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Carillion cost revelations: 5 things we learned

Today saw the government’s costs watchdog publish its investigation into the collapse of Carillion.

The 51-page report by the National Audit Office is the latest in a series of probes into the fall of the country’s second-biggest contractor.

Focusing on the government’s role, it chronicles what actions the government and its various bodies took before and after the collapse.

CN has taken an in-depth look at the report and picked out five of the biggest revelations.

Carillion wanted hundreds of millions from the taxpayer

In the week before Carillion’s collapse, the company’s directors made a series of last-minute pleas to the government for financial help to avert collapse.

The demands included a direct loan of £160m to aid cashflow until April, a deferment of tax payments worth £63m due in the first half of 2018, and £40m in advanced payments for work on government deals. 

Carillion also asked for up to £125m from the government to fund the completion of the Midland Metropolitan Hospital, in exchange for an equity stake in the PFI deal.

A number of requests for what the NAO labelled “unquantifiable amounts” from the government were made by the contractor.

These included a funds-for-equity swap in its Aberdeen Western Peripheral Route contract, an automatic extension on some of its existing public sector deals, and a commitment by government to award Carillion what the contractor called its “fair share” of new contracts in future.

Carillion also looked to strike a deal with the Pension Protection Fund that would see it detach itself from its £2.6bn pension liabilities.

Carillion was leaking money through its PFIs

Carillion was expected to lose £234m on four of its biggest loss-making contracts in 2017, the report reveals.

On the Aberdeen Western Peripheral Route alone, Carillion was set to lose £91m as unforeseen ground conditions and problems with utilities firms ramped up costs.

On its Midland Metropolitan Hospital PFI, design problems and spatial constraints were set to produce losses of £48m, while on Royal Liverpool Hospital asbestos issues and structural deficiencies led to a forecast £83m hit.

Carillion’s Ministry of Justice deal to provide FM for 52 prisons was set to incur losses of £12m throughout 2017, the report also found.

Contingency plans came less than a month before collapse

After the July profit warning, the Cabinet Office began contingency planning for Carillion’s possible failure. 

Following the second profit warning in September, the Cabinet Office called on all government departments and arm’s length bodies to provide detailed contingency plans by the end of November.

Public bodies’ contingency plans – estimated cost  
ClientEstimated costs of contingency plan
Network Rail* £146.7m
Ministry of Justice £52.6m
Ministry of Defence £27.8m
Oxfordshire County Council £3.4m
Department for Education £3m
London Boroughs of Harrow and Ealing £2.6m
London Borough of Hounslow £1.5m
Leeds City Council £0.4m
Stockport Strategic Partnership £0.3m
HM Revenue & Customs £0
HS2 Ltd £0
Total £238.2m

The majority of organisations missed that deadline, and another letter was sent demanding plans be sent by 20 December.

In the end, the Cabinet Office received a total of 65 contingency plans from 26 public bodies, but only 11 were costed.

Network Rail had the highest estimated cost for its contingency plan, believing the Carillion collapse could cost it £147m in a “worst-case scenario”. Network Rail has since said the actual cost is far lower than this.

The Ministry of Justice’s contingency plan was the second costliest at an estimated £52m, while the Ministry of Defence’s plan was expected to cost £28m.

Clients could not stop awarding Carillion contracts

Despite Carillion issuing a profit warning in July with a writedown of £845m, Carillion continued to be awarded public contracts.

From the profit warning to its collapse, Carillion picked up eight government deals with a value of £1.9bn.

During this time Carillion was rated as “high-risk” but the Cabinet Office did not believe this was grounds to refuse the awarding of contracts.

On HS2, Carillion’s JV won a phase one contract worth more than £1.3bn just two days after the profit warning.

Despite HS2 bringing in EY to re-run financial tests, Carillion continued to pass. The tests carried out only looked into its public accounts covering 2016, the NAO report said.

Network Rail meanwhile awarded two electrification schemes to Carillion in November. The award was part of a framework deal, with due diligence carried out on Carillion when the contract started in 2014/15. Network Rail said not awarding the deals would mean re-procuring the contract, which would increase costs and delay work.

In all but one of the eight deals, Carillion’s JV partners were required to take over the contracts following its collapse.

Carillion creditors could see some cash back

When Carillion went under in January, it had very few assets available for the estimated 11,600 subcontractors that were working with it at the time of its collapse.

The majority of the limited funds held in the company have been used to cover the costs of insolvency.

Nevertheless, the NAO report said that the official receiver would likely distribute some money to creditors whose debts are with companies in the wider Carillion group that still have positive net assets.

Currently only 31 of Carillion’s 198 companies are in liquidation.

Timeline: Carillion’s final fortnight
31 December First formal request to government by Carillion for financial support, deferment of taxes, help in restructuring its pension liabilities and immunity from penalties arising from regulatory investigations.
3 January A Financial Conduct Authority investigation is announced into the “timeliness and content” of some of Carillion’s stock market announcements between 7 December 2016 and 10 July 2017.
5 January Government representatives and their advisers meet Carillion, its major lenders and pensions representatives. Carillion says it needs restructuring plans in place by 19 January and had hired insolvency practitioners to help it plan. It says about £275m-£350m is required. The lenders’ advisers said it could well be more, and pensions liabilities could be £600m-£1.5bn. Lenders reportedly voice concerns over Carillion’s slow progress in business and contingency planning, and by the rate at which it is using cash.
8 January Carillion shares with the Cabinet Office and other creditors a draft business plan setting out its plans for restructuring the company.
Carillion makes a more detailed request for support to the Cabinet Office.
10 January Carillion presents its business plan to its creditors. It reports losing £655m of cash from operations in 2017. Its future strategy is to: do “fewer things better”; exit non-core businesses, including public-private partnerships; reduce annual operating costs by £100m; and dispose of non-core assets.
11 January The chief executive of the civil service, the chancellor and the Cabinet Office minister approve the option of a trading liquidation.
12 January Government meets lenders and pensions representatives. Potential private investors state that any additional finance would be long-term (post-restructuring), without links to loss-making contracts, and with the understanding that they would take priority in any payouts to creditors. Major banking lenders would not proceed without government guarantees and pensions liabilities resolved.
The Cabinet Office promises Carillion a decision by 15 January.
Carillion reports to the Cabinet Office that HMRC is not minded to support its request for deferment of tax because:
• The proposal did not fit with HMRC’s ‘Time To Pay’ model because of the level of debt accruing
• It suspected Carillion had other sources of liquidity
• It lacked confidence in the viability of the company following the restructuring
The prime minister approves the option of a trading liquidation.
12–14 January Carillion and the Cabinet Office have further discussions about the nature of government support requested.
13 January The Cabinet Office submits the results of its options analysis for Carillion’s support or insolvency to the Cabinet Office minister.
14 January The Cabinet Office informs Carillion it will not provide support. 
15 January Carillion’s directors apply to the High Court for liquidation.
  • Carillion cost revelations: 5 things we learned

    Carillion cost revelations: 5 things we learned

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