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Carillion Special report | What went wrong

Construction aerial

Former Carillion boss Richard Howson last month laid bare the firm’s problems to a committee of MPs.

He gave accounts of scores of trips to the Middle East in an attempt to bring in cash and explained how the discovery of a cracked beam on a hospital project sent timescales and costs spiralling.

Previously, other senior Carillion executives had cited interest rates, Brexit, foreign exchange markets, advisors, the General Election, investors and suppliers as factors in the company’s collapse.

No choice but liquidation

Carillion went into compulsory liquidation on 15 January, with an order appointing the Official Receiver as liquidator. On the day, Carillion told the stock market that, “despite considerable efforts”, last-ditch discussions with lenders “have not been successful”, and that the board had therefore concluded that it had no choice but to take steps to enter into compulsory liquidation.

After weeks of silence, ex-chief executive Richard Howson finally outlined the projects that in part brought the construction giant to its knees at a hearing before a committee of MPs. These projects were two hospitals, a road in Scotland and a development in the Middle East. MPs from the Commons work and pensions committee and the business, energy & industrial strategy committee, are investigating the firm’s collapse. Howson was chief executive from 2012 until July 2017.

An unpaid debt of around £200M for work on Qatar’s Msheireb Downtown redevelopment contributed to Carillion’s financial woes, Howson claimed. The project was originally meant to finish in May last year and is now not expected to be completed until December this year, Howson told MPs.

Carillion qatar crop

Carillion qatar crop

Msheireb Downtown development

On-demand performance bonds were written into the contract

Carillion signed, and the client also had the power to bring in a new contractor to complete the work at Carillion’s expense if it failed to complete the job.

“Working in the Middle East is very different from working anywhere else in the world,” Howson said. He revealed that he had made almost monthly trips to Qatar for several years in an attempt to bring in the money, saying: “I felt like a bailiff just to try and collect the cash.”

Client Msheireb Properties is reported to have challenged Howson’s claims, saying that it had continued to pay Carillion, but alleging that the firm failed to pass funds on to its supply chain.

Cracked beams

The discovery of a cracked beam on the Royal Liverpool Hospital project (pictured) set it back by more than six months and increased costs by a further £20M. “If I had walked you round the Royal Liverpool a year ago, it looked finished, paint on the wall, ceiling tiles in, carpet down,” Howson said.

After the discovery, Carillion investigated the whole structural frame of the building using independent engineers and found a total of eight cracked beams. The remodel took two months and it took a further four to five months to fix the beams.

Howson added that Carillion should not have bid for work on the Aberdeen Western Peripheral Route and that problems with the building services design of the Midlands Metropolitan hospital in Smethwick led to rising costs and delays.

Bebo arch at bogenjoss crop

Bebo arch at bogenjoss crop

Aberdeen Western Peripheral Route

In total nine problematic projects were cited in a business plan the firm put before lenders in the days before its collapse.

The problems came to light early last summer, as Carillion issued the first of three profit warnings in July. These included a £845M writedown, of which £375M related to the UK and £470M to overseas markets.

The company was toppled by a combination of too much debt, which stood at £1.5bn when it went into liquidation, and the problem contracts, chairman Philip Green told the board. He admitted that “because of the level of [Carillion’s] debt we didn’t have the capability to withstand the knocks that we took…we didn’t have that wiggle room.”

Pension deficit

The rot set in when Carillion acquired Alfred McAlpine in 2008, in a bid to de-risk its business by moving further into facilities management.  This resulted in Carillion taking on millions of pounds in pension deficit.

The Alfred McAlpine pension deficit was £110M, eight times higher than Carillion’s at the time. Within a year Carillion’s own pension deficit had gone up 348% to £61M.

Other former directors from the firm were also hauled before the MPs, who challenged them about the company’s reputation for late payment.

These included former finance director Richard Adam and remuneration committee chairwoman Alison Horner, who said they “did not recognise” Carillion’s reputation for poor payment to suppliers which reportedly stretched up to 120 days.

45 day payment limit

They said it paid most of its suppliers within 45 days and only “outliers” would have waited for the full four months before receiving payment.

The former bosses also defended company culture and insisted that the board had been rigorous in challenging executive decisions and seeking advice.

Howson gave an example of how the UK market compared to the Middle East, citing a Crossrail contract at Paddington station.

He said: “My example is our contract on Crossrail which we won in 2012 and had a value of £30M. We had to finish that contract by end of 2014, by the end 2014 our costs, our liabilities were in the mid high £90M and we had been paid £76M. As was normal we had had to fund the construction of the project up in to the end.

“Within two months of the end we sought to settle our final account and settled our account at just over £100M, and cash came in.

“In the interim period we had paid our suppliers, we had cash flowed our suppliers, we had funded the project to the end and then the cash came in and that’s normal.”

A series of delusional characters maintained that everything was hunky dory

The directors were quizzed about the introduction by Carillion of clawback condition changes to make it harder for the company to reclaim bonuses in the event of the company’s collapse. After being pressed individually on whether they would repay bonuses they received in the years leading up to Carillion’s failure, none would confirm they would willingly return the cash. Work and pensions committee chairman Frank Field said: “All four of you have done rather well out of a company that you helped to crush.”

Following the hearing, the inquiry’s co-chairs Field and Rachel Reeves said: “This morning a series of delusional characters maintained that everything was hunky dory until it all went suddenly and unforeseeably wrong.

“We heard variously that this was the fault of the Bank of England, the foreign exchange markets, advisers, Brexit, the snap election, investors, suppliers, the construction industry, the business culture of the Middle East and professional designers of concrete beams. Everything we have seen points the fingers in another direction – to the people who built a giant company on sand in a desperate dash for cash.”

The company itself had acknowledged some of its failings. In the recovery plan Carillion put to lenders days before its crash in January it said: “The group had become too complex with an overly  short term focus, weak operational risk management and too many distractions outside of our ‘core’.”

In the end, it ran out of time.


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