https://www.theguardian.com/business/nils-pratley-on-finance/2018/jan/15/blame-the-board-for-the-carillion-collapse-it-was-deluded
Responsibility for Carillion’s collapse lies in the boardroom. It is the job of the directors to manage risk and the eight pages of Carillion’s last annual report devoted to the subject clearly only scratched the surface.
Chairman Philip Green should have spent less time wondering about the long-terms risks from Brexit and more time addressing the upfront and present dangers from cost over-runs on three big jobs: new hospitals in Liverpool and Smethwick plus the Aberdeen bypass. The walk-on role played the auditors, KPMG, will go under the Financial Reporting Council’s microscope in due course. But the hard fact is that Carillion directors were boasting in March last year of having “substantial liquidity with some £1.5bn of available funding” yet the company ran out of money 10 months later.
As usual with the construction sector, the immediate cause of failure is a mix of badly priced contracts, badly managed risks plus too much debt. On a good day, contracting firms run on tight operating margins of 3%. If debt is too high, there is little room to absorb calamitous contracts. When three contracts go sour in quick succession, the numbers can spiral out of control.
In the circumstances, the government had no choice but to let the company go bust. Carillion had six months to organise its own rescue and failed, despite being thrown a few contracts such as work on HS2 to buy breathing space. Besides, a bailout of Carillion would also have been a bailout of the company’s banks and bondholders, who definitely don’t deserve it since they were asleep to the risks as much as the directors. The government has still inherited a fine old mess – and, however much ministers talk up their “contingency” plans, it seems highly likely that costs from Carillion’s failure will rebound on the public purse.
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