After The Carillion Collapse: Who Is To Blame?

Submitted by Bill Blain of Mint Partners

“Look back at the past and the changing empires that rose and fell, and you can foresee the future….”

Why and How did it happen? And who should we blame?

Welcome to the X-Factor Economy: Carillion, once the darling of infrastructure, is exposed as a debt-addled fraud. Shock! Horror!

Tabloids full of “Carillion executive ate my Hamster” headlines. Brek-Drek morning TV is full of insights: the tragedy of small local suppliers likely to suffer enormous losses as invoices go unpaid, starving schoolkids as their lunches don’t turn up, prisoners running amok because their guards have been sent home. Hospitals half finished, train-tracks un-laid, and a government follolopping around like a fish out the water. (Again.) Even the banks elicit some sympathy for the losses they will suffer.

Someone has to take the blame – and Theresa May’s hapless government is the obvious target.

Whoa. Steady. Step back. What you pay for, you get.

Don’t bleat for the financiers. Carillion has been a massive short across the smart money for ages. Don’t bleat for the banks who are fully provisioned. I do feel a tinge of sympathy for the German investors sold the firms Schulschein private placements.

Why did it happen? Over the past 5 years Carillion has taken revenues of some $20 bln from Government contracts. Despite paying its 13 layers of management and sales teams handsome salaries and bonuses, and awarding its owners inflated dividends, the company’s pension fund is left massively underfunded, and the firm was about financially stable as a chocolate teapot. (As bonds yield rise that pension deficit would lessen – but too late for the 20k Carillion employees in the UK who are now consigned to the Government scheme.)

There is a great quote from Julian Assange, that well known Ecuadorian, on corporate collapse: “When Enron collapsed, through court processes thousands and thousands of internal emails came our, and it provided a window into how the whole company was managed. It was all the little decisions that supported such flagrant violations.” I can’t wait to learn how Carillion won its business….

And, government knew all about what was happening. They were collectively complicit – but were happy because Carillion apparently delivered Rolls Royces at Mini prices. Government ministers could happily preside over the ribbon-opening of a new hospital pontificating platitudes about value-for-money, budget responsibility, and value for tax-payers. Utter b*ll*x.

Despite watching the company gorge and fatten from the contract trough, and stumble into increasing debt, the government continued to award them contracts. Outsourcing became a mantra of government efficiency. Carillion embraced the need. It ate itself on increasingly less lucrative contracts and increasing debt.

Of course, you could blame the civil servants who approved the contracts. Civil servants on massive pension guarantees (paid by our taxes) were quite happy to do their job – which was awarding contracts to the cheapest bid and going out for regular and expensive dinners with the Carillion bid teams to “review contracts”. Due diligence means cheapest. But, they appear to have paid absolutely no attention to ability of the contractor to actually deliver or opine on its financial prospects.

In this modern World we need know who is responsible.

More to the point, what happens next? In the short-term – and I mean the next 48 hours – civil servants will “courageously” and “tirelessly” scramble to cover Carillion contracts, and cover up their tracks. I hear they are sending firemen to ensure kids get fed this lunchtime. But guess what? All these busted contracts won’t be replaced at low-ball bid levels. The new providers will charge real money – and mark ‘em up a bit/ a lot. Government officials will attempt to justify the hit to the public purse. Civil servants “can’t possibly comment.” Inflation will rise as service costs go up. Unhappy electors will moan a little bit more.

There are some £28 bln of future government contracts up for grabs by the next Carillion. These need to be reviewed. Strip out the numpties that award them, and the nonsense of giving them to the lowball bid. Real contracts are great for the economy – providing real trickle down to contractors, staff up-skilling and honest returns. Award contracts on the basis of ability, quality and deliverables. Watch productivity go up, and the infrastructure base of the economy move from barely satisficing to genuinely good.

Meanwhile. Let’s find someone to shoot! And speaking of chocolate teapots, it might as well be the Prime Minister. A bit of creative political destruction might not be a bad thing. If it wasn’t for the fact an election would make Brexit even more messy and uncertain, and a few years of Corbyn might prove too many, why not? Time to press the reset button. It might be a darn good thing for May and the rest of the Tory dinosaurs to tumble into the political abyss, giving the opportunity for the smart young mammals of the party to float to the surface..

Meanwhile, I really ought to be talking about market stuff – like inflation, rising bond yield prospects, oil prices rising but looking toppy around $70!, rising global growth forecasts and all that stuff. Or, why Asia is so strong this morning, as Japan closes on yet another high. It can all wait for tomorrow.

Comments

spastic_colon Tue, 01/16/2018 - 09:16 Permalink

wait wait.....lemme guess.........trump?......what do I win /s

 

soon enough "infrastructure" will be the new siren song for spending in the USA and you can be assured that they will also be "debt addled frauds"

LostandFound SubjectivObject Tue, 01/16/2018 - 11:30 Permalink

As a former employee i can tell you that the issue stems back at least 7 years ago, when the senior management were reporting profit and revenue that didn't exist / or were never realised in the overseas business. The gap in revenues and profit then became too big to cover up, whether it being through new contracts or from loaded up on additional debt. This is what happens when managements bonuses are tied to the stock performance, total negligent reporting. The auditors of the accounts are simply useless outside the UK jurisdiction and are therefore easily persuaded.

In reply to by SubjectivObject

shovelhead ipso_facto Tue, 01/16/2018 - 10:11 Permalink

My nephew did concrete costing on that job as a college summer intern and one day he gets his figures back for a recheck and accidentally mixed in with them was a rough submittal sheet where his costs were multiplied by 4X. That one paper he said taught him more about costing public projects than 4 years of Tech school. He obviously was working too hard to be accurate.

In reply to by ipso_facto

boattrash shovelhead Tue, 01/16/2018 - 10:42 Permalink

Good one shovelhead! It reminded me of when I found a shipyard billing sheet that billed my company $36K+ for removal of 4 liquid mud circulation pumps. The helluvit was, my oiler and I had removed them ourselves. It sure smelled like a "kickback" and calling out the two managers at the dinner table verified the smell, as they both shit themselves. Seems I ruined their "bonuses".

I guess crooked motherfuckers need to be more careful where they leave their paperwork laying around.

In reply to by shovelhead

Rabidcephalopod ipso_facto Tue, 01/16/2018 - 14:09 Permalink

I had a similar experience to this on the planning side. When I worked for a State DOT back in the early '90s, one of my last tasks before I left was preparing estimates for hundreds of miles of new highway construction and rehabilitation. Cranked out the numbers using cost data from other projects, schedule them throughout the desired plan duration, and then apply inflationary increases based on how many years out the project was. The goal here was to put together a pile of projects and estimated costs to present to state voters - a 20 year plan. 20 years - when even lousy communist governments 50 years ago limited themselves to 5 year plans.

When my supervisor reviewed the work, he made a couple minor adjustments and passed it up the food chain. The department head came back and said "No, this can't be right - reduce the costs". I imagine this is what happened everywhere across the sates. The public was presented such a bill of goods, they approved it and it was then sold to them - lock, stock and barrel. Fast forward to the year 2000: The 20 Year Plan had imploded because of "increased construction costs". Well either that or the number of projects was too great. Either way there was too much work and too little funding. I saw the writing on the wall back in the day, which influenced my decision to leave their employ ahead of time.

In reply to by ipso_facto

NoDebt Tue, 01/16/2018 - 09:23 Permalink

Federal contracts get awarded the same way in the US.  Cheapest wins.  Zero consideration given to whether the company has the capacity to actually fulfill that contract.  

Remember the movie 'War Dogs'?  It's actually like that and not just for military stuff.  That is, unless the contract is obtained by corruption (excuse me, LOBBYING) in which case it is run down the "single source" path.

 

JohninMK 3-fingered_chemist Tue, 01/16/2018 - 09:53 Permalink

Went on a writing a government tender course many years back. We were asked what the role of the Project Manager was.

Being British we basically replied 'get the job on time to budget'.

The American giving the course basically replied 'don't be stupid, the PM's job is to get well'.

'What's that?' we replied.

'Change every line in the specification you bid against to up the price to make a profit, you know, the element we are leaving out of the bid so that we can win'.

Times don't change, just more apply that thought pattern.

In reply to by 3-fingered_chemist

East Indian NoDebt Tue, 01/16/2018 - 12:01 Permalink

Cheapest wins.

That reminds me of this joke.

When the Channel tunnel was built, the lowest bid was from a man (of your choice of ethnicity); he had quoted GBP 100,000. The Committee perforce had to call him because he was the lowest bidder. They asked him to explain his costing.

"Well", he mumbled, "I will start from Dover and dig and dig and dig; my friend there will start from Calais and dig and dig and dig; we meet in the middle, under the Channel. Voila, you get your tunnel!"

The Committee regained their speech a few moments later, and asked, "What if you two fail to meet?"

"Then you will have two tunnels!"

In reply to by NoDebt

itstippy Bill of Rights Tue, 01/16/2018 - 12:23 Permalink

So then, all those fuckers in Government with dark suits and red ties are not corrupt, but the guys in dark suits and blue ties are corrupt?

Either you just don't get it, Mr. Bill Of Rights, or you're a paid shill for the RNC.  Everything you post blames the Democrat Party for our problems, and implies that the Republican Party would run things in an upfront and honest manner.

What in Hell does the Democrat Party in the U.S. have to do with Carillion going broke in the U.K.?

In reply to by Bill of Rights

RockySpears Tue, 01/16/2018 - 09:46 Permalink

It is not just Carillion though:

I took a quick look at the UK contractors for HS2, only 3 out of 10 at first look are British:

Balfour Beatty - Pension deficit £3.4 Billion !!!! in 2017, other debt of £966 million.  (figures from Motley Fool)
Sir Robert McAlpine - £100 million pension deficit, £100 million loss in 2 years, 2013-2015. Profit for 2016 £1.6 million
Costain - Pension deficit £33 million, Revenue £1.1 billion which gave them a profit of £28 million or 2.5% before Tax

Can any one see good news here? 

RS

Calculus99 Tue, 01/16/2018 - 09:52 Permalink

'Smart' young mammals of the party!

They might be younger but I can assure you, they're not smart. 

What they are is the same as the older models sharing exactly the same characteristics -

1. Weak

2. Incompetent (related to the above)

3. Mendacious (related to the above)

viator Tue, 01/16/2018 - 09:56 Permalink

Anybody looked at the Carillion website? It's full of greenspeak, post modern gobblygook, and Euro socialism, Reminds me of GE under Jeffery Immelt or Elon Musk. They forgot that were first and foremost capitalists not progressives.

To Hell In A H… Tue, 01/16/2018 - 10:29 Permalink

Carillion was paying dividends it could not afford while their pension funds stood still. The chairman was on £15 million a year plus options. The Carillion business model was neoclassical and neoliberal economics at its best. A business model only 8-week old Rhesus monkeys would claim makes any business sense.

The business practised on the altar of free market madness, but they were forced to. These fuckers have to hide the real cost of inflation for materials. It lies all around. You hear anecdotal evidence of this in the building industry all the time.

New football/soccer stadium cost £450 million. A slight delay of a year due to planning restrictions and high court challenges. New stadium cost revised £600 million. A £150 million difference in a year to 18 months?

There is either mega inflation of some materials in the building game, or maybe the newly revised cost is the real building price. Whatever the logic or reason is, something is not right in the construction industry in the UK and I'm shocked. Honesty in the Square mile and from so-called blue-chip companies is a thing of the past. 

Irish Yoga Tue, 01/16/2018 - 10:43 Permalink

The Contractors Dictionary:

Contractor - A gambler who never gets to shuffle, cut or deal.
Bid Opening - A poker game in which the losing hand wins.
Bid - A wild guess carried out to two decimal places.
Low Bidder - A contractor who is wondering what he left out.
Engineer's Estimate - The cost of construction in heaven.
Project Manager - The conductor of an orchestra in which every musician is in a different union.
Critical Path Method - A management technique for losing your shirt under perfect control.
OSHA - A protective coating made by half-baking a mixture of fine print, red tape, split hairs and baloney--usually applied at random with a shotgun.
Strike - An effort to increase egg production by strangling the chicken.
Delayed Payment - A tourniquet applied at the pockets.
Completion Date - The point at which liquidated damages begin.
Liquidated Damages - A penalty for failing to achieve the impossible.
Auditor - Person who goes in after the war is lost and bayonets the wounded.
Lawyer - Person who goes in after the auditors to strip the bodies.