Lessons from the collapse of Carillion

Originally posted on my blog for Inside Housing on January 16.

On the face of it, housing seems set to escape relatively unscathed from the crisis at Carillion but there are still some important lessons to be learned.

The construction and outsourcing firm that sounds more like a heavy metal band went into liquidation on Monday leaving £1.5 billion owed to the banks, 19,000 workers facing an uncertain future and a £600 million hole in its pension fund.

That’s before we get to the egg on the faces of ministers who continued to award it lucrative contracts despite clear warning signs about its future, the controversy about executive pay and dividends and the awful knock-on effects on smaller companies and workers in the supply chain owed money that may not get paid at all.

The broader lessons extend as far as the tentacles of Carillion’s operations: construction’s low-margin, risk-passing culture; the long-term consequences of PFI; the pros and cons of outsourcing in the public and private sectors; and why we let companies get away with putting dividends and bonuses before their obligations to their pensioners.

In a narrower sense, the good news is that Carillion seems to have had relatively few direct links with housing: one of its subsidiaries was one of three firms appointed to replace heating systems by the Northern Ireland Housing Executive in December and it is now having to make contingency plans; another maintains 50,000 homes for the armed forces and was criticised in 2016 for ‘repeated failings’ but says its operations are not affected by the collapse; and in the past it boasted of its success in Decent Homes projects for local authorities.

In Monday’s parliamentary debate, it emerged that one Scottish housing association is about to move its maintenance contract from Carillion to another firm and that the Ministry of Housing Communities and Local Government has been in touch with English associations that may be affected. ‘So far we have not been alerted to any immediate difficulties,’ said Cabinet Office minister David Liddington.

All that is relatively small beer by its main businesses in construction, rail, energy and outsourcing of public sector and some private sector services, including Private Finance Initiative (PFI) projects.

It’s worth asking why that is. One reason I think is that housing associations existed when governments began to privatise and outsource public services in the 1980s. Private finance and stock transfer enabled taking public spending to be taken off the government balance sheet without much need for PFI and all the problems that go with it.

Outsourcing remains a factor but there is also now a healthy scepticism in the sector about its merits. A series of problems with maintenance contractors plus potential tax savings have led some landlords to take repairs back in house, for example.

However, there may also be lessons for housing in the way that a large organisation went through rapid growth and then collapsed as it over-stretched itself and lost focus.

Add Carillion to the collapse of the Dutch housing association Vestia and you have two cautionary tales for those involved in mega-mergers.

And reach a little further back and there is another housing connection that is worth highlighting.

Carillion’s roots lie in a 1995 swap of assets between two of the biggest names in construction that left Tarmac as a construction and minerals company and Wimpey as a housebuilder.

Tarmac then split into a building materials company and a construction firm that, rebranded as Carillion, went on to acquire several other big contractors before moving into outsourcing.

Meanwhile Wimpey merged with another construction firm, Taylor Woodrow, selling off its contracting activities and forming the housebuilder Taylor Wimpey, which went on to swallow up several other smaller firms.

The point of the history lesson is that the same process of consolidation created not just Britain’s second biggest contractor but also our second biggest housebuilder.

But go back ten years and it was Taylor Wimpey rather than Carillion that was facing collapse.

At the height of the financial crisis and credit crunch, the firm’s share fell by 50 per cent as it tried desperately to line up a rescue package and avoid breaching its loan covenants.

It’s interesting to compare the current calls for ‘no bail out’ for Carillion with what happened after 2008.

Like many of the other major housebuilders, Taylor Wimpey was rescued by a combination of lender forbearance, action by the Bank of England and direct state intervention including the purchase of unsold homes, cuts in ‘red tape’ and of course Help to Buy.

But the government did not just bail out the housebuilders, its interventions also sent their profits, share prices and executive bonuses soaring.

Some, like Taylor Wimpey, made even more by selling leasehold houses with escalating ground rents and then selling on the freeholds.

The relationship may have cooled a bit recently, and leasehold is now being banned for new houses, but the government continues to rely on the big developers to deliver its plans for 300,000 new homes a year.

Far from scaling back the assistance, Help to Buy was doubled with another £10 billion in equity loans announced at the last Conservative conference.

It was interesting to see the way that the boss of Persimmon, another big housebuilder, defended his potential £100 million bonus last week.

Jeff Fairburn told the Financial Times: ‘My point on that is that it’s supply and demand, and the demand has been created through the Help to Buy scheme. Government has stimulated demand, and we — particularly at Persimmon — are looking to meet that demand.’

Critics make exactly the same argument to demonstrate why the bonus is outrageous and if you substitute ‘pressure to contract out services’ for ‘the Help to Buy scheme’ bosses at Carillion could have made the same case about their pay and bonueses.

So maybe the final two lessons are, first, the dangers of markets being dominated by a few large firms and, second, that the government needs big housebuilders a lot more than it needs big outsourcing companies.