Carillion shows a black heart linking PFI and private/state interrelations

The weekend just passed has seen the midnight oil burnt in Westminster as increasingly desperate attempts were made to rescue the company Carillion. You may wonder why as of course it is not a bank?! But the story emerging is one that is sadly familiar in many ways but with a few credit crunch era twists. For those unaware of what it does here is how it describes itself.

Carillion is a leading integrated support services business.

Not the best of starts as we wonder what that means? Later we do get some more precise detail.

Support services –  Facilities management, facilities services, energy services, rail services, road maintenance and utility services.

Public Private Partnership (PPP) projects – Our investing activities in PPP projects range from  defence, health, education, transport, secure, energy services and other Government accommodation.

Middle East construction services – Our building and civil engineering activities in the Middle East.

Construction services (excluding the Middle East) – Our market leading consultancy, building, civil engineering and developments activities in the UK.

I recall rumblings of trouble not so long ago with the Middle East projects but the most notable issue here is what it calls PPP but what we have discussed on here as the Private Finance Initiative or PFI.

We work in partnership with the public sector to deliver important services which offer value for money and make a positive difference to the lives of people in the communities where we work.

The company embedded itself in two areas in particular that are both considered vital but also have been ridden with PFI scandals.

 Some of the country’s largest and most prestigious NHS Trusts rely on us to deliver services critical to the safe care of over three million patients each year.

In the education sector,we have designed and built 150 schools, many as Public Private Partnership projects. We provide to 875 schools, clean more than 468,000m2 of school accommodation across 245 schools and provide mechanical, electrical and fabric maintenance services in 683 schools.


What has happened?

They say that in war the first casualty is the truth well it is true in company collapses as well. Only on the 3rd of May the Chief Executive Richard Howson announced this.

We have made an encouraging start to the year

Yet after only a short journey to the 11th of July Reuters were reporting this.

Shares of UK construction services firm Carillion (L:CLLN) slumped again on Tuesday with a profit warning, suspension of dividends and a CEO departure now wiping out half the company’s value in two sessions.

Danger! Will Robinson Danger!

A few words at the end of the Reuters article leapt off the page at me.

one of the UK’s most heavily shorted stocks

We move in those few short words from the “Why?” of Carly Simon to the “Who Knew?” of Pink. This is because shorting a stock on such a scale indicates that more than a few people knew something was wrong here. Yet we get a sniff of possible corruption as we note that even so new contracts were awarded for example these on the 6th of November.

Carillion is today announcing two contract awards, both in respect of Network Rail’s Midland Mainline improvement programme.

Were these part of an attempt to bail the company out at the expense of the taxpayer? Even worse was this from Construction News after the July problems.


Carillion / Kier / Eiffage clinched the central packages, picking up the £742m C2 North Portal Chiltern Tunnels to Brackley and the £616m C3 Brackley to Long Itchington Wood Green south portal.

Yes just when you thought it could not get any worse we see that Carillion is embedded in HS2 and we got an official denial of trouble!

Transport secretary Chris Grayling has defended the choice of troubled contractor Carillion as one of the firms to build phase one of HS2.

I guess we will find out what a “secure undertaking” is.

Private Finance Initiative

This was a large strand of business and as I reported on the 1st of September last year the main sound for the companies involved was ker-ching as they counted the cash.

The capital value of the assets which have been built is £12.4bn. However, over the course of the life of the contracts, the NHS will pay in the region of £80.8bn to PFI companies for the use of these assets.

However on this road the clouds darken again as we mull how a company with contracts which gave guaranteed profits baked by the taxpayer mostly in the UK but also abroad could go broke? Either much of its other business was appalling or it spent the money profligately.

Number Crunching

There are/were some real issues here so let us start with the dividend paid last June 9th. Shareholders received some 12.65 pence each which has to be questioned as only a month later came the announcement of financial distress. Of course those who held their shares have been wiped out by the compulsory liquidation but the real issue is with the board. On what grounds did they feel able to make the payment as allowing the business to carry on as normal mostly benefited them? There is a large moral hazard here especially after they told us this.

The Board and its Committees continue to benefit from a strong balance of expertise, experience, independence and knowledge of Carillion and our business sectors.

Next comes the issue of goodwill.

I queried as to how on earth Carillion could claim this? This has led to quite a debate where the real issue is why were the numbers not downgraded as the situation worsened. We of course return to denial of the state of play and the dividend payment but it is hard to move on without mulling this from @dsquareddigest.

Force of habit means that whenever I see the word “goodwill” I read “overpayment”

Or this from @SieurdePonthieu

What evidence did the supply to their auditors to substantiate the £500m? How did the auditors test the valuation? Post auditors were supposed to be very hot on that.

Pension problems

The next piece of number crunching comes from the pension scheme. From the Financial Times.

As a result of the liquidation, the Pension Protection Fund will take over payment of pensions for the company’s 28,000 retirement scheme members, and ensure scheme members who are not yet drawing a pension receive a capped level of benefits, with their retirement income cut by around 10 per cent.

Will they end up funding the goodwill via reduced pensions? Then of course there is the Pension Protection Fund can we find the goodwill here too? From the pensions expert John Ralfe

My take on pensions. Buy out deficit = c £1.4bn. PPF deficit = c £800m.


There is a lot to consider here as we look at the collapse and liquidation of Carillion. Let us open with two pieces of good news which is firstly that the road to privatisation of profits and socialisation of losses was not open this morning as there has been no bailout. Next whilst some benefits will be reduced pensioners will get a lot of protection albeit at the cost of the PPF or other pension schemes.

But there is damage across a wide range of areas. Contractors and sub-contractors must have been dreading the news today as not only will future payments stop at least for now but due to the 120 days payment policy past payments will not be made. There should be an investigation into this as we note that there was money to pay both dividends and directors. Next we come to PFI schemes and whether such companies become mini-monopolies and how if so they can manage to fail?

Yet again we find the issue of accountancy and auditing as in spite of all the supposed checks another large public company turns out to be an emperor with no clothes. Then we find that PWC get work on the liquidation after being one of the architects of PFI as we again find ourselves mulling another monopoly of sorts. They seem to benefit whatever the outcome.

Lastly I suggest that if you find someone called Phillip Green at the top of a pension scheme you immediately get very nervous albeit it is a different one this time around.

38 thoughts on “Carillion shows a black heart linking PFI and private/state interrelations

    • Not likely to ever be criminal in this crony capitalist paradise, hence why the banks will never leave for Europe Brexit or no Brexit.

      What annoyed me over the weekend was that there was even talk that they should get bailed out … along with the fact those who have been at the trough paying themselves vastly inflated pensions only get a 10% haircut. Now i know sweet FA about their pension scheme or PPF but if others are bailing it out surely a ceiling of UK average salary should be the limit to which anyone can receive. Maybe then Mr Shred and these failures will be held to account prior to destroying a business.

  1. Hi Shaun
    What a tawdry mess, Carillion seems little more
    than a ponzi employment agency.
    I find it interesting that Carillion was deemed
    small enough to fail by TPTB! Clearly the accountancy
    firms employed by this and other large companies are
    telling porkies on a grand scale, presumably “Goodwill”
    counts for nothing and should not be given any value on
    any company accounts from now on. Is there a table of
    the most shorted UK companies?

    Why no comment from GB?

    • “No more boom and bust” a statement on a par with the Late Lord Sutch’s manifesto promise to abolish winter.
      Then he also sold a large portion of the nations gold reserves at a knock down price having made announcement suppressing price before the sale???
      He also ended tax relief of dividends for defined benefit pension schemes initiating their demise.
      Light touch regulation of the financial industry…that worked out well.
      The prosecution rests…
      His defence he claims he saved the world?

      • I was one of many rogered by GB’s db pensions action,
        so i’ll revert to Loonie humour “A Frivolous Fraud Office
        will be set up to inspect fraud that is to silly for the serious
        fraud office:o)

      • He sold the gold because he inherited an economy bled to death by the Conservatives after 18 years of misrule. There isn’t a person anywhere who was happy about that but it was necessary. The fact that he did this before an upturn in the gold market is what made this decision look so bad but he couldn’t possibly have known that would happen. Market speculators with decades of experience use state-of-the-art computer algorithms to try to predict such things and rarely succeed as the 2009 world recession proved. The day after Labour’s general election victory in 1997 the NHS received a billion pound cash injection. That money had to come from somewhere (and there were plenty of other things that needed to be fixed once the Tories were removed).

  2. As a chartered accountant, let me make a few observations:
    1. The profession has completely lost the plot on auditing, as it consistently fails to spot the elephant in the room, namely that a company may have all its accounting up too date etc, but is going bust (I refer you to the banking crisis as well as Carillion);
    2. Accounting standards are set by essentially a clique drawn from the big firms (I was at Price Waterhouse so saw this in action). The phenotype of people in my experience who volunteer to set standards come from a very very narrow mindset, which seems to equate to “Let us add to the complexity of everything and to hell with the user”. No one sees the wood for the trees;
    3. The result of this is that, for no benefit to anyone except audit fees, accounts are now massively long and complex;
    4. For what it is worth, I would always look at the cash flow. It is harder to fudge, If you cannot reconcile this easily to the refit and loss account (eg a major capital project), run a mile.
    In the case of Carillion, I would bet that:
    1. Accounting standards forced them to put the goodwill on the balance sheet. If it arose on acquisition, this will be the case, as Companies used to write off far too much on acquisitions deliberately (“kitchen sink accounting”), allowing future years to show growth. If you wrote off acquired stock, for example, you would have 100% gross margin on anything you sold from that stock;
    2. The company’s accounts include a mass of long-term contracts. If ever you want to fiddle your accounts, these are the way to go, as anything that involves further estimates will be open to abuse;
    3. It is very unusual to go straight from normal trading to liquidation, so there must have been really nasty things there.

    The mistake the directors of Carillion made, of course, was not to set up a banking subsidiary, in which case, we would be hearing today about systemic risk, bail-outs etc and, of course, th bonuses would have continued to flow for the directors.
    A very sad story, which shows the auditors to have been a waste of space, the directors either negligent or out of touch and the only ones to gain being a bunch of short traders.
    Poor old employees, who were presumably working without any knowledge of all this and who will suffer greatly.

    • Spot on – cash flow is King! I used to drum this endlessly into the heads of managers who reported to me. They often had businesses that were booming on the top line with great expansion plans but were technically bankrupt. The difference was that in our case the parent co in the USA could post a letter of comfort with the banks and business went on as usual. It went down like lead balloon at head office of course as it indicated poor management skills. I suspect something like that happened in Carillion as the company extended payment terms and at the same time their own customers in the M east were late in paying. It would be interesting to know what the bosses bonus’s were measured on as this often moved the focus away from cash flow and debtor control.

      • No, most people know next to nothing about high finance and business accounting. They *suspect* the system is rotten to the core, and James’ comment helps them to understand how.

  3. Shaun, I am glad that they were liquidated. You raise the obvious questions, how long have they been trading a lie and why did the govt continue to award contracts to a business who claimed 1/3 of assets were “goodwill” when their suplly chain had so much bad will towarss them.

    Lets see how many other mega corporates can survive…. whe we get an increase in interest rates.


    • Hi Paul

      I think that at first minsters were in a type of denial but the “Who Knew” question appears again when we see that the shorting of the shares began some tine before. I do hope it was not leaked.

      As to the mega corporates then this song is especially appropriate today with an RIP to the singer.

  4. As Shaun points out, it really does show the extent of incompetence and/or corruption when a company with such fat lucrative contracts connected to PFI can end up going bust.

    As always, the accountancy “profession” comes out of this very badly indeed, but operating in the UK is always a free ride for anyone pursuing shady deals, crooks and corruption, regulation is slim to non existent and the legal system has a track record of looking the other way as far as white collar crime and especially financial or banking fraud.

    It seems the bigger the fraud or losses involved the more unwilling the regulator or the legal system are to act.

    Here are a few of the major collpses of recent times:Polly Peck;Barings;Equitable Life;Northern Rock;NatWest and RBS.

    I’m just waiting for the details of the inevitable bailout by the government. Failure, incompetence and corruption must be rewarded.

    Gangster’s Paradise? you bet, Coolio sums it up best I think:

    • Hi Kevin

      I have always liked that song as it lifts the chorus of one of the songs from the first album I ever bought ( actually double cassette) Songs in the Key of Life by Stevie Wonder. It gives us another look on inflation as I paid £6.99 for it all those years ago! Worth every penny and some………

  5. I agree with all the comments above on the worthlessness of ‘goodwill’ in the balance sheet and the effectiveness of boards and auditors.

    Now that the company is liquidated, why can’t the Government buy the PFI contracts from the liquidator at a price well below the discounted future contract costs? They would be bidding against commercial companies who hadn’t been parties to the contracts up to now so would be estimating their future value whereas the Govt could calculate it’s avoided future costs accurately.

    • A great idea, but I will take a bet that Carilllion has already monetised some by selling them (or the profit on them) to third parties, as did other PPI thieves

      • I did wonder whether this factored into the government’s thinking as to whether to bailout Carillion. Do those who bought these contracts now stand on the hook for providing the services as promised?

  6. Any company can fail suddenly if, say, a major customer goes bust and the business was not sufficiently diversified in risk terms to survive.

    What strike about this case is that it appears to be a slow burn issue which has taken some time to come to the surface and this makes it much less excusable than the case above; this has been brewing for some time and yet the remuneration and dividend streams have remained largely unchecked; the only noise emanating about this has been the snoring at the wheel that has been taking place.

    Like James above I am a chartered accountant and have been a member for nearly fifty years (now albeit on the retired list) and there is little doubt that the standing of the profession is now much less than it was when I qualified; the venality and crony aspects of relationships may always have been there but are now much more visible and much more “in your face” than before. Auditors are not guarantors but they are (or should be) an institutional backstop which helps to underpin the integrity of the whole system but it seems that this is being gradually eroded and cases such as this do not enhance one’s confidence in the system.

    • The only audit I ever trusted was that carried out by our internal auditors. It was like a visit from the Gestapo however I welcomed it as it would inevitably highlight systems that could be improved upon and if you were given a clean bill of health it was an audit result you could trust. Our official auditors were Arthur Anderson and we all knew how good they were! There was more emphasis on ensuring they were awarded next years contract than on internal systems.

  7. Why were the Government still awarding contracts to this company until recently? Everyone knew it was in trouble, so why was not a block on any awards of further contracts in place?
    The company was far too big to manage and control, and not doubt were working on tight profit margins of 1 or 2% to win contracts. So unless you have the best managers in place it was bound to fail.
    Carillion(silly name) was the result of many mergers and takeovers in the construction and FM industries. No doubt this lined the pockets of the merchant bankers, accountants,lawyers and the directors, but did it make for a profitable and efficient company – today we have the verdict!

    • Hi Foxy

      My father who was a plastering subcontractor was often very critical of the management of building companies and often argued they could be run far better. He also felt that more than a few takeovers happened because the buyer wanted to be able to put a smokescreen over its own accounts for a couple of years or so. Makes you think about all the mergers and takeovers doesn’t it?

  8. hello Shaun

    give it few months and the knighthoods will be handed out…….

    The TBTF banks must have got their money out of this company or there would have been bail-outs

    mind you , watch this space!


  9. The i’ll ‘name that tune in one’ companies like a Carillion put in ridiculous bids for contracts screwing employees and sub contractors to try to make their margin of course the remuneration of the incompetent boards goes in the opposite direction.
    The banks are going to take a justiable hit in this case how can you be allowed to run up debts of 900 million on assets of 300m not to mention the pension deficit.
    Yet again the pension protection fund is going to be called upon it appears this means reduced pensions for employees ripped off yet again a lot of these projected deficits are the fault of government Gordon Brown’s raid on dividends tax relief followed by the suppression of interest rates by money printing called QE .
    The demise of Carillion,the financial crisis the demise of defined benefit pension schemes can be traced back to one thing… DEBT.
    As Ronald Reagan used to say “You ain’t seen nothing yet “

    • Hi PrivateFraser

      Perhaps the banks just assumed it would be bailed out because of the government link via the PFI deals. I have written before about the issue of Hammersmith and Fulham back in the day when I was just starting my city career where the assumption of a bailout in that case of local councils was also false.

      As to the banks why do I fear that RBS will again be top of the wrong list?

    • You are absolutely right – did you hear on the radio this morning that the debts are no longer a piffling £900 million, but have risen miraculously in a day to £1.5 billion?

  10. Well, let’s just spare a moment to shout invective in the direction of that financially illiterate but polictically cynical chump Gordon Brown, under whose watch the PFI scheme exploded as it allowed him to spend so much money off balance sheet. Nothing worse than the cunning of a stupid man who thinks they are being clever.

    Of course, the taxpayer whilst not bailing out Cariilion itself will incur very significant costs as it picks up contracts and liabilities. Not least through the state owned bank RBS (and formerly Lloyds) who will have to make large write offs. An incestuous relationship between government, state owned banks and immensely powerful and influential private contractors is a marriage made in hell when it comes to honesty and probity.

    “Mini monopolies” is a good description of the real relationship of outsourced services. Once outsourced in any field, it is devilishly difficult to manage or move. Frankly, attempting to keep spending off the PSBR has wrought terrible damage to the taxpayers of this country – not least with the privatisation of student debts at huge interest rates and costs to students under the Tories.

    • I hadn’t read the comments before making my comment, but I note others have also raised the issue of Gordon Brown. The video is well worth the short watch as it explicitly lays the blame (correctly I may add) for the entire financial crisis on his shoulders by firing the starting gun on the race to the bottom between London and New York!

      But his fingers are still affecting everything around us. We can even thank him for Brexit as it created the unworkable situation in Europe of most being in the single currency and the UK not (your perspective as to whether that is a ‘good thing’ or not will depend on your outlook – although I note that he both simultaneously holds it was correct to not join the Euro AND incorrect to come out of the EU, such is his stupidity).

      • Hi Hotairmail

        I will skip the politics whilst agreeing 100% with this bit.

        “An incestuous relationship between government, state owned banks and immensely powerful and influential private contractors is a marriage made in hell when it comes to honesty and probity.”

  11. PFI is just one of the myriad of ways our society has constructed an unworkable ultra-complicated ‘regulated’ environment. The only beneficiaries of such a system are the rogues, corporate and political, who extract value at every stage. ‘The Death of Common Sense’ by Philip Howard is a good read about certain aspects of this common problem across western societies.
    Carillion isn’t the first and certainly won’t be the last.

    • Hi Jim

      I agree and let me add an element I did not emphasise today which is the way PFI helps the public finances in the short term. It is another form of kick kicking which creates a larger problem for the taxpayer in the future.

  12. Great blog as usual, Shaun.
    Carillion was a UK company but it had a big footprint in Canada too, where it has around six thousand workers. Not the best day ever, since we also heard about the death of Dolores O’Riordan of the Cranberries. Although the group was Irish, she and her family lived about half of their time in a town north of Peterborough, Ontario, so she was at least an honorary Canadian.

    • Hi Andrew and thanks

      The export of Carillion and its products to Canada amongst others is unlikely to be the UK’s finest hour so sorry about that. As to the Cranberries I did not know about the Canadian link and the death of a singer with such a distinctive voice is very sad before we even get to her 3 children who would have hoped for their mum to live much longer.

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