STUC BLOG: The Carillion Carrion - the Decaying Model of Public-Financed Procurement

January 15th 2018

In the first blog post of 2018, the STUC Policy Team takes a closer look at Carillion...

The news that multinational construction and facilities management company, Carillion, has gone into liquidation, has left thousands of workers not knowing if their wages, pensions or jobs are secure.

Carillion employs 43,000 people worldwide, 20,000 in the UK, with the Herald reporting 2,000 jobs are at risk in Scotland. Through its supply chains far more workers could be at risk, given suppliers exposure to Carillion’s debts.

Given the complexity of contracts and subsidiaries, information outlining the exact extent of Carillion’s interests in Scotland is somewhat difficult to find, however projects include: the Aberdeen bypass; electrification of the central Scotland railway line through Shotts; a platform extension at Edinburgh's Waverley Station; two facilities management contracts with the Ministry of Defence worth £158m and covering 83 military sites in Scotland; and contracts with West of Scotland Housing Association. There are also likely to be other contracts which come to light in the coming days and weeks.

Carillion’s last annual return showed an operating profit of £182.7m for their support services, including facilities management, and £28.3m for public private partnership work. However, with the Carillion group having debts and other liabilities totaling £4.1bn, whilst assets are worth £3.7bn, it is clear that Carillion have not been in a particularly stable place for some time. In July 2017 their share price fell from 192p to 57p in one week. With share prices now sitting around 14p it is quite clear that Carillion has known about this coming collapse for some time. Regardless, the UK government issued Carillion the HS2 contract after share prices began to tumble, begging the question: where was the government’s due diligence in ensuring public finances were used appropriately and for best value contracts?

At this point we don’t quite know how many dominoes might fall as a result of Carillion’s collapse but it could be substantial, particularly in the construction sector which is already facing a difficult economic climate.

How has this happened?

Well much of it relates to the murky world of privatisation and outsourcing.

Most of Carillion’s work is dependent on public contracts and PFI deals in sectors as diverse as transport, education, local government, healthcare, aviation, and defence. It seems it underperformed on its contracts – and more than likely was underbidding to win large volumes of work. The result is workers, taxpayers and public service users are now left to pick up the tab.

Yet companies such as Carillion, where the Chief Executive and Chief Finance Director’s total remuneration in 2016 was over £2.5million, with bonuses of 37% and 30% of their respective salaries, continue to bid on and win public service contracts left, right and centre in the UK and Scottish economy.

The electrification of the railway at Shotts and the Aberdeen bypass projects sit squarely at the heart of the Scottish Government’s draft budget plans on infrastructure investment, therefore are key components of the Government’s economic and industrial strategies.

Whilst Carillion’s Chief Executive’s pay increased 8% over 2015-2016 and taxable benefits increased by 40%, the average for all other UK employees of Carillion was a 2% pay increase and nil on taxable benefits. Directors’ bonus strategy is set at up to 100% of their salary and the employer contribution is 20% for their pension scheme, as opposed to 7% for all other employees.

Importantly, Unions have long reported concerns with a model of procurement for construction and maintenance projects which has led to poor results across many publicly funded contracts - a shining example of which remains the Edinburgh schools debacle. These issues have a knock on effect on the nature and quality of work in the sector with systemic use of bogus self-employment; umbrella contracts; a serious lack of health and safety standards; and the systematic blacklisting of workers. The STUC has been warning about precarious work in the construction industry for decades, and despite union campaigns and even legislative change, public contracts continue to be awarded to the worst offenders.

That these concerns, and Carillion’s financial situation, were well known raises serious concerns about why Carillion were still awarded significant contracts.

So what happens now?

The impact on employees is unclear. The UK Government has urged staff to go to work as usual and promised they will be paid. Yet the RMT are reporting that Carillion cleaners are already experiencing difficulties with their pre-paid fuel cards. The UK Government have also said some services would be taken in-house while others would be handed to other companies. That’s led to shares in outsourcing giant Serco surging this morning, as traders bet on them being a winner from Carillion’s demise.

The whole saga exposes a litany of failure within our model of public procurement of construction projects. Surely the time has come to look at public provision of these vital infrastructure projects to ensure workers, taxpayers and public service users are not asked to pick up the pieces of these companies failings?

For more info, or to send us your comments, please send us an email at info@stuc.org.uk

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