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Carillion Special Report | Will the industry survive?

The collapse of Britain’s second biggest contractor has been the only item on the news agenda in 2018 so far.

To an extent this is unsurprising, as its collapse was and is terrible news for many – for the thousands of small and medium sized enterprises (SMEs) and self-employed workers reliant on it for their incomes, and for the thousands of pension plan members who were and are similarly dependent on it for their retirement.

But now industry leaders who have spoken to New Civil Engineer are seeing a real danger that all this talk is talking the industry into oblivion. In the immediate wake of the collapse experts, industry bodies and others leapt  on Carillion as evidence of how the industry model is broken and that we are all doomed without change.

Failed industry model

“Sad and shocking,” one said. “A good company falling victim to an industry model that doesn’t work,” was another. It must serve as a wake-up call to clients and the need for them to drive industry change, said another.

This talk is dangerous; it gives clients like the government an excuse not to commit to projects; it throws the industry into a bad light globally; and, worse, it gives shareholders an excuse to take their money and invest it somewhere else.

The share prices of Carillion’s peer group have not fared well in the weeks since its collapse. Yes, some have problems of their own, such as Interserve. But others, such as Balfour Beatty, Costain and Kier are minding their own business, picking up work and getting on with it – and could really do without being labelled as the “next Carillion”.

Change is needed

Yes, the industry needs to change. Yes, it must embrace better procurement, more technology, more industrialisation, more creativity, more diversity, and more things besides. But is the whole market broken?

“No, of course not,” asserts one industry insider.

“This is not Dutch Elm disease,” says another, senior advisor. “There is not a succession of Carillion’s waiting to happen.”

Companies go bust all the time. It’s what happens, move on

The clear view is that Carillion was just a badly run company. And its collapse is just what happens in the free market. Well run companies prosper. Badly run ones fail.

“Companies go bust all the time. It’s what happens. Move on,” another industry insider tells New Civil Engineer. “Bad companies fail. It’s business,” says another.

What happened to Carillion was quite simply explained by its failed directors in front of the MPs on the Commons work and pensions and business committees. They encountered a series of avoidable problems on four major contracts.   

  • On the Midlands Metropolitan Hospital, it commissioned a design which became unbuildable
  • It completed the Royal Liverpool Hospital  project without detecting serious latent defects
  • On a late running project in Qatar it agreed to extremely onerous payment terms. In Qatar it reached a stalemate over payment for its work on the Msheireb Downtown redevelopment
  • On the Aberdeen Western Peripheral road project it lacked a strong enough supply chain to deliver the work on time  

These were compounded by the industry’s low margin cashflow focus, but ultimately, these four issues would not have brought down a well-run company. Chairman Philip Green admitted as much to the committee. “When a business collapses because of three bad contracts and one withheld payment this is complete failure of business planning isn’t it?” he was asked. “Yes,” he replied.

‘Delusional’

The inquiry’s co-chairs Frank Field MP and Rachel Reeves MP summed the business’ executives up succinctly as “a series of delusional characters who maintained that everything was hunky dory until it all went suddenly and unforeseeably wrong… as “people who built a giant company on sand in a desperate dash for cash”.

In over three hours of grilling from MPs not one Carillion director  tried to blame the industry model for their collective failure. Indeed, axed chief executive Richard Howson actually defended it, referencing the fair and prompt payment it received for its work on Crossrail.

Howson was more eager to focus on the £200M Carillion was owed for its work in Qatar, simply highlighting  the problem of trying to play in a global market when you are not big enough.

Retreat to the UK

It is for that reason that most other UK contractors retreated to the strong UK market in the 1990s. It made them smaller and much more parochial, but stronger and safer.

The collapse of Carillion should not be allowed to be seen as a sign that the entire industry is teetering on the brink. The overall message should be, must be, that this industry remains ready and able to deliver what is asked of it.

That is the clear view of industry insiders who have spoken to New Civil Engineer.

“There is a wave of excitement around things like the Sector Deal for construction, and major projects such as Crossrail and High Speed 2. We can’t let that be knocked off course by the collapse of one company,” says one.

Crossrail example

Just look at what has been achieved by Crossrail. As Crossrail chairman Terry Morgan told a recent lecture in London: “In the last two years, 200 trade delegations have visited us. They are so impressed with what we’ve done. There is no world city today that is not looking at metros to cater for its expanding population. That is why we have set up Crossrail International to export some of the expertise we have developed for the first time.”

Crucially, Crossrail International is not about exporting construction, Carillion-style. It’s about key leaders from Crossrail and its supply chain teaming up to export the upfront project conception, initiation and governance skills. The venture has already landed its first, albeit modest commission in Australia and Morgan, for one, is passionate about its future.

“For me, this is about trying to grow that cadre of British engineers to go out around the world once again,” he urges.

With that ambition in mind, how can we as an industry allow Carillion to drag us down?

Damaged reputation

Already there are ominous noises. As one research organisation in dialogue with a government funding body says: “We’re talking to them about our bid. They’ve seen we’re in construction. ‘But isn’t that industry struggling?’ they ask.” That’s a bad sign.

So let’s get a grip. Carillion’s demise came as no surprise. If you want evidence of that, look at its peers. How many of the UK’s leading contractors have JV’d with Carillion in recent times? Not Skanska. Not Costain. Not Bam. Not Morgan Sindall. Industry insiders tell us that they’d all worked out long ago that Carillion was not to be touched.

Look wider even, and look at the fund managers. The market generally knows what’s going on and it had been short-selling Carillion stock for months, going on years.

In fact the only people taken by surprise seems to have been its clients, who kept awarding it work long after everyone else worked out it was a dead man walking. Which probably says more about them than anything else. More on that to come, we suspect.

So, shocking? No. A sign of an impending wider industry collapse? No. We need to be clear. This is an industry that can still be world class. And is getting better, not worse. In short, look at Crossrail, not Carillion.

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