UK government seeks to limit damage after Carillion collapses

Published 15/01/2018 in Business, Economy & Finance

UK government seeks to limit damage after Carillion collapses
FILE PHOTO: Cranes rise above Carillion’s Midland Metropolitan Hospital construction site in Smethwick, Britain January 11, 2018. REUTERS/Darren Staples/File Photo

LONDON (Reuters) – Britain’s Carillion (CLLN.L) collapsed on Monday after its banks lost faith in the construction and services company, forcing the government to step in to guarantee major public works contracts.

In one of the biggest British corporate failures in recent years, Carillion went into compulsory liquidation after costly contract delays and a slump in new business left it swamped by debt and pensions liabilities of around 1.5 billion pounds ($2.1 billion).

The demise of the 200-year-old business poses a headache for Theresa May’s government which had employed Carillion to work on 450 projects including the building and maintenance of hospitals, prisons, defense sites and a high-speed rail line.

The government’s priority is to ensure that public services are not disrupted, said David Lidington, the minister in charge of the Cabinet Office which oversees the running of government.

Some contracts handled by Carillion would go to alternative providers, he added. Lidington urged the company’s staff to continue to work and said the government would pay their salaries.

Although the government has promised to support workers and ensure contracts are delivered, it has stopped short of bailing out the company as it did with major banks during the financial crisis almost a decade ago.

WEEKEND TALKS FAIL

Carillion owed around 900 million pounds to banks which include the country’s five biggest – RBS, Santander UK, Lloyds, HSBC and Barclays – and it has a pension deficit of 580 million pounds.

“In recent days we have been unable to secure the funding to support our business plan and it is therefore with the deepest regret that we have arrived at this decision,” Chairman Philip Green said.

However, Balfour, which worked with Carillion on three British road projects, said the collapse would probably cost it between 35 and 45 million pounds.

The company’s collapse comes at a difficult time for May who is trying to negotiate Britain’s exit from the European Union.

The opposition Labour Party questioned why May’s government continued to award contracts to Carillion despite its profit warnings and questioned why Britain had handed over so much of its public service work to private companies.

“This company issued three profit warnings in the last six months yet despite those profit warnings the government continued to award government contracts to this company,” Labour’s business spokeswoman Rebecca Long-Bailey told BBC TV.

Carillion collapse regrettable, but government cannot bail it out: PM May’s spokesman

“We’re … asking for a full investigation into the government conduct of this matter.”

Many of Britain’s service providers have been hit in recent years after they took on work during the financial crisis at low prices for long-running, fixed-price contracts.

The contracts left little room for delay or failure and have led to problems for groups including Capita, Mitie and Interserve.

“Taxpayers cannot be expected to bail out a private sector company,” Lidington said.

“All employees should keep coming to work, you will continue to get paid. Staff that are engaged on public sector contracts still have important work to do.”

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