By, Robert J. Moss
What was once the lucrative winner of numerous construction and facility management contracts, at one point working on Union Station renovations, ceased to exist after being engulfed by crisis. Almost two years since its liquidation, what caused the collapse of Carillion?
Carillion was a British multinational firm based in Wolverhampton, UK. In 1999, the firm was created through a demerger with building materials provider, Tarmac. Across the world, Carillion provided construction services, overseeing the completion of projects by managing subcontractors and procuring materials. They also provided facility management services. These are outsourced services such as hospital and prison maintenance. Prior to liquidation, Carillion employed 43,000 employees with 19,000 in the UK and 6,000 in Canada.
Liquidity, the ability to meet short-term obligations, was the driving factor behind the crisis that led to its liquidation. Particularly, their inability to manage their accounts receivable and accounts payable or, as they refer to them, “trades and other receivables” and “trades and other payables.” In their 2016 annual report, the last published one before liquidation, Carillion’s days of sales outstanding was 138 days compared to days payable outstanding of 188 days. Both those numbers are shocking considering the rule of thumb taught in accounting courses is 30 days for each. Carillion was clearly struggling to receive payment from clients, hampering their ability to pay subcontractors and suppliers. Accounts receivables comprised 73.3% of current assets and 37.5% of their total assets. Intangible assets also occupied 37.6% of total assets. If their payment policies were not bad enough, the allocation of accounts receivable and intangible assets demonstrates how few real assets the Wolverhampton-based company had and the peril they drifted into.
Due to its weak liquidity position, the firm had to keep accepting low-margin contracts. In some cases, Carillion was significantly underbidding the competition on UK government contracts and being rewarded, raising questions about the government’s stewardship when laws are in place exactly to prevent abnormal bidding. Regardless, Carillion had entered a negative reinforcing cycle that inevitably brought them down. The problem with this business model, as an anonymous industry competitor explains on the Financial Times, “’All we really do is pre-sell labour and make bets on the long term costs. ’” Carillion’s bets were not paying off.
In 2017, they had to write-down GBP£1.2 billion in contracts. Creditors refused to extend loans to the failing construction firm unless the British government bailed out Carillion. Prime Minister Theresa May’s government refused on account of Carillion being a private company with issues that arose outside the UK. Without assistance from creditors or the government, Carillion was forced to announce their liquidation in January. Afterwards, the British government stepped in to assist in ongoing UK projects and to secure the pensions of Carillion workers.
Questions have mounted over Carillion’s collapse. Some question the very model of public-private partnerships which saw the UK government outsource contracts to Carillion, a model commonly used in Canada as well. Others have questioned whether Carillion was valuing its intangible assets fairly. A large portion was comprised of goodwill from the acquisition of Eaga which is argued should have been impaired given the business unit’s revenue declined 95.0% by 2016 since the acquisition. Moreover, what does scandal say about KPMG and the accounting industry at large, that Carillion’s long-term auditor never issued a qualified opinion on the company as it drifted to disaster?
Carillion was the most notable corporate collapse since Lehman Brothers in 2008. Like the defunct investment bank, Carillion will serve as a harrowing case study for future students, corporations, and policy makers.
Featured image by EJ Yao.