Lessons from the collapse of Carillion

There is a lot to unpick from Carillion’s demise and the lessons to be drawn. Here are some initial observations.

The House of Commons Library Briefing, The collapse of Carillion, tells us that

In the eight years from 2009 to 2016, Carillion paid out £554 million in dividends, almost as much as the cash it made from operations. In the five years from 2012 to 2016, Carillion paid out £217 million more in dividends than it generated in cash for its operations.”

It also informs us that over the eight years from December 2009 to January 2018, the total owed by Carillion in loans increased from £242 million to an estimated £1.3 billion; more than five times the value at the beginning of the decade. Reportedly Carillion was left with only £29 million of cash when it collapsed. The banks to whom it owes money are exposed to the tune of £2 billion. Read on below or download a PDF here lessonscarillion

Milking the public sector

These extraordinary figures underline the extent to which the public sector was being milked to line the pockets of directors and share-holders, with no consideration for the services they were providing, nor the people who received them. Moreover, it treated businesses that worked for it with complete disdain. The total owed to ‘other creditors’ within a year rose rapidly from £212 million in 2009 to £761 million in 2016 as a result of delayed payments.

Carillion’s borrowing was not used to invest in the company. That can be shown by the fact that whilst its debt rose by 297%, the value of its long-term assets grew by just 14% between 2009 and 2017. Over the same time-scale its revenue fell by 2%.

Carillion has also participated in what is euphemistically known as “aggressive accounting”; that is declaring revenue and profits before they are realised, based on optimistic forecasts. As the House of Commons Library Briefing explains, when these projections are not realised profits can turn very quickly into losses. They suggest that the profit warning issued in July 2017 had been “£845 million too optimistic about its contracts”. When on September 29th 2017 Carillion’s half-yearly financial statements revealed a total hit to the company’s worth of £1.2 billion, it was enough to wipe out the profits from the previous eight years combined.

Dividends are supposed to be paid out of profits. Yet when dividends are paid on the basis of expected profits, the company is effectively borrowing to pay its shareholders and trusting to luck. If the forecast profits fail to materialise then the finances of the company are undermined.

The following table from the House of Commons Library Briefing shows the reckless degree to which dividends were paid out without any consideration for the company’s long term stability, nor the organisations for which it was carrying out contracts.

Dividends versus cash, £ million


Cash from


Dividends paid

Cash left

































Total 2009-16




Total 2012-16




These dividends, of course, were paid out despite a growing pension deficit.

All this underlines the stupidity of the assertion that outsourcing transfers the risk from the public sector to the private sector. One of the key questions which merits attention is the fact that the government gave additional contracts to Carillion even when it knew it was in difficulties. It appears that it was handed these contracts in order to try to prevent it going under. The company did not just issue a profit warning, something which the Prime Minister attempted to dismiss as commonplace, but it had clearly over-reached itself. It decided to withdraw from construction markets in Qatar, Saudi Arabia and Egypt, and PPP construction projects in the UK.

A watershed moment?

Jeremy Corbyn described the collapse of Carillion as a watershed moment. Teresa May, in countering Corbyn’s criticism in her Observer article quoted Tony Blair in defence of use of the private sector in the NHS. His assertion was that outsourcing work to the private sector had enabled the New Labour government to cut the waiting times for work such as cataract operations. Of course, the work that the private sector was interested in was straight forward activities such as cataracts and hip replacements which could be organised on an industrial basis. What this did was to take simpler work away from NHS organisations and leave them with the more complicated and expensive work.

New Labour argued that the private sector would improve ‘efficiency’. However, for private companies efficiency is measured by the ‘bottom line’. If it’s profitable it is deemed to be efficient. Yet outsourcing and PFI have added wider system costs to a service in which efficiency should be measured by health outcomes not by the yardstick of profit. The cost of PFI contracts is a real burden to hospitals, since the costs of the building and the facilities contracts such as we see at the Great Western Hospital in Swindon, has to be paid regardless of the shrinking income resulting from government cuts. Moreover, the profit motive also leads to sweating smaller numbers of staff to do the work with consequences for its quality.


British companies have for many years been criticised for their notorious concentration on short-term results which boost stock market valuation and remuneration for the top managers. This is exemplified by Carillion spending 93% of its income from its activities over 8 years, leaving it with the princely sum of £40 million to invest. As the financial position deteriorated the more reckless the management acted, handed out in dividends worth more than double the ‘cash from operations’.

So long as the only legal responsibility a PLC has is to its share holders then there are no obstacles to directors placing their own interests and those of share holders (they are shareholders as well) above the interests of the organisations they carry out contracts for and the users of the services they provide. So long as this system remains in place then they can carry on with the gravy chain regardless of the state of their workers’ pensions. It should be illegal to hand out dividends if their pensions schemes are in deficit.

In rushing to the defence of out-sourcing and PFI, recalcitrant Blairites and supporters of the ‘free market’, are anxious to impress that the collapse of Carillion is just an indictment of bad management rather than private sector involvement in the public sector. However, they are out of touch with public opinion which has been progressively formed by the experience of being ripped off by the privatised utilities whilst the so-called regulators have allowed them to get away with the occasional slapped wrist.

Systemic failings

Carillion’s collapse is the result of systemic failings which are the result of the profit motive being introduced into the public sector in the name of competition and efficiency. There is no real competition on the railways nor in the public utilities because these are natural monopolies. Private companies have not ‘leveraged in private money’ so much as sucked it out of the system in dividends and exorbitant management wages.

Faced with the possibility of a Corbyn government the more thoughtful big business media are making their criticisms of out-sourcing whilst assembling their arguments as to why nationalisation is no solution. With this discussion opening up it is important to examine the experience of nationalisation, which is not necessarily a socialist measure. It can be a form of state capitalism. I will write about this in a future article.

Meanwhile a forensic analysis of Carillion’s downfall needs to be carried out.

Martin Wicks

January 26th 2018

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