Jarvis was building a name for itself in the railway sector, until the 2000 Potters Bar accident. Eight years later, the business has finally come off the rails
When Jarvis entered administration last Thursday, it was the end of a construction saga. Having survived a disastrous stint in PFI, the Potters Bar rail crash and the collapse of its business model, the contractor appeared to land in a safety net, in the form of a £91m trackwork contract with Chiltern Rail. Two months later, Jarvis failed to secure lending to pay its bills and finally collapsed, placing 2,000 jobs at risk.
Nick Edwards, joint administrator for Deloitte, said he would “identify which parts of the business we can continue to trade and seek buyers for as going concerns”. Offers may not be forthcoming. A big infrastructure player said you would have to be “mad” to take them on; another said: “good riddance”.
That seems to be the end of one of the most remarkable stories to emerge from the construction industry since the day in 1994 when a charismatic Iranian civil engineer bought a moribund, 148-year old Yorkshire contractor. It was a brilliant move. Paris Moayedi had spotted the fact that the privatisation of British Rail would create an opportunity to corner the market in track maintenance. He bought the corporation’s Northern Infrastructure Maintenance Company and four years later spent £6m on an American track laying machine that was four times faster than conventional methods. It arrived as Jarvis’ share price, after rising at an angle of 90Þ, reached its zenith.
Naturally, there were doubts about the relationship between share value and tangible assets (this was before the dotcom boom). Moayedi’s response was typically belligerent: Jarvis just did the work better than its rivals, such as Amey and Balfour Beatty. One analyst (with the benefit of hindsight) says: “The business was built on a fantasy. For a long time Paris believed his rail maintenance margins were twice everyone else’s. That was the beginning of the end.”
The company’s share price re-entered Earth’s atmosphere fairly quickly in the noughties, but things still looked good in the rail sector: by 2002 it was responsible for maintaining 4,000 miles of track.
It all went wrong in May of that year, when a train travelling from London to Norfolk derailed at Potters Bar in Hertfordshire, killing seven people. A report from the Health and Safety Executive found maintenance, for which Jarvis was responsible, to blame. The incident was a PR disaster, largely because Jarvis insisted the crash was the result of sabotage. “The company’s fantasy continued here,” says the analyst. “Paris was telling people it was sabotage but this looked like he was trying to wriggle out of responsibility without any evidence.” Jarvis eventually admitted joint liability for the accident with Network Rail in April 2004.
The business was built on a fantasy. For a long time Paris believed his rail maintenance margins were twice everyone else’s
By that time the company had diversified, and was particularly strong in the PFI schools market. It won 19 contracts including jobs in the Wirral, Kirklees in West Yorkshire, Liverpool and Brighton. By the end of 2001 Jarvis held 25 PFI contracts. But the reality was altogether grimmer.
When a company wins a PFI contract, it receives a “development margin” amounting to, say, 5% of the value of the contract. Usually, this is spread throughout the life of a contract, but Jarvis spent it straightaway, meaning it was not in the bank to help when contracts later ran into trouble. The money was meant to cover the bid costs of the project won, and two that were lost. In 2001, Jarvis’ strike rate was so high it had few failed bids to cover, so the money was masking losses it had started to incur.
The wins and losses had the same explanation: Jarvis was systematically underbidding. Pretty soon rivals decided it was a waste of money to tender against it. That might have made it possible to raise its prices, but by that time the damage was done. Losses for 2003 stood at £256m, and in 2004 the company was kicked off a £175m deal to build and maintain 10 schools in Fife. It also lost a £92m Norfolk council PFI deal.
In 2003 former Conservative transport minister Steven Norris, famed for his failed London mayoral bid and five simultaneous affairs, replaced Moayedi as chairman of Jarvis. But taking on a business that had destroyed its reputation was no easy task. In October 2004 it sold its PFI operations to French supercontractor Vinci. Some would say that was a good move, others a lucky escape.
More patching up was needed. After a refinancing deal that wiped out 300 jobs in 2005, and a debt for equity swap of £378m, Norris concentrated the business fully on rail. And that was when it finally lost its balance. “Since then it has been a long, slow decline into administration,” says Richard Kelly, head of construction at accountant BDO. “Its ability to diversify from rail into wider construction services was hampered by the previous damage done to its reputation and consequently it was always reliant on one major customer and the support of the banks.”
Jarvis continued to win places on Network Rail’s track maintenance and renewals frameworks. But it was never far from trouble; over new year 2008/09, half its engineers didn’t turn up to do maintenance work, leading to chaos when trains were cancelled for four days. Luckily for Jarvis, a clause in its contract meant it was exempt from penalties. But that was the last escape. A few days later Network Rail announced it was scaling back spending on track work by 30%. From that point, Jarvis’ fall was inevitable. The long fantasy had come to an end.
Trouble on the line
If Network Rail’s decision to cut track renewal by 30% eventually did it for Jarvis, other rail contractors are bound to be hit in the race to slow the national borrowing, particularly those on Network Rail’s renewal framework: Amey Colas, Babcock Rail, Balfour Beatty, Carillion, Grant Rail and Trackwork. A source at one said: “Some businesses, like Balfour Beatty, are still getting lots of volume, but others are being squeezed hard. Even people like Carillion have seen their rail divisions shrink.”
Babcock has also restructured its rail division and the prediction is that those contractors that have not acted similarly already will be doing so soon. Otherwise, the economic consequences will be severe. David Hudson, head of corporate insolvency at Baker Tilly, says: “With huge government spending cuts like this, there will only be greater and greater concern over firms entering administration and liquidation.”
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Additional reporting by Andrew Hankinson