 at 8:18 pm

      Depends on how much of the profit was siphoned off/ stolen Tic Tic beaches

  9. Old Engineer
    Jan 15, 2018 at 5:43 pm

    Let me get this straight: Carillion is basically a social welfare client with the government their only customer and the government paying whatever Carillion says it costs to build? Unless the management are a really special kind of idiots I bet that you can find most of that debt in offshore bank accounts.

    • James Levy
      Jan 16, 2018 at 7:28 am

      We’ve reached a level of upper class depravity where they can’t even leave a gold-laying goose alone, but must gut the thing for a quick monetary fix like crazed junkies on a bender. True fact: Harry Truman refused seats of various corporate boards because he felt taking such would be demeaning to the office of the presidency he had once held. Pretty soon they will tell you that such a thing never happened, never could have happened, because no one would ever do such a thing and it is contrary to “human nature.”

      • Tom Ford
        Jan 16, 2018 at 9:46 am

        How times have changed.

  10. Sporkfed
    Jan 15, 2018 at 7:26 pm

    The more layers to the deal, the easier it is to skim.
    Privatizing formerly government duties is designed to do
    exactly that. Feature, not a bug.

  11. John Doyle
    Jan 15, 2018 at 7:35 pm

    Unless the work is unwarranted, public spending is not “a drain”. PFI’s are the drain. The nation has no need of profiting from infrastructure spend. It makes money for the economy by being used.

  12. Rates
    Jan 15, 2018 at 7:52 pm

    Readers of this blog know that there’s a solution that requires zero bailout.

    The company should rename itself Carrion Blockchain. Yes, yes I know the company’s name is Carillion, but the new one is more self describing.

    Guaranteed share price pop.

    • Frederick
      Jan 15, 2018 at 8:20 pm

      Or just let them go away and allow the process to run it’s course Somebody will buy up the remnants at pennies on the dollar and get things healthy again Don’t give me that too big to fail nonsense

      • Rates
        Jan 16, 2018 at 9:37 am

        Say you and yet the muppets will allow the bailout to go through. So you prefer a bailout or a name change?

  13. kiers
    Jan 15, 2018 at 10:07 pm

    I see no mention of Trump’s coming Public Infrastructure Plan taking lessons from PFI failures. Puerto Rico power contract going to a two man firm was a taste, an appetizer. More to come. Not that it matters.

  14. Trinacria
    Jan 16, 2018 at 1:24 am

    Wow, an over indebted company with an underfunded pension plan…where have I hear that before???

  15. Trinacria
    Jan 16, 2018 at 1:33 am

    Forgot…one more thing…has anybody checked out McDonald’s – yes the golden arches where they claim to serve “food” – per the Sept. 30, 2017 form 10-Q filed with the SEC, the balance sheet shows total assets of $32.5 billion vs total liabilities of $36 billion with an deficit in equity. Yet, the stock is selling at an all time high !!! Are we in the rabbit hole now???

    • Nick Kelly
      Jan 16, 2018 at 5:01 pm

      They are profitable. The earnings that represent the E in the PE ratio is neither an asset or a liability.
      Carillion far from being profitable was losing lots of money.

      • Trinacria
        Jan 16, 2018 at 6:24 pm

        Yes, McD’s is profitable, but….that is a huge debt load to overcome. A minor change in consumption habits of the garbage they call food, could make things very interesting down the road…roads that Carillion no longer maintains.

    • kiers
      Jan 16, 2018 at 5:04 pm

      Trinacria, it’s the hip new fashion in accounting appearances: “the zero equity capitalizers” i believe is the term for the cool kids nowadays….

      • Trinacria
        Jan 16, 2018 at 10:57 pm

        Hi kiers: you might have a point…you see, I’m a retired CPA, used to be an auditor for one of the big national firms, therefore I’m very traditional and believe that a solid company has a both a good income statement accompanied by a strong balance sheet. Then in 1999 “they” said “forgetta bout earnings, who needs earnings when you gotta .com …shortly thereafter the Nasdaq plunged 83% over the next 3 years. So, even though McD’s has earnings, they are creating quite a hole on the balance sheet and, if the economy ever getsreal again, they along with many over indebted companies will face series challenges. Simple as that.

        • kiers
          Jan 17, 2018 at 12:33 pm

          Yes. it’s all the problem of “they”…!

          forget McD, Moodys, even GE wants to be “cool” nowadays. think……Ge.com.blockchain.digital-manuf.

          beating “the market” means beating .com who are the top 6 in “the market” by far and away…..and what, pray tell, is .com accounting? must be wondrous: what’s expense? whats’ SG&A? what’s capex? what’s a sale? what’s cogs? all up in the air stuff. whoo needs a balance sheet?

  16. Realist
    Jan 16, 2018 at 1:39 am

    I did notice the banks involved, HSBC, RBS and Santander UK. Anyone surprised ? Regarding Santander, sometimes I wonder wether its US owners use Santander in cases where they don’t want to show their names but want the profits involved.

  17. raxadian
    Jan 16, 2018 at 4:45 am

    And bailing out wouldn’t have also been a great waste of money? At least the UK government taking care of those services doesn’t mean the company gets a bail out while at the same time getting paid to do those services, and said paid also coming from public money.

    Companies that go wrong fall, that’s the Free Market so many economists seem so happy about. Bailing out is socialism because you are keeping a private company alive with taxpayers money.

    Why should government money go to keep dying private companies alive and so just increasing the national debt?

    • James Levy
      Jan 16, 2018 at 7:47 am

      No, providing jobs and services to workers who lose their jobs is socialism. Bailing out the rich investors is crony capitalism.

    • MD
      Jan 17, 2018 at 3:18 pm

      ..because once you’ve handed the contract to said private company, then you’re forced to implement ‘socialism’ if it goes belly-up unless you want to go without these essential services.

      But that’s neoliberalism – offering you evermore expensive, evermore poor-quality pared-back public services in the quest for year-on-year increased (and special) dividends and stockholder returns.

      It seems anyone who thinks there’s a better way ‘is ‘naiive’; it’s the way things are and the way they’ll stay, says the right-wing press.

      Because there is apparently no alternative.

  18. Deflation Rulez
    Jan 16, 2018 at 11:59 am

    – This bankruptcy shows something else as well. I.e. to have a (fairly) guaranteed income from the government doesn’t mean that a company won’t/can’t go bankrupt.
    – I assume that not every part of the british government had enough money to provide Carillion with an endless stream of (enough) income.

  19. Deflation Rules
    Jan 16, 2018 at 12:08 pm

    – @Don Quijones: And which persons are behind those “Foreign domiciled entities” ? The same persons who were on the board of Carillion ?

  20. R Davis
    Jan 16, 2018 at 6:23 pm

    “impairment charge” is a new term for writing off worthless goodwill.

    Financial Difficulties – 10/7/2017 Carillion issued a trade update that referred to a $1.165.339.500 impairment charge in it’s construction division.
    Share price dropped.

    Acquisitions – It seems to me that Carillion has ventured to stretch itself a bit thin & risky, some acquisitions may have been unwise.

    One must think 10 year ahead & forsea all evil things.
    Zealous, caution may have been thrown to the wind.

    Out with the old & in with the new. We must not lament the demise of a failed venture, failed, it is only an albatross around our necks.

  21. R Davis
    Jan 16, 2018 at 6:26 pm

    They blew it.
    Good bye.

    “Next please”
    “Let us hope you do better than the last lot – hey.”

    The aren’t looking for a bailout – are they?
    No welfare here mate.

  22. MD
    Jan 17, 2018 at 3:24 pm

    When contracts for essential public services and a country’s democratic infrastructure are seen as vehicles for ‘flipping’ for profit, you know there and then 100% that you have a country that is completely captured by the financial speculator.

    What happens next is historically not pretty. The Brits are going to find out to their cost over the next 10-20 years of turning away from manufacturing and export and towards the fast, easy riches of credit-driven speculation.

    Degeneracy ahoy!

    PS USA’s no better. Same stupid ideas driven by short-term financier greed and lack of industrial strategy have prevailed there, too.

  23. Willim Bourne
    Jan 19, 2018 at 10:13 am

    Taxpayers victim to endless RICO crimes. From national treasury inflationary currency devaluation and IMF theft schemes to crooked federal spending by rich career politicians to cities running two sets of books, the problems are out of control.

Comments are closed.