Threat of contagion likened to re-run of banking crisis with up to 30,000 small firms in supply chain owed money

This article is more than 2 years old

This article is more than 2 years old

The dramatic collapse of Carillion has started to hit thousands of the firm’s suppliers, as the real world impact of the demise starts to emerge.

Subcontractors owed money by the construction and services giant are already being pressurised by their banks and have begun laying off workers, as the threat of contagion afflicting the sector was likened to a near re-run of the banking crisis.

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Andrew Adonis, the former Labour transport minister, said: “It is a bit like Lehman Brothers [the Wall Street investment bank that collapsed in 2008]. You don’t know what the impact will be. A very large part of Carillion’s work was project management where subcontractors do the work, but these subcontractors don’t know if they will be paid.”

The supplier concerns came as the liquidators PricewaterhouseCoopers said it would not pay any bills “for goods/services provided before the liquidation date [on Monday]”, while Carillion workers providing services to private sector firms face having their wages stopped on Wednesday unless another employer steps in.

Profile The Carillion CV Show Hide The Carillion CV History – The business was built from the construction division of Tarmac. It was spun out of the Tarmac corporation in 1999 and then acquired rivals, including Mowlem and Alfred McAlpine. It also acquired a number of Canadian businesses. Base – Wolverhampton Employs – 43,000 staff (20,000 in the UK) How the problems emerged – A profit warning on 10 July revealed an £845m impairment charge in the construction division. Months later shares were down more than 70%. There were further profits warnings in September and November. Major projects – Involved in the construction of numerous high-profile projects, including the GCHQ ; the Beetham Tower in Manchester; London Olympics Media Centre; Rolls Building courts complex in London; Heathrow Terminal 5; Library of Birmingham; Liverpool FC’s Anfield stadium expansion; the Battersea Power Station redevelopment; and work on HS2. Government contracts – School meals and cleaning at nearly 900 schools, maintenance contracts at half of the UK’s prisons, managing 200 operating theatres and traffic monitoring systems for the Highways Agency. Photograph: PA

The developments represented another frantic day following the collapse of Carillion, which went into compulsory liquidation with debts of £900m on Monday. They included:

The government telling the Insolvency Service to fast-track an investigation into the conduct of Carillion directors, and ordering a full investigation of the work done by the company’s auditors, KPMG. The accountancy firm gave Carillion a clean bill of health last March.

The revelation that Carillion had just £29m in cash left when it collapsed, with two top accounting firms – PwC and EY – refusing to act as its administrators because they feared not being paid.

Carillion’s creditors being warned in court documents they are likely to receive less than 1p for every pound owed.

A host of major British firms – including British Gas owner Centrica, Nationwide building society and Arriva Rail – revealing they relied on hundreds of outsourced Carillion workers to help run their businesses.

Carillion directly employed around 20,000 workers, all of whose jobs are now under threat. However, that figure is dwarfed by those employed in the firm’s supply chain, where as many as 30,000 small businesses are thought to be owed money.

Andy Bradley, managing director of Cambridge-based landscaping company Flora-tec, said he has had to lay off 10 of his 90 workers because he is owed nearly £1m by Carillion. “We’ve got a profitable business but we can’t trade out of a black hole of £1m,” he told the Guardian.

Rudi Klein, chief executive of the Specialist Engineering Contractors’ trade group, added: “Banks are already starting to apply pressure on subcontractor firms that worked for Carillion. Banks are getting anxious and trying to find out companies’ losses.



“It’s massive. This could be the last straw ... because Carillion took four months to pay, we are talking about big numbers [owed to subcontractors]. It is early days but there could be a potential disaster looming.”

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Contractors were being paid 120 days after invoicing Carillion, but often have to pay their own workers on a weekly basis.

One Carillion subcontractor, who did not want to be named but whose firm is owed a six-figure sum, said its bank manager had been in touch . The subcontractor said his lenders “will be concerned about our liquidity position”.



Another, working on the construction of Carillion’s much-delayed project to build the new Royal Liverpool hospital, said: “Our blue-collar staff have been sent home and are not being paid. A lot of the time the site worker is the most affected and it is them who can least afford it.”

Q&A What went wrong for Carillion? Show Hide Carillion relied on major contracts, some of which proved much less lucrative than it thought. Earlier this year it slashed the value of them by £845m, of which £375m related to major public-private partnerships (PPPs) such as Royal Liverpool University hospital. As its contracts underperformed, its debts soared to £900m. The company needed a £300m cash injection, but the banks that lent it money refused to put more in. The government also refused to step in and bail the firm out. That left the company unable to continue trading and forced it to go into liquidation. Photograph: Tolga Akmen/AFP

Trade bodies urged the business secretary, Greg Clark, to ensure that firms affected by the collapse of Carillion receive maximum government and banking support.

Paul Reeve, director of business at the lobby group Electrical Contractors’ Association said: “The engineering specialist sector is the highest value sector in UK construction, and many specialists will be hit hard. The government and the banks must act to help protect public and private sector suppliers, who are the businesses the UK economy really needs.”

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The comments raise the spectre of more taxpayer money being required to support sectors such as construction, which accounts for around 6% of UK national output, and they were reiterated by Lord Adonis, who said that “the Cabinet Office’s own estimate of contingency costs” from the Carillion collapse was £600m.

Ministers have insisted that there will be no extra costs to the taxpayer stemming from Carillion’s collapse, beyond the fees and indemnities necessary for the official receiver.

Meanwhile, the impact on larger firms also started to emerge. The engineering firm Van Elle warned of a £1.6m hit if it failed to claw back money owed by Carillion. The court documents suggest that at 1p in the £1, the group will only get £16,000 at most. The group, which worked with Carillion on several contracts to carry out rail improvement and maintenance work for Network Rail, highlighted a further £2.5m of revenues linked to contracts with Carillion.

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