The problems were so structural and so ingrained that others were dissuaded from coming in to rescue the contractor, says Richard Steer
Most of the public sector projects have gone to consortia which the government would expect the consortia to continue with, but the difficulty with that is Carilllion would have been such big players within the consortia that even though strictly speaking you might expect the consortia to keep going they will be so weakened without the strength of Carillion behind them that I think the projects will flounder.
They’ve got into dire straits on some of their projects and this is why they’ve gone into liquidation rather than administration - in that they’ve now gone rather than limp on and get someone to take them over. You’ve got to pay a market rate for these people; it’s very easy to make headlines out of that.
You’ve only got to sneeze at the wrong time and you lose 0.7%. What Carillion had happen was two, three, four projects all go wrong at the same time
You’ve got to compare it with what happened with Balfour Beatty really where they managed to dig themselves out of their problems and are now not doing too badly. The real difference is Carillion’s huge pension deficit which has made it undesirable for anybody to buy them out.
They had three difficult projects: the PFI ones, the military bases - which they hadn’t bid very well and weren’t providing a very good service - and there was also the bypass in Scotland, along with a couple of overseas projects that went badly for them.
Part of the overall problem is the margins that contractors have to work on. If there was some fat in our industry and the contractors could actually get sensible returns on their work they may have been able to survive better, but it’s paper thin.
It seems the problems were so structural and so ingrained that it hasn’t been worth it
You’ve only got to look at Mace’s results last year - they made 0.7% profit and you’ve only got to sneeze at the wrong time and you lose 0.7%. What Carillion had happen was two, three, four projects all go wrong at the same time. By doing a rights issue and refinancing, Balfour Beatty managed to get through, but a £600m pension deficit which is almost an open-ended promise – you kind of know that’s going to increase, particularly if it’s final salary stuff – it’s really dissuaded anybody from buying them and taking them on. It would be easier to try and pick up some of the contracts and work them once the contractor has disappeared out of the scheme.
To me it was always the pension scheme that has been the barrier to people buying them.
Carillion will have to be replaced on projects, but the people who now move in will be demanding far better margins for coming in and doing the work. This is why the government has been slightly wrong-footed; they’ve allowed for those contracts in budgets and now all of a sudden the cost of those contracts is going to go up by the very nature of people going in to rescue the situation.
This is why the government has been so closely involved, as they know there is going to be additional expenditure which they haven’t budgeted for.
I thought one of the big European or American contractors would come over to buy them up to take their place on the big infrastructure frameworks and then look at trying to reduce the pension deficit and increase the profitability on the projects, but it seems the problems were so structural and so ingrained that it hasn’t been worth it and people must have been taking a look.
Carillion have got some good people in there and we are always looking to take on good people, so we may be able to offer a home to some of their team.