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.

Comment

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.