Public-private disaster unfolding in Britain

It has barely been reported in Australia, but it is big news in Britain. One of that country’s largest beneficiaries of government outsourcing, a company called Carillion, has gone broke. While the Government has refused to bail it out, the British taxpayer will still have to pay the pension liabilities and the continuing wages to thousands of employees performing essential work at government-owned facilities.

Carillion in its current form dates from 1999, when it was spun off from parent company Tarmac. Tarmac was founded in 1903 to commercialise the new roadbuilding material of the same name invented that year.

After its demerger Carillion grew quickly, largely through debt funded acquisition. It expanded into rail services, facilities management, real estate and construction. At its peak its annual revenue exceeded £5 billion and its market capitalisation was over £1 million.

It all started to go bad a year ago. In the first half of 2017 it lost over £1 billion. Its share price plummeted, and its market capitalisation declined to £61 million. Its debt burden is £1.5 billion, including a £600 million pension deficit.

All indications are that Carillion expanded too quickly. Too many of its projects, particularly in the Middle East, had major cash flow problems and the company had to borrow money to stay afloat. Last year most of its directors resigned, and it has gone through three CEOs in six months. It started selling off bits of the company, but a collapse now seems inevitable.

The company employs 20,000 people in Britain and as many again overseas. Its government contracts include the maintenance of 50,000 dwellings for the Ministry of Defence and nearly 1000 schools. It is also the second largest contractor to HS2, Britain’s new high-speed rail network which is the largest infrastructure project in Europe. It has dozens of other contracts, many of them quite significant.

Yet, while all this has been happening, the Government has continued to award to Carillion new contracts, a practice which has now come under intense scrutiny. Expect a major inquiry soon.

Over the weekend Government officials and Carillion senior executives were in crisis talks. But it became very obvious very quickly that the company was too far gone to be saved. A spokesman for Prime Minister Theresa May said: “It’s regrettable that Carillion has not been able to find suitable financing options with its lenders. Taxpayers cannot be expected to bail out a private company.”

But that is just what taxpayers will be doing. They will not be propping up the company, but they will be paying billions of pounds to fix the mess. Question about why profits should be private while losses are funded by the public purse are already being asked.

Liberal Democrat leader Sir Vince Cable, who was Business Secretary in David Cameron’s Tory-Liberal Democrat coalition, told BBC Breakfast: “They’ve got to force the shareholders and indeed the creditors, the big banks, to take losses, and then the government can take responsibility for taking the contracts forward and making sure they are delivered.”

Money, money, money.


Public-private partnerships, now very popular in Australia, seem great on paper. But in the private side of the equation runs into problems it is the public left holding the baby. While we have not had anything as big as the Carillion disaster, there are plenty of examples in Australia of things going wrong.

The UK government has no choice but to prop up Carillion. Someone needs to provide the services it is contracted for. Someone needs to meet its pension obligations. Will anybody be held to account? A few wrists may be slapped and a scapegoat politician or two might be faced with some career limitation problems, but you can be sure this will not be the last time it happens.

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