Editor’s comment: Nearly half a million businesses across the UK ended 2017 in a state of significant financial distress. This week, only one mattered.
Few corporate collapses have been as visible that of Carillion. You had to be in Canary Wharf a decade ago to see Lehman Brothers’ staff leaving the building with their belongings. For most, the demises of Equitable Life, BCCI and Barings Bank were seen from afar.
But wherever you are in the country, the consequences of Carillion’s liquidation are highly visible – as inescapable, perhaps, as the queues that formed outside Northern Rock in 2007. This time, though, it is the inactivity that tells the story. From Manchester (Angel Gardens and No8 First Street) to Birmingham’s Paradise Circus, a 180,000 sq ft Google office in King’s Cross to the Royal Liverpool hospital, affected projects stretch far and wide.
It was insolvency firm Begbies Traynor that talked of widespread business distress this week. “Significant” distress rose across every sector and region of the UK over the past 12 months, but nowhere more so than in the circles Carillion moved in.
Support services was the worst-performing sector by volume, financial distress in construction grew by 31% and by 46 % in real estate. Between them, those three sectors – Carillion’s heartland – accounted for 45% of the 493,296 UK businesses experiencing negative net worth or a worrying increase in their working capital deficit.
There are macro and micro reasons that led to Carillion’s speedy descent from profit warning to liquidation. Lengthy inquiries will reveal more about the culpability, competence and compensation of those involved. But there are more immediate problems.
Up to 30,000 businesses are owed money by Carillion. Their future looks less certain.
And while the public sector may have reduced its dependence on private finance initiative-type projects – through which Carillion is a major supplier – more than 700 such deals with a capital value of around £60bn are still operational.
In a report written before Carillion’s collapse, the National Audit Office made it clear there was no easy way of diluting the government’s reliance on such arrangements: “Annual charges for these deals amounted to £10.3bn in 2016-17. Even if no new deals are entered into, future charges which continue until the 2040s amount to £199bn.”
Profound consequences for the public sector and private developers. This week most contacted by EG talked of business as usual, resilience and minimal disruption.
But between the urgent contingency planning and inquiries, whose conclusions will be years down the line, there needs to be another course of action.
Writing in EG this week, CAST Consultancy’s Mark Farmer says Carillion “provides further evidence that the construction industry’s delivery model is broken and that ‘business as usual’ is no longer feasible in a market of large-scale fragmentation and sub-contracting, a turnover rather than margin culture, a growing skills and labour crisis, rising cost inflation and systemic issues surrounding deteriorating predictability of cost, time and quality outcomes for end clients.”
Or to borrow the title of his report for the government on modern methods of construction from 2016, at every level the built environment sector needs to modernise or die. Carillion didn’t and perhaps it couldn’t. Ensuring it doesn’t happen to you will require a full operational review.
To send feedback, e-mail damian.wild@egi.co.uk or tweet @DamianWild or @estatesgazette
