Editor’s viewpoint: Domino effect

Editor’s viewpoint: Domino effect

In PBM’s February edition, Editor Paul Davies talked about the implications for the merchant sector of the collapse of Carillion.

The collapse of one company, however large, clearly does not mean ‘the system is broken’. But it does serve to reignite the debate (about) the more ‘direct’ involvement of local, SME businesses.

Even though the story continues to unravel on an almost minute-by-minute basis, it would be impossible to not even attempt to discuss the compulsory liquidation of Carillion. Whilst the fallen giant’s activities stretched far and wide (almost implausibly so in many instances — school meal provision, anyone?), much of the crisis has concerned its construction and maintenance arms, and the potentially far-reaching impact of its collapse.

Whilst I’m sure everyone is familiar with the detail, it worth restating some of the facts before going on to consider the fallout. Whilst describing itself as an ‘integrated support services business’, Carillion has been typically referred to as the UK’s 2nd biggest construction firm, with around 40% of its revenue coming from construction projects.

It was involved in around 450 government contracts in various ways, including the maintenance of prisons, hospitals and 50,000 homes for the MOD. It was a partner for HS2, whilst cost overruns on the construction of the £350m Midland Metropolitan and £335m Royal Liverpool hospitals have been cited as integral reasons for its collapse.

It went bust with debts of £1.5bn, including a pension deficit of around £600m, and liquidated with just £29m in the bank. Employing approximately 20,000 people in the UK directly, it relied on an estimated 30,000 smaller firms in terms of sub-contractors and suppliers — framed slightly differently, in 2016 it spent £952m with ‘local suppliers’.

This latter point is of central relevance. Not only were government contracts ‘outsourced’ to Carillion, the company itself was effectively outsourcing a considerable proportion of its workload. Whilst Carillion was the giant believed to be too big to fail, it was underpinned by businesses that will have operated their own smaller scale supply chains, inevitably including builders’ merchants, and the consequences will be stark — redundancies have already been reported at these firms and, inevitably, some of these SMEs will not survive.

Whilst there is clearly a bigger picture that has the capacity to reach the very heart of government, there will be an immediate supply chain tsunami that reverberates through all corners of the construction sector — affecting businesses of all types and sizes, snowballing to impact upon their own suppliers and customers.

Much of the current debate, appropriately, has focused on the support and protection that can be afforded to these businesses and individuals. But the ‘disparate’ nature of Carillion’s operations and structure, and especially its use of sub-contractors, means that there are limitations in what can be done.

The whole, sorry affair has placed the nature of government contracts and the wider issue of public / private partnerships into the spotlight. The collapse of one company, however large, clearly does not mean ‘the system is broken’. But it does serve to reignite the debate — and already, organisations such as the Federation of Small Businesses, the FMB, NFB and BWF are all highlighting an alternative approach that heightens the more ‘direct’ involvement of local, SME businesses.

Given they were already shown to be doing a sizeable chunk of the work anyway, you can understand the argument. There’s a long, long way to run on this, and we shall watch on with interest. As we state later in the issue, we’d be especially keen to receive your thoughts and whether your business is suffering — either directly or indirectly — from the fallout. Please email pbm@hamerville.co.uk or Tweet @PBMmagazine

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Editor’s viewpoint, January 2018

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