- Former chief executive Richard Howson lays bare problems, talking of almost monthly visits to Qatar to bring in cash. “I felt like a bailiff,” he said.
- Investigation co-chairs slam testimonies: “This morning a series of delusional characters maintained that everything was hunky dory until it all went suddenly and unforeseeably wrong.”
- McAlpine pension deficit was £110M when Carillion bought it in 2008 – eight times higher than Carillion’s at the time.
- Ex-Chairman Philip Green said he takes responsibility for collapse.
Former Carillion boss Richard Howson has laid bare the firm’s problems, giving accounts of scores of trips to the Middle East in an attempt to bring in cash and how the discovery of a cracked beam sent timescales and costs spiralling on a hospital project.
Ex-chief executive Richard Howson outlined the projects – two hospitals, a road in Scotland and a development in the Middle East - that in-part brought the construction giant to its knees at a hearing in front of MPs. The hearing was held by MPs from the work and pensions committee and the business, energy and industrial strategy committee, who are investigating the firm’s collapse in January. Howson was chief executive from 2012 until July 2017.
An unpaid £200M debt for work on Qatar’s Msheireb Downtown redevelopment contributed to Carillion’s financial woes. 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.
On-demand performance bonds were written into the contract Carillion signed, and the client could also bring in a new contractor to complete the work at Carillion’s expense if it did not 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 years in an attempt to recoup the money, saying “I felt like a bailiff just to try and collect the cash.”
The discovery of a cracked beam in the Royal Liverpool Hospital set the project 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 remodelled whole structural frame of the building using independent engineers and found a total of eight cracked beams. The remodel took two months and 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 led to rising costs and delays.
The company was toppled by a combination of too much debt, which stood at £1.5bn when it went into liquidation, and these few 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.”
The “rot set in” when Carillion acquired Alfred McAlpine in 2008, which was aimed to be a move to de-risk the group by adding more support services, but saw it take on millions of pounds in pension deficit.
The McAlpine pension deficit was £110M, eight times higher than Carillion’s at the time, and within a year Carillion’s own deficit had gone up 348% to £61M, MPs said.
Directors, which also included former finance director Richard Adam and remuneration committee chairwoman Alison Horner, “did not recognise” Carillion’s reputation for poor payment to suppliers which reportedly stretched up to 120 days.
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 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 its Crossrail contract. 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.”
The directors were quizzed over clawback condition changes to make it harder 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 Frank Field MP and Rachel Reeves MP 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 inquiry published the recovery plan Carillion put to lenders days before its crash in January in a bid to convince them that it was worth giving the firm more financial support. In the plan (page 18), Carillion cited the following “themes and issues” that surrounded its management of contracts:
- Insufficient understanding of, and adherence to, contract requirements
- Ineffective change control
- Poor planning and lack of effective contract controls
- Portfolio not balanced
- No focus on contract demobilisations
Carillion’s problem projects
Former chief executive Richard Howson’s evidence before the committee gave insights into the projects that played a part in bringing down Carillion.
Msheireb Downtown Doha
The £395M deal to construct a major phase of the Msheireb Downtown Doha project was instrumental in the collapse of Carillion. The firm, delivering the work in an 80:20 joint venture with Qatar Building Company, was building a mixed-use development comprising retail, commercial, residential, leisure, cultural and community facilities.
Former chief executive Richard Howson told MPs he visited the site almost every month for six years in a bid to get payments, saying the firm couldn’t have walked away from the project as completion was tied to performance bonds. MPs heard that when the firm’s 2016/7 accounts were filed, it was owed around £180M-190M, which went up to £200M at the time of the collapse. The project was supposed to be completed in May 2017, with the date being moved to the autumn. Then worker numbers doubled on site from 6,000 to 12,000. Howson said he now understands it will finish in December this year.
Royal Liverpool Hospital
Eight cracked beams resulted in the £335M PFI project to build the Royal Liverpool Hospital running up to seven months’ behind and needing more than £20M in remedial works. Howson told MPs how an “enormous” cracked beam in a plant room led to investigations by engineers which took a couple of months and found a total of eight cracked beams. “It is a very exceptional event to find beams that crack that have been designed by a professional designer, but as a competent contractor – and it goes back to my pride in Carillion – we didn’t just cover it up, those beams would probably never fail in their cracked state, but we chose to rectify it because it’s a public building,” he said attempting to explain how cost projections changed in Q2 in 2017.
Other problematic contracts:
Midland Metropolitan Hospital
The fundamental problem with the deal to build the £338M Midland Metropolitan Hospital was that the building services design ran six month’s late and didn’t work, Howson told MPs.
Aberdeen Western Peripheral Route
Little was said about in front of MPs, although Howson said in hindsight he would not have bid for the bypass. The Carillion, Balfour Beatty and Galliford Try consortium named Aberdeen Roads Ltd won the design, build, finance and operate deal for the the £550M Aberdeen Western Peripheral Route / Balmedie-Tipperty project in 2014. However it was hit by delayed earthworks.