FILE: A group of Carillion Plc workers look on during renovation works at London Waterloo train station in London, U.K., on Monday, Aug. 7, 2017. Carillion Plc, a U.K. government contractor involved in everything from hospitals to the HS2 high-speed rail project, has filed for compulsory liquidation after a last-ditch effort to shore up finances and get a government bailout failed. Our editors select the best archive images on Carillion and their global projects, in the United Kingdom Battersea Power Station and the M6 Motorway, and in Abu Dhabi the Al Muneera development. Photographer: Simon Dawson/Bloomberg
Carillion was liquidated in January with £7bn in liabilities, leaving the government to step in © Bloomberg

The liquidation of collapsed British outsourcer Carillion will cost UK taxpayers at least £148m, according to a report from the government’s auditor, of which an estimated £50m will be paid to auditor PwC for its work in the process.

PwC is the “special manager” appointed to the windup process by the Insolvency Service, causing anger among politicians, given its former role also as an adviser to Carillion.

Schools, hospitals, local authorities and special purpose vehicles delivering private finance initiative contracts are now locked in a dispute over a 20 per cent premium they are being charged by the Insolvency Service to handle the cost of the liquidation, according to a National Audit Office report released today. They are also disputing outstanding invoices from Carillion.

Frank Field, chair of the work and pensions committee, said: “As special managers, with a contract to print money awarded without any competition, PwC will draw £50m for six months’ work.”

Mr Field said he had written to PwC requesting further information over how “PwC’s conflicts of interest arising from their long history of work on Carillion are being managed”.

Rachel Reeves, chair of the business, energy and industrial strategy committee, described Carillion as “the gift that kept on giving — for the Big Four, at least, as they raked in millions for their audit and other work”. She added that the Big Four auditor firms “make a killing in fees advising struggling companies how to turn them[selves] round and then they pocket millions tidying up when that advice fails”.

PwC said that its priority has been to “keep public services, such as the maintenance of prisons, hospitals, roads and schools, running safely across the country — minimising the disruption caused by the collapse — while transferring contracts and saving thousands of jobs”.

It added: “We understand concerns over the cost of the liquidation, however, without this work the cost to UK jobs, the economy and the taxpayer would be considerably higher. From the outset it has been clear that PwC’s fees . . . will be subject to scrutiny and approval by the official receiver and the court.”

When Carillion was liquidated on January 15 it had just £29m in cash and £7bn in liabilities, leaving the UK government to step in to ensure delivery of key services such as school meals, hospital and prison cleaning.

The collapse of Carillion

The Insolvency Service, which is handling the liquidation, expects to have completed the transfer of all 18,200 of its UK workers and an estimated 420 public sector contracts by the end of this month.

Non-government creditors — including banks, subcontractors and suppliers — are “unlikely to recover much of their investments”, the watchdog warned. Meanwhile, the company’s extensive pension liabilities will need to be compensated through the Pension Protection Fund.

There is also uncertainty over the timing and value of asset sales, while the amount owed to Carillion remains unclear and may require legal action, the NAO said. This means it will “take a long time to establish the actual final cost”.

Although its facilities management services for central government made operating margins of just 1 per cent in 2017, its local authority contracts were more profitable, generating operating margins of 13-15 per cent, the report revealed.

The NAO report shows that the scale of the £845m losses in the July profit warning “came as a surprise to the Cabinet Office as it “contradicted previous discussions with Carillion and market expectations”.

A review carried out by the consultancy firm FTI but not seen by the Cabinet Office or lenders before Carillion’s insolvency reported practices that it described as having “enhanced reported financial performance above underlying operating performance”.

Mr Field said that report “adds new weight to what we found: Carillion hoodwinked the government as they did many others who were so naive as to trust their published accounts”.

He added that it was “difficult to shake the impression that this was conscious cash-chasing, bugger the long term consequences and bugger the interests of suppliers, workers and pensioners”.

In a statement the Cabinet Office said: “The government has been clear that its priority is to ensure that public services continue to run smoothly and safely. We are grateful to the NAO for their report, and will consider their findings.”

The government started contingency planning in July but first had to work to “establish a complete list of government contracts”. The process accelerated in October but the Cabinet Office was still seeking information on schools and local authorities at the point of liquidation.

Although the Cabinet Office had raised the delayed payments to subcontractors and the short selling of shares since 2013, it did not have a crown representative in place for Carillion from July 2017 — when it issued its first profit warning — to October that year because it was searching for someone with restructuring experience.

From September, the Cabinet Office spoke to the company every day, with eight government “insiders” given access to the same information as lenders, including access to cash flow statements.

In December, Carillion’s lenders said it would not give further loans unless the company approached the government. In early January, the company asked the government for a further £223m to help it with financial restructuring, which comprised a £160m loan and a £63m deferment of tax, which could be partly offset if the government paid disputed claims of £39m.

It also asked the Cabinet Office for £125m towards the completion of Midland Metropolitan hospital in return for an equity stake and offered to transfer Carillion’s equity stake in the joint venture building the Aberdeen bypass. Other requests included support to arrange a solution for the £2.6bn pension liabilities with the Pension Protection Fund and help negotiating an exit from lossmaking Middle Eastern contracts.

The government declined all the requests as it was concerned about Carillion’s business plans, the legal implications, the possibility of setting a precedent and the concern that Carillion would return with further requests, the NAO said.

Get alerts on Carillion PLC when a new story is published

Copyright The Financial Times Limited 2021. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article