EY to administrate Carillion as construction outsourcer collapses

16 January 2018 Consultancy.uk 6 min. read

Controversial outsourcing firm Carillion has finally entered into administration, after extended pleas to lenders and the UK Government failed to prevent the company’s collapse. Auditors from EY were reported to have been placed on stand-by as of last week, as it emerged that the ailing construction group would not receive a bailout from the Government, despite being integral to a number of major state projects, including HS2 and the NHS.

Carillion, a British professional services firm which provided facilities management and construction services to the UK public sector, has gone into liquidation, threatening thousands of jobs and jeopardising the delivery of a number of keystone services. The company, headquartered in Wolverhampton, United Kingdom, ran into trouble after losing money on big contracts, as well as running up unsustainable debts totalling around £1.5 billion. Its failure means the Government will now be forced to provide funding to maintain the public services formerly supplied by Carillion.

The move came after talks between the firm, its lenders and the government failed to reach a deal to save the UK's second biggest construction company. Directors of Carillion saw a final rescue appeal to its lending banks rejected on January 15th, as Barclays, HSBC and Santander UK ultimately remained unconvinced, having already been exposed to huge potential losses.

EY to administrate Carillion as construction outsourcer collapses

The company has 43,000 staff worldwide, and 19,500 in the UK, who now face a protracted wait as their futures hang in the balance during the administration process. So immediate is the state of uncertainty the employees face that Government Secretary David Lidington was even forced to issue a statement urging staff to continue attending work. "All employees should keep coming to work, you will continue to get paid. Staff that are engaged on public sector contracts still have important work to do," the Cabinet Office Minister said.

Such is the extent to which the Government currently relies on the outsourcers, meanwhile, that Defence Secretary Gavin Williamson told MPs there would be a meeting of the government's Cobra emergency committee – which last assembled in the wake of the Parsons Green Tube attack – to discuss the situation. Carillion is involved in major projects such as the HS2 high-speed rail line, as well as managing schools and prisons. It is the second biggest supplier of maintenance services to Network Rail, and it maintains 50,000 homes for the Ministry of Defence.

According to Carillion’s website, the outsourcer is also “one of the largest providers of facilities management to the NHS”, employing about 8,000 people in the healthcare division, while managing 200 operating theatres, with 300 critical-care beds and just under 11,500 in-patient beds. As the NHS has come under increasing strain in recent years, Carillion’s failure could cause a crisis within the vital public institution.

Since the announcement of Carillion’s collapse, the Government have faced calls for a public inquiry into its own conduct – having handed over £1 billion in contracts to the outsourcer, whose troubles were reportedly well known to the Cabinet. One example cited by critics is that just weeks after issuing a profit warning in September, Carillion was awarded a £62 million rail contract, as the Government sought to push ahead with its upgrading of the often maligned rail network. The company issued a total of three profit warnings over 2017.

Further to this, the close ties of Carillion’s Chairman, Philip Green, a former advisor to Number 10, will not have helped matters. An outspoken supporter of the incumbent Conservative Party, Green was appointed as an advisor to then-Prime Minister David Cameron’s administration in 2011 – the same year that he joined Carillion. The Government is expected to experience intense scrutiny for this aspect of the saga, in particular, even though it is thought that Green vacated the role in 2016.

Commenting on the liquidation of the group, Green said it was a "very sad day" for the company's workers, suppliers and customers.

EY to administrate

As Carillion’s crisis gained momentum, audit heavyweight EY was placed on standby to step in as administrator. The professional services firm was notified at the end of last week that if banks and the government could not thrash out a deal to save the firm, they would be needed to head up its winding down proceedings. According to earlier reports, EY was said to be favoured by the company’s directors, possibly because Lee Watson, a Partner at the Big Four giant, is presently on secondment to Carillion, acting as a Director and as the contractor’s Chief Transformation Officer.

Carillion initially hired professional services firm EY to assist with a review of its finances in the Summer, as the UK construction group battled to repair its balance sheet. At the time, the FTSE 250 company said it had brought in EY to help implement a strategic review it had released the week before, with a focus on cutting costs and collecting more cash from contracts. The report, by Carillion's auditor, KPMG – who were recently named as the administrators for troubled airline, Monarch – had examined 58 of the construction firm's contracts, after it became concerned over late payments.

The results of KPMG’s review, released as EY were brought on board in July, identified four problem contracts – three in the UK and one in the Middle East. While the group’s share price rose around 15% following EY’s initial appointment, alongside winning two contracts on the UK’s HS2 railway — worth around £450 million to the company – this ultimately could not save the company.

Carillion is not the first major outsourcer to have been placed into administration on the Government’s watch, meanwhile. In 2010, Connaught’s public services and social housing arms went into administration, resulting in the loss of 10,000 jobs, as the firm was unable to repay the £220 million debt in 2010. EY’s Big Four rival PwC, a firm reportedly being considered as an alternative to provide administration services to Carillion – was since charged with ‘misconduct’ over its auditing services – being ordered to pay £5 million, the largest fine ever to be administrated by the Financial Reporting Council, after the downfall of property services group.