The Carillion fallout is still spreading across the construction industry, and looks likely to do so for some time.
An immediate knock on effect is insolvencies among Carillion’s suppliers, caused by the large unsettled debts the collapse left them facing. Those companies themselves owe significant sums to their suppliers, and so the chain reaction continues.
The scale of Carillion’s collapse has raised some expectations that there will now be changes made in government procurement and in construction’s payment practices; things couldn’t just go on the way they did before, could they? These expectations do not so far seem to be founded on much more than faint hope. Ten years ago the world faced a financial crisis of far greater magnitude than the collapse of a single badly managed contractor. The world financial system looked under threat and concerted action was needed to bail out the banks. The measures averted catastrophe, but analysts say that nothing fundamentally has changed in the banking world. The implication is that it could easily happen again.
If an event that almost brought the world financial system crashing down results in little change, why should the collapse of a single contractor in the UK? At the moment there is no certainty that the next Carillion scale collapse isn’t just around the corner. The warning signals aren’t being flagged up on the market for shorting shares in the way they were for Carillion – warning signals that were largely ignored – but short sellers cannot be relied on to identify every corporate disaster in the making.
Carillion collapsed because of a range of problems, all of which frequently beset other companies, but which faced Carillion in a unique combination. It’s own management is being given much of the blame by well publicised Parliamentary reports. ‘A story of recklessness, hubris and greed,’ is but one of the damning phrases in the joint report of the Business and Work and Pensions select committees. The only cash underpinning the business activities was the money being withheld from its suppliers, they pointed out. Advisers had suggested that they increase their payment terms to 126 days as an ‘opportunity’. It all certainly justifies calling Carillion’s a ‘rotten culture’ as the MPs do.
After 15 weeks of evidence taking the MPs produced a 107 page report that positively drips with vitriol. A bit more rigorous examination of government procurement and construction’s payment practices at an earlier date would have been useful however.
As valuable as the MPs description of what happened at Carillion is, what is really needed is analysis of why and how such a situation can have arisen at a major government contractor apparently undetected. Clearly something is wrong with the corporate culture that allows this sort of situation to develop, along with a business model that was ‘doomed to fail’ as the MPs said, but something is also clearly wrong with the procurement system that awards contractors major long term contracts at unsustainable margins and allows them to postpone the inevitable day of reckoning by denying their own suppliers the cash flow needed to operate properly, and then drags them down with it when it collapses.
Time for the MPs to move on from feasting on the corpse of Carillion and turn to the procurement and contracting system that produces the opportunity for disasters like that to happen.
Nick Barrett
Editor