- Created: Thursday, 01 February 2018 14:30
- Written by Trevor Rayne
When Carillion went into liquidation on 15 January 2018 it was the biggest collapse in the history of the British construction industry and one of the largest bankruptcies in recent British corporate history. Carillion’s demise is not an aberration of capitalism: rather it expresses exactly what capitalism has become in Britain: corrupt and parasitic, incapable of providing decent public services. From plundering our taxes to enrich its executives and shareholders, to the teams of accountants paid millions for cooking the books and the swarm of hedge funds gambling on its failure, Carillion represents British capitalism today. This system must be got rid of. Trevor Rayne reports.
Carillion described itself as ‘one of the UK’s leading integrated support services companies, with a substantial portfolio of Public Private Partnership projects, extensive construction capabilities and a sector-leading ability to deliver sustainable solutions’ (Annual Report 2016). It was Britain’s second largest construction company, after Balfour Beatty. However, 90% of Carillion’s work was outsourced to sub-contractors; there are 30,000 of them. It held some 450 contracts with the government, worth 38% of its income in 2016. It was one of eight building firms forced to admit to running a blacklist of 800 trade unionists who had complained about health and safety conditions.
Upon news of Carillion’s collapse and before they were sent home, sub-contracted workers took as many tools and personal possessions with them as they could, fearing the equipment would be seized and sold by the company’s liquidators. 14 hospitals resorted to emergency plans to provide services previously supplied by Carillion. In Oxfordshire, the fire service was put on notice that it might have to deliver school meals. Carillion’s creditors have been told they are likely to receive less than a penny for every pound they are owed. This is how the mighty fall. The chief executive of the Specialist Engineering Contractors’ Group warned of hundreds of smaller businesses collapsing as they go unpaid for work done: ‘The fallout from this could be horrendous. The domino reverberations as it travels down the supply chain could be unprecedented.’
Carillion was formed out of the firm Tarmac in 1999 and took over the construction companies Mowlem, Alfred McAlpine and George Wimpey. It was responsible for such prestige projects as maintaining the façade of Buckingham Palace, building the Channel Tunnel and renovating Battersea Power Station. By the time Carillion imploded it employed 43,000 people worldwide, 19,000 of them in the UK. Carillion expanded with the growth of Private Finance Initiatives (PFIs). The process of outsourcing public services to private business was launched by the Thatcher Conservative government in 1979 to enhance private sector profits in a time of crisis. PFIs were introduced by the Conservative government in 1989, but their use accelerated under the 1997-2010 Labour governments. With PFIs the government contracts private firms to raise the money to build and operate public sector assets. The firms are then repaid, with interest, by taxpayers for periods up to 30 years.
Through PFI outsourcing, Carillion managed 200 NHS operating theatres, 11,800 NHS hospital beds, provided patients’ meals, built motorways and bridges, designed and built 150 schools, provided catering at 875 schools, maintained and repaired prisons, managed several public libraries, was working on London’s Crossrail and the HS2 high-speed rail project and so on. The government depended on Carillion to maintain its GCHQ headquarters building, which Carillion designed and built. It was the biggest manager of military bases for the Ministry of Defence and was building £1.1bn of new accommodation for British troops. Carillion had contracts worth a combined £685m to build the new Royal Liverpool University Hospital and the Midland Metropolitan Hospital in Birmingham. The firm operated in Canada and the Middle East, holding a contract for the 2022 football World Cup in Qatar.
Carillion maintained half of Britain’s prisons. Prison reports frequently condemned Carillion’s service: Wormwood Scrubs in a seriously dilapidated state, cell windows broken, sheets unchanged, showers and telephones out of order; Ford prison with broken down kitchens; Dartmoor where ‘leaks of rainwater have contaminated the food preparation area. The speed of repair work was affected by the slow and cumbersome relationship with Carillion,’ but still the contracts kept coming.
Debt and deception
Carillion appeared to be a successful British firm, so why, when it asked to borrow £20m more from its banks (RBS, Lloyds, Santander, HSBC and Barclays) did they vote ‘No’ and when Carillion met with government ministers on 13 January 2018 to ask for short-term funding did the government reply that it would cover the cost of liquidation instead?
The overriding reason was debt; by the end of 2017 Carillion owed £1.3bn to the banks, plus £630m of ‘bonding facilities’ (another form of borrowing); it owed £350m of invoices, plus a £587m pension deficit. By the time it collapsed Carillion was already under investigation by the Financial Conduct Authority for the ‘timeliness and content’ of announcements it made to the stock market between December 2016 and July 2017, when it issued its first profits warning. Money owed by Carillion’s construction customers rose from 13% of construction revenues in 2009 to 31.6% in 2016. For non-construction customers this rose from 14.4% of revenues in 2009 to 30.5% in 2016. Businesses were not paying their bills. There was a cash flow problem. Carillion also used the Early Payment Facility, introduced by the government in 2011, whereby money that Carillion owed to its suppliers would be paid by partner banks, including RBS, Lloyds and Santander, in exchange for a fee paid by Carillion. Carillion would then owe the banks. Debt accumulated in this way grew from £263m in 2011 to £760.5m. However, this debt was not included in the company’s published debt figures. This practice is described as ‘an old accounting trick’, used to disguise a problem.
Carillion kept getting new contracts in order to pay old customers, using new or expected revenues to meet demands for payments, and as collateral for new loans, and to pay dividends to shareholders. The government obliged by issuing £2bn worth of new contracts even as new profit warnings were issued. As the debts piled up, so Carillion had to pay higher interest rates to borrow. Nevertheless, paying off debt was not Carillion’s executives’ priority; debt recovery payments amounted to £47.4m in 2015 and £46.6m in 2016, but dividends paid to shareholders amounted to £80m and £82.7m in the same years. When executives’ bonuses are linked to dividends and share prices, what else can be expected from them?
Carillion turned to the German Schuldschein debt market for loans. This was facilitated by HSBC and Bayerische Landesbank. Here, borrowers’ qualifications are less closely scrutinised than is usual. This market is growing, with foreign companies replacing traditional German medium-sized businesses as the borrowers. In Carillion’s case it received money from Taiwanese investors, instead of German savings banks.
Carillion consistently declared construction profit margins higher than its rivals and every year since its formation it increased its dividend payments. Carillion’s auditors were complicit in the deception, hiding the firm’s deteriorating condition: Deloitte served as the internal auditor and KPMG the external auditor. KPMG received £29.4m in fees in 2017 and approved of Carillion’s financial viability for at least three years ahead. ‘We believe that we conducted ourselves as Carillion’s auditor appropriately and responsibly’ said KPMG. Deloitte declined to comment. Even unto the end, market analysts were recommending Carillion shares: stockbrokers were listed among the top 20 shareholders. The Financial Times tried to reassure its readers about the justifiability of PFI in the midst of this debacle. It identified two problems with Carillion: the pressure on the government to accept the lowest bids and poor scrutiny of business. This is misleading: Carillion was directed by the needs of capital accumulation in the hands of giant financial monopolies: banks and investment funds – the City and its unscrupulous hirelings.
Shareholders and hedge funds
Writing in The Observer (21 January 2018) Will Hutton decries the ‘short-term financial priorities’ of Carillion’s management and shareholders and calls for a longer term commitment to investment. This is deluded; capitalism in crisis is desperate for the quickest returns it can get and if it cannot get them in one place it moves on to the next. It does this on a global scale. Large-scale capital takes a monopolistic and fluid form; its demands dictate what such as Carillion do. The top ten investors in Carillion held 43% of the shares; the top 100 had 89%. The biggest shareholder is the New York-based BlackRock Incorporated, which has assets of $6.2 trillion under its management, including shares in the four biggest housebuilding companies in Britain, the estate agents Savills and the construction industry supplier Travis Perkins (see page 5). Other major Carillion shareholders include Standard Life Investments, which is a major shareholder in three of the four biggest British housebuilders plus Savills, and Deutsche Bank and UBS Investment Bank. More and more British firms are borrowing to pay their dividends to keep the likes of BlackRock and UBS happy.
From 2013 investors were aware of delays in Carillion’s payments. On one analysis, 18 hedge funds made £80m betting against Carillion’s shares; much more will have been made. Hedge funds borrow shares from other investors for a fee, and then sell the shares with the intention of buying them back for less at a later date. If they gamble correctly, and the share prices do fall, they buy them and return them to the original investor for a profit. In the summer of 2017, 25% of Carillion’s shares were ‘shorted’ in this way. BlackRock joined in this game; another player was the hedge fund Marshall Wallace, whose founder, Sir Paul Marshall, was a major backer of the Leave campaign. They make fortunes for producing absolutely nothing – vultures.
Taking a hint from the hedge funds’ attentions, Carillion’s directors inserted changes in the 2016 Annual Report removing clauses enabling the firm to claw back pay-outs made to them in the event of ‘corporate failure’. The changes appeared in 8-point type on page 78. Embarrassed, the Institute of Directors said the decision ‘appears in retrospect to be highly inappropriate’. Carillion’s directors included an advisor on corporate responsibility to the Prime Minister, the chair of the Confederation of British Industries construction council, a former vice president on strategy to Royal Dutch Shell, a Tesco director and director of Tesco’s pension scheme. This is the ruling class – parasitic and insatiable.
PwC (formerly Pricewaterhouse Coopers) was appointed by the High Court on 15 January 2018 to manage Carillion’s liquidation. It can expect to get £50m for this. Earlier, the government contracted PwC to advise on contingency plans if Carillion collapsed. The Cabinet Office is paying £750,000 a week for 50 PwC staff, or an average of £15,000 per employee each week. ‘Although PwC has taken the central role in winding down Carillion, the latter’s demise has triggered a jamboree of fee-earning opportunities for other professional services firms. With the fate of Carillion’s employees, contracts and property to be decided, they stand to earn tens of millions of pounds from the consequences of the liquidation’ (Financial Times 17 January 2018). Alongside these, scores of buyout firms are circling Carillion’s remains, seeking to cherry-pick choice assets at knock-down prices.
In 2017 PwC was appointed to advise on how to protect Carillion’s pensions. There are 28,000 members of Carillion’s pension schemes. 66 of the FTSE 100 British companies’ pension schemes had deficits amounting to a total of £87bn at the end of 2016, up £17bn on the year before. These FTSE 100 companies, like Carillion, pay out four times as much in dividends to shareholders as they pay in contributions to their pension schemes. Many firms have stopped new employees from having access to their pension schemes and increasingly refuse new contributions from existing members.
Jeremy Corbyn said that Carillion’s collapse was a ‘watershed’ moment and that a future Labour government will ‘end the PFI rip off’, and bring many PFI contracts back in-house. The largest PFI contracts would cost £50bn to end, more than the outstanding debt, even before compensation to shareholders is considered. For some hospital PFI contracts to be ended the government would have to pay £500m and more over the cost of the project that the original contract covered. Would Labour ever contemplate that? To end this PFI scandal and to end the parasitism it is part of requires a socialist revolution.
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