“Not another Carillion,” says UK government to soothe frazzled nerves, as entire industry is teetering.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Since the sudden downfall of the British infrastructure giant Carillion two weeks ago, investors’ nerves in London are frayed. And short-sellers, scanning the horizon for their next prey, seem to have found it.
Its name is Capita. It is one of the UK government’s biggest outsourcing firms with contracts to provide services to government entities, such as NHS cleaning, school dinners, and prison maintenance. It has 70,000 employees in the UK, Europe, South Africa, and India.
On Wednesday, its shares tumbled 47.5% to a 15-year low after its new CEO, Jon Lewis, slashed profit forecasts, announced plans to tap the capital market for £700 million, and suspended a dividend that was worth more than £200 million to shareholders last year.
On Thursday, the rout continued , with shares dropping a further 13%. On Friday, shares bounced off a tiny 2.3% to close at 162.3 pence, down 77% from June 2017 and down 88% from July 2015.
In a desperate bid to calm market nerves at the height of Wednesday’s rout, the UK government released a statement insisting that Capita was “not another Carillion.”
But whatever the government might say, there is a striking resemblance between the two companies:
Like Carillion, Capita is massively dependent on government contracts. In the last two years alone it was awarded 226 public sector contracts — 10 times more than Carillion — making it the biggest supplier of local government services in the country, according to public sector data provider Tussel.
Like Carillion, Capita is massively in debt, with an estimated £1.1 billion of funds outstanding. And like Carillion, it’s been exceptionally generous with its dividend policy in recent years. So did it, as Carillion is accused of doing, borrow money and sell-off assets in order to pay its dividends, in direct contravention of UK law?
Like Carillion, Capita has a pension shortfall, estimated to be around £380 millioin, but, as happened with Carillion, it could grow in the coming days as the full extent of its long-term liabilities becomes clear.
Capita also shares the same auditor as Carillion, KPMG, whose alleged role in cloaking Carillion’s financial reality is already under investigation by two parliamentary inquiries.
There are also important differences between Capita and Carillion, not all good.
On the positive side, unlike Carlillion, Capita has over £1 billion of cash on its balance sheet. And Capita doesn’t have high-risk high-cost construction projects bleeding it dry.
But Capita is hemorrhaging funds at a startling rate. And it has been losing important business contracts, partly as a result of the political uncertainty over Brexit. Whether Capita gets through the immediate storm it faces will depend largely on its ability to raise £700 million from shareholders, for which it claims it already has full “standby underwriting” — but this undertaking has gotten immensely more difficult after the crash of its shares.
If it fails, the implications for the UK government could be huge. It already has to take over many of Carillion’s sprawling public service operations, which will no doubt be funded by an expansion of public debt, while concerns are growing about the gaping deficits at UK pension funds, estimated to be worth a combined £210 billion. If Capita were also to collapse, the sheer scale and scope of its operations would make it even more complicated to replace. As the UK Independent reports, Capita doesn’t just provide some services, it runs entire councils:
Created from humble beginnings in 1984 as a for-profit consultancy arm of the Chartered Institute of Public Finance and Accountancy (CIPFA) – Capita became the Vampire Squid of business process outsourcing, its money grabbing tentacles extending through every layer of Government, from pensions, to council finance, from parking and congestion charges to NHS GP primary care support, funeral services, and even the privatised food safety agency.
If the financial situation becomes untenable at Capita, not only would the government have to mobilize a herculean effort to ensure the firm’s sprawling, diffuse web of services continue to be delivered; it could also have serious knock-on effects for other outsourcing firms such as Serco and Interserve, both of which have their own share of problems.
In the last 12 months, Serco’s stock has fallen 40% and is down 78% from July 2013. Shares of Interserve, which is already on a watch list, plunged 25% over the past two days, 35% over the past two weeks, and 88% from June 2015. In the event that Capita’s turnaround plan fails, contagion could spread throughout the teetering sector, at which point the viability of the UK’s public-private service model could even be threatened. For the country’s already slowing economy, the timing could not be worse. By Don Quijones.
Has the Carillion collapse triggered the “Next Arthur Andersen?” No, the “Final Four” audit firms are “too big to replace.” Read… Fallout from Carillion Collapse Hits KPMG
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This is heavenly! Could the demise of the odious, corrupt and fraudulent PPP system be in sight at last? Be still my heart.
You forgot to mention that it could also be a nail in the coffin of the whole odious and evil idea of “outsourcing” or “offshoring”. The people have had enough of all this corrupt (jobs export) corporate crap. I note that this “Capita” has Indian employees: no doubt desperately trying to steal all UK jobs as they have been doing in the US. Good riddance I say! They need a “Trump” to put a stop to all these fraudulent visas. Tata is another one that needs to die immediately!
I work for Capita’s direct competitor in pension outsourcing in the UK (we are a subsidiary of Tata). Believe me when I say the most frustrating part of my job is dealing with Indian offshore incompetence. The focus on cost over service has led to the general business model being off-shoring work at the expense of highly skilled pensions staff in the UK.
Offshoring or importing of Indians, illegally, where they’re put into dorms and paid Indian wages (who’d complain? Free vegetarian food and they get to see “America”) is a cancer where I am. Once in a while some company forgets to pay their bribes and gets caught and it makes the news,but then it’s all forgotten.
Carillion? They should call it Carion. Yuk yuk yuk.
Big, clunky Imperial battle-cruisers always crash in the end. ‘;]
Or explode upon one hit in the wrong place by a hostile projectile.
It was never a question of “if,” buy only of “when,” someone would sneeze and the entire “house of cards,” reliant on massive debt, overt and covert government subsidies, and tax preference would start to collapse.
This will be a disaster for the UK, and is sure to propagate into the US economy given the extensive banking relationships between their TBTF banks and our TBTF banks.
Will General Electric be the first US fatality in the 2018 global “credit event?”
Aaaaaaaaand…neoliberalism starts to unwind as private corporations which have loaded up with debt to keep ‘activist investors’ happy with increased and special dividends (special in terms of using cheap borrowed cash then hiding it in the books) crumble into indebted dust
And who’s going to have to step in to pick up the pieces GASP it’s that howwible, howwible nasty government, using money it’s ‘stolen’ in the form of taxes!!
‘Libertarians’ (ie people with long pockets and short arms…) truly are f***tards of the highest order – because all this was inevitable anyone with a lick of sense.
…while government oversaw the whole thing, and GASP did nothing, while lining their pockets. Nothing like a regulator asleep at the wheel, dreaming of his golden pension.
…bring on the Trotskyites
This is so typical of Crony Capitalism. I suspect brown envelops have been exchanged for contracts. Companies that do this, what happens is the management becomes complacent because the fix is in and they do not do proper due diligence or risk management.
Go to Youtube and type in Capita and see what this lovely company gets up to. I am expecting a visit from these lovely individuals any day soon because I have cancelled my TV licence because of BBC propaganda and they will be on my door step soon.
Here in the UK the state is broke and there will be a collapse but I have a feeling they will not go into the light without a fight.
Crony capitalism? Britain isn’t exactly the beating heart of capitalism. You sure you don’t mean human greed?
All “…isms” can play the crony game, but socialists are especially blessed: check out nationalized oil companies in Mexico, Brazil, Venezuela, Russia and almost any African or arab nation you care to name.
I don’t think significant national resources should be private, in any country. So, nationalization seems appropriate in some cases, especially in Russia where resources were sold at fire-sale prices at a time of national upheaval. I am even less familiar with the other countries’ deals.
Companies can and should develop and own the technology that they create, but I believe it is best for citizens that the resources remain with the nation. I mean – can you think of anything more politically expedient than selling national assets for a quick buck?
> I don’t think significant national resources should be private, in any country.
Call me old fashioned but I think public assets should be owned and managed by the government and private assets should be owned and managed by private parties. And quasi public assets should be owned and managed by regulated monopolies.
The idea that a private corporation should take over and run a public hospital or a food safety agency is just deranged and people deserve exactly what they get for letting that happen.
“Call me old fashioned but I think public assets should be owned and managed by the government”
That dosent work as those entities get invaded by taker time servers sanctioned by leftist and Socialist Administrations.
Public ownership coupled with private contract management. is the way forward. A modification of the SOE system.
“State is broke”….THAT is the Trump/Koch/Devos plan with the deficits: break the bond market, break the muni bond market and let private capital collect bills and fines, do policing, do prisons, do schooling,…show up on your doorstep, issue parking tickets (with the Internet of Things), etc etc.
It will happen in US. People will cheer.
The privatization of government services seems to have the goal of creating off-balance sheet liabilities that will have to be put on the balance sheet all at once. Nice job. Who would’ve thought it could happen?
2008: Banks collapse like House of Cards
2018: Real economy collapsing, like a House of Cards.
Added bonus, we have a sterling crop of leadership, best ever, to guide us through this. well done.
Out sourcing firms do well when employment is suffering and workers are willing to work cheap. When wages start to rise and employment improves they can’t keep the cheap labor to sustain their contracts. It could be that their employees are going where the grass is greener. In order to keep employees during an upturn they have to pay more and they lose their edge.
This has nothing to do with high wages, unless you are implying dividends are wages. It is simply a case of greed similar to Carillion and Sears, they spend money now with funds that are supposed to be saved for tomorrow. Pension funds should never be under funded, since the employees tend to pay in with each pay cheque and don’t pull out the funds until they are no longer on the payroll.
Greedy investors have grown accustomed to borrowing funds from anywhere at any time, they just assume they can pay off what they owe with more debt down the road. Now we see the alligators in the swamp now that the free flow of debt has dried up, and no one wants to jump in for them to feed off anymore.
I wasn’t defending them, only pointing out that outsourcing/temp firms have a different business cycle.
Pension money doesn’t just come from workers, there is also an employer portion. The employer not paying their portion is one way plans land up underfunded.
It would seem to be a simple fix to require that yearly pension fund liabilities must be paid before any dividends (or stock buy-backs) can occur, and that existing pension funding shortages are corrected.
These funds are deferred wages, not a gift from management. Theft of wages is a serious felony, especially on this scale, as it indicates a criminal conspiracy.
That is a good way to instantly bankrupt almost every democratic controlled state and city in America. Along with tne imploding said pension funds.
It would have simular consequences in England. Mostly to Labour Controlled Councill’s.
BE CAREFULL WHAT YOU WISH FOR.
As legislation like that, can not be drafted, and apply only to the private sector.
“deferred wages” … you must be nuts.
Municipal/state/federal employees retire at 55 on 65-100k a year with COLA and health for EVER and that is ‘deferred wages’???… I think you mean its government cheese … like Illinois/Dallas
“Wednesday, 11 July 2012
Over 70 MPs Connected to Companies Involved in Private Healthcare”
Have a good look around in the above site!.
I think you will find BT’s pension scheme deficit has doubled to about 14Bn GBP in the past 2 years.
Yet BT continues to pay a dividend.
Rolling over debt in as rates rise becomes harder and harder.
Borrowing to prop up the share price or to pay dividends
is just looting from the inside.
This on a week when the stock market cracked, which will drown out all other news. Don’t they know such news have to be put off till the weekend?
The UK magazine Private Eye has been reporting on “Crapita” for years.
I’m looking forward to their next issue for scathing analysis on this company and Whitehall.
When they look under the books, half of London is probably owned by Russian oligarchs, the other half by other tax dodgers of various nationalities.
Like I mentioned before this is business as usual. Privatisation of services the state offered, increase debt as much as possible then force the state to take charge of those services again.
The Labour outsourcing outfits are bottom feeders that low bid then underpay their Labouring staff. Forcing them to provide their own safety equipment.
Even worse cutting safety and general working conditions, to the bone.
The market is overfull of them, even among then bottom feeders it is time for consolidation. This dosent mean less Jobs for workers, only a few Administrators will loose out. As the work itself still has to be done.
Those administrators, deserve to loose, they are the ones that cut safety and working conditions, to enable low ball bid profits.
So will the red queen be forced into to stepping back and hock the palace sterling ?
Remember that the UK Monarch now has minimal, if any, control over governmental policy.
Indeed, I get the impression that if she could she would reintroduce the popular Tudor solution of “off with their heads” for the socioeconomic damage the these sociopathic individuals have done to both the public and private sectors of the realm.
I am betting Sterling will soon be double the US Dollar just like last time. It’s proof of incredible policy setting!!!!
I’m having trouble picking out the inflationary scenario we’re being fed lately, did I miss something?
I worked for 3 months at capita, sacked people who worked for the company for 20 years, offshored to india. Had government and local government business they couldn’t service properly. Their business model was also wrong as they bought smaller competitors out for substantial monies and then realised they weren’t worth anything. Love to see what their intangible asset goodwill number is on the balance sheet.
So what to do? Buy even more gold and hope for the best?
Believe it or not the UK government being monetary sovereign can simply “write a cheque” to pay for the whole shebang. Under Lisbon it is supposed to sell gilts to match the deficit, but it shouldn’t be too difficult.
As far as unfunded pensions are concerned, there’s hardly a private pension fund that is not in trouble. World wide these will have to be bailed out unless you want rioting in the streets. Once again the MS governments will have to write cheques. It’s not even unpalatable although they might like to make the errant companies’ shareholders bankrupt, no “too big to fail” appeasement. They are going to have to bite the bullet, and act.
For a government to “write a check” to bail out a company is a criminal wealth transfer (theft) from taxpayers to shareholders, corporate creditors such as bondholders and banks, and other corporate stakeholders. If the central bank “writes a check” via printed money, its still theft but works via the currency, which hits a broader target than just taxpayers.
Failed companies need to be allowed to fail. They can be restructured in bankruptcy court to where they can continue doing business, while their shareholders, creditors, and other stakeholders get to eat the fruits of capitalism: losses. This is all well-established. Governments need to allow this system to function.
Allowing all institutions that are not system critical to fail and be restructured/resolved With out STATE aid should again be the norm.
The regulations regarding what is and is not direct fraud, AKA asset stripping. Need to be tightened. Time frame lengthened, and enforced, with claw back from third and fourth party capabilities, along with serious criminal penalties.
In the land of Legalised Corporate Fraud ( AKA The US) the chances of this happening are almost 0) in England once it it free of the EU, we may see some moves in this direction.
Narcissistic Richard Branson has made a fortune off the British government by obtaining rail franchises in the United Kingdom during the privatisation of British Rail. He was recently bailed out by the government due to overwhelming losses. So the other UK companies who do business with the government sustain losses yet Sir Branson is bailed out. Maybe he is expecting the US government to also bail out his failed Virgin Galactic the first spaceline. Interesting times in the UK to say the least.
Time to short REITs invested in Britain?
Timing is everything.
Probably time to Hedge, or get out of reits, particularly US ones, at the least.
Ah Richard Branson the guy who keeps going on about Brexit even though he lives in the British virgin islands for tax reasons. Ref pulling out of the rail franchise, he shouldn’t have been able to, as with other government contracts you pull out, you get heavily fined.
If one looked at the accounts of Carillion for the last few years, it basically increased WIP (Work In Progress) in the accounts that had the effect of increasing the profit and net assets on the balance sheet however its borrowings continued as did its creditors as it paid suppliers later and later. The company died when it ran out of liquiditybecause it had not actually been making a profit for a long time.
A compnay or the government outsourcing is basically admission that it cannot run its self.
The outsourced company expects to make a profit so this is a profit or saving that the company that outsourced failed to take.
Normally when a company outsources, the company hs to appoint a manager to monitor the outsourcing company.
The only time I can see the point in outsourcing would be for example IT where the company is so small that it cannot appoint a full time IT employee.
Outsourcing and paying pensions? Why don’t that sound right. LMAO