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Counting the huge cost of Carillion's collapse


There has not been governmental exposure to a private sector liquidation of this magnitude since the collapse of half the British banking system a decade ago.

The numbers involved in Carillion will be smaller than the tens of billions required then, but the potential impact on public services is immediately far more severe.
So the political jeopardy involved in the handling of this is substantial.
Sky News was given the departmental minute from the Cabinet Office which details the Government’s proposals to take a “significant contingent liability for which there is no specific statutory authority”.
This is a case of “special urgency”, where the liability has had to be incurred immediately without allowing MPs 14 days to object.
In order to appoint a receiver acting to safeguard the continuity of public services, the Government has indemnified the receiver against any claims and proceedings.
This may occur if creditors believe that some parts of the business should stop supplying services to the public sector – and could sue on this basis.
No figure is attached to this assessment.
:: Carillion collapse: Private sector workers’ pay runs out on Wednesday

Image: Carillion has many interests including construction and maintenance
David Lidington, leader of the House of Commons, apologised to MPs for not giving them the normal time to approve the liability.
Separate to that, the Government will also loan Carillon the money to continue to fund the salaries on public sector contracts and for the rest of employees for a 48-hour period while private customers decide if they want the contracts to continue.
The Government now has a complex multi-faceted test of competence and public sector delivery across hundreds of contracts, sites, schools, hospitals, prisons, and homes.
That is why the Government’s emergency Cobra committee met with a mix of Cabinet and newly appointed junior ministers last night.
But the departmental minute – a contingent liability – also represents something much bigger.
From the creation of private finance projects to their great expansion under the Blair government, the point of the costly funding was this: risk transfer.
The departmental minute is the moment that at least part of that transfer of risk now falls firmly back on the Government’s shoulders.

Video: Who will be affected by the collapse of Carillion?

When these contracts were being signed the critique was that the transfer never happened, as when push came to shove governments could not allow these contracts to fail.
This is what is happening right now.
Shareholders are wiped out, bond holders will lose a lot, but ultimately the taxpayer will step in to ensure continuity of public service provision.
Part of that will require a significant loan to the receivers.
No figure will be revealed until next month but it could be hundreds of millions of pounds.
: What ultimately went wrong at Carillion
Government sources stressed to Sky News that the taxpayer will become the “preferred creditor”, and so first in line for repayments from the liquidation.
But this has happened on a broader political canvas too, where Labour, four months ago, called for many of these contracts to be brought back into the public sector.
Labour leader Jeremy Corbyn called the Carillion collapse a “defining moment”, and indeed it does appear to contain a toxic mix for the Government of massive bonuses, failing companies and public services provision.

Video: How did it come to this for Carilllion?

There are plenty of questions about the continued awarding of billions in contracts even as it was evident the company was in financial distress.
The Government argues that a third of the contracts it now has to sort out were signed under the last Labour government.
But the Government does now face the reality of having to take some of these contracts back in-house, effectively renationalising them, and providing for a significant taxpayer loan to the receiver, of an as of yet unspecified amount, and then also take responsibility for the provision of these services again.
It must hope that there is no contagion to other similar companies, but fear of the impact on the Carillion supply chain.

More from Carillion

So far the response has been to maintain continuity over the next few days.
But this is a private sector collapse with implications for the Government over months and years, at a time when Brexit and the NHS crisis are already consuming most of the political bandwidth.

Source: Sky

About Business Ideas UK

My name is Joel Bissitt. I have been an entrepreneur for 24 years and have run many small businesses across various sectors. For the last 10 years I have worked mainly within online media, franchising and small business start-ups. I am an author of various websites including Franchise UK https://www.franchise-uk.co.uk

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