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Comment | Carillion collapse: Hogwash and hyperbole

Carillion’s collapse has been described as many things over the last 48 hours. Almost all of it is hogwash.

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

Almost all of it is hogwash.

Yes, the industry needs to change. Yes, it needs to embrace better procurement, more technology, more industrialisation, more creativity, more diversity, more, more, more…

But what happened to Carillion is neither explained nor excused by any of that.

Carillion was a badly run company. Simple as that.

And its collapse is just what happens in the free market. Well run companies prosper. Badly run ones fail.

Just like Woolworths. Just like Monarch. Just like Mouchel. Those companies didn’t fail because no-one bought their kind of products or services anymore. They didn’t fail because they worked in competitive markets. They didn’t even fail because they worked in low margin industries – plenty of their peers were and still are doing just fine. They failed because they were badly run.

Woolworths

Woolworths

Carillion’s story is no different to Woolworths’

It’s no different here. Carillion got into deep debt through rapid expansion, bid low to win the work it needed to feed the beast it created, and came unstuck when three big jobs hit problems. The timing was perhaps unfortunate. But ultimately its collapse came as no great shock. It’s happened before. It’ll happen again.

If you want evidence at the lack of surprise, 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.

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.

So shocking? No.

Sad then? Well, clearly you do have to feel for the people who are going to be hit most by Carillion’s demise: the thousands of self-employed workers and the pensioners who depended on it for their wages and their retirement and who have done nothing wrong.

But what of its bigger suppliers? It’s looking bleak for them too with High Court documents showing that creditors could get less than 1p for every pound owed after banks and staff have been paid off. But is there not the feeling that if you swim with sharks you can’t be too surprised when you get bitten? This is after all Carillion, the company that outraged an industry with its 120-day payment terms. Yet suppliers felt forced to accept them, lacking the collective will, organisation or trade body support to fight it. Even though they all knew that in an industry where cash is king waiting a third of a year – yes, a third of a year - for their due payment was just madness.

There is one thing that is genuinely sad about Carillion’s demise. It is that it proves once again how hard it is for a UK contractor to have an impact internationally, and further reinforces the position of those that continue to resist the urge, no matter how tempting the markets look. Costain, Laing O’Rourke and others have all pulled back or out completely in recent years and it is a shame.

But the simple reality is that Carillion – as Britain’s second biggest contractor with its turnover of £5bn – just didn’t have the necessary scale or diversity of business to work in complex global markets and be able to spread the risk of a bad job (or three). Even Balfour Beatty (Britain’s biggest) with its £8bn turnover faces a battle compared to the serious global players.

You don’t have to look far for comparison – just across the Channel will do, where Vinci and Bouygues both have turnovers well in excess of £35bn, and make margins upwards of 5% in the process. And they are diversified. Yes, Vinci takes on some risky construction jobs – it built the giant concrete containment device at Chernobyl for heaven’s sake – but it also runs practically every car park in France and gets a nice steady, low-risk income stream from it. Bouygues is the same. It also does risky construction – it even JV’d with Vinci on Chernobyl. But it also owns and runs TV stations – and gets a nice steady income stream from them.

And therein lies the difference. Big, established, diversified businesses with robust governance and a clear strategy. Three bad jobs – no matter how bad – would surely not have sunk a Vinci or a Bouygues.

It is a shame, as it would be wonderful to see Britain exporting its now really rather enviable track record in complex major project delivery. Indeed, in a post-Brexit world it would be a bold and positive move. But the reality is that the UK contractor has just fallen too far behind the rest of the world. Sad, but true.

And is that not the truly sad thing?

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Readers' comments (6)

  • David Hall

    Well said

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  • A very good synopsis, I worked for Tarmac, then Carillion for 25 years. I have worked for Eurovia for the last 10 years, part of the Vinci Group, and totally agree with your final point. I think the word that says it all is Governance.

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  • You mention Vinci and Bouygues having steady income streams from running car parks and TV stations. Carillion is diversified too, with a potential steady income from the provision of non-construction services to schools, prisons and hospitals.

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  • I am not sure that this piece is less hyperbolic than others.

    Somewhere around 15% of the stock was still 'shorted' at the time of collapse, so these individuals (they are not investors) looking for a short term gain didn't anticipate the collapse, the market does not necessarily always have the answer.
    Have bad decisions been made? Obviously yes. Should a rights issue have been pursued after the 1st profits warning? Probably yes. However, a distinction needs to be made between the poor decisions made at a high level and those made by the project teams. At the moment all are being tarred with the same brush.

    Secondly, many suppliers have been working on schemes with Carillion for a number of years, often well before the announcement of the 1st profits warning so are not necessarily in a position to refuse to work with Carillion. As one of the SME's affected by the collapse, we work with individuals on projects and we often have had relationships with these individuals for many, many years and therefore it becomes very difficult to simply say no. We rely on the work and if we refuse now and the company continues we may lose future work. Furthermore, we have personal links to the individuals involved thus making it harder to say no. It is possible to negotiate better payment terms than the 120 days quoted, but this still does not fully insulate one from the loss.

    However, if someone can explain how a set of accounts can be independently audited giving the company a clean bill of health 4 months before a crippling profits warning revealing huge losses then I would welcome some insight. Companies regularly issue profits warnings, these are not always the indication that a company is going to fail, but in this case the hole that has opened up is enormous. Surely it should have been visible to the auditors?

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  • Jon's last paragraph opens a can of worms.......and should be investigated. Perhaps earlier warnings might have highlighted something that might of saved some SME from getting into more trouble.
    Who does an auditor owe more duty of care to? The debtors or the shareholders?
    I really hope the people that rely on the company's pension scheme don't lose out.

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  • This article argues that the Carillion collapse is just a natural part of healthy capitalism, without exploring fundamental arguments to the contrary.

    To ignore or dismiss off-hand the questions raised on privatisation of basic state activities, cost-driven procurement, corporate governance rules and needlessly long complex supply chains and paint this as a picture of healthy Darwin-esque competition seems disingenuous.

    It’s time the Institution questioned some of the fundamental issues underpinning our industry, and considered how engineering can better contribute to society – the status quo is going to be shaken up and we should be at the forefront of change, not banging the drum for a broken model.

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