Developers Raise The Bar After Carillion Crash But Don’t Want The End Of PFI

The collapse into liquidation of contractor Carillion will be one of the most costly corporate failures of recent years. And it is changing the way developers go about their business.

The hurdles that contractors need to jump over to prove to developers they are a financially sound partner are now a lot higher, with instances of developers ruling out contractors from biddding processes because they are now paying more attention to their financial solvency.

But in spite of the public backlash against public-private partnerships or private finance initiatives following Carillion’s demise, senior developers said partnerships between the government and private sector to deliver built environment infrastructure should not be scrapped — a radical overhaul of the system is needed instead.

“We have a £50M forward funding with a U.K. institutional investor, due to sign up in the next few weeks,” Palmer Capital Chief Executive Alex Price said.
 
“Yesterday we cut one of the two contractors from the short list because we decided the financial covenant bar just got higher — although arguably if Carillion can go bust so can anyone.”

In the middle of 2016, Carillion had a market capitalisation of more than £1.5B. The speed and scale of its collapse are startling.

The company employs more than 43,000 people worldwide, around 20,000 in the U.K. with thousands more in the U.S., Middle East and Brazil. With the firm in liquidation, all of these jobs are now precarious.

U.K. trade bodies estimate that a further 30,000 sub-contractors in the U.K. alone rely on Carillion, and those jobs are now also at risk. Estimates as to the losses for Carillion’s banking creditors start at £2B. It was the middle man in projects as far ranging as the building of schools and hospitals, to providing property and facilities management services to the public and private sector.

It had its own property development business, which it sold last autumn as it scrambled to raise capital.

A combination of falling profit margins and a growing pension fund liability caused investors and creditors to lose faith in the company, and it was unable to secure new credit lines from lenders or a bailout from one of its largest clients — the U.K. government.

It is this relationship with government that has received the most scrutiny in the wake of the company’s liquidation. Carillion was one of the contractors on the huge HS2 rail project in the U.K. And it continued to win government contracts even after it issued a profit warning last October.

More widely, the use of private-sector contractors and the reliance of governments on PPP or PFI contracts to deliver vital public infrastructure has been questioned.

But senior developers argued the baby should not be thrown out with the bath water. Significant changes are needed to the system, but it is worth retaining.

“PFIs can be a much better use of government’s resources, attracting best-in-class institutional capital and operators and driving operational efficiencies that can save taxpayers billions while often shifting risk to the private sector,” Seaforth Land Chief Executive and Founder Tyler Goodwin said. “Often the private sector companies that partner with government are backed by pension capital in search of stable, long-term cash flows resulting from completed public sector works, and those profits are distributed to their pensioners. Public capital not tied up in capital-intensive public works can then be deployed to other more urgent needs such as social services.”

Developer Sir Stuart Lipton, who developed the Broadgate office campus in the City of London, outlined a raft of ideas to make the system less exposed to risk.

These include introducing more specialist contractors for specialist areas, to avoid an overreliance on huge companies like Carillion, which concentrates risk; introducing specialists in each government department that uses PFI contracts, positions which have been eliminated to save costs; and the creation of an independent advisory panel to scrutinise government construction and establish best practice and vet bids over a certain size.

There is no reason why public buildings built in conjunction with private companies cannot be fit for purpose and even inspiring, as was the case in previous generations, he said.

“Early hospitals were welcoming, now often their gross architecture isn’t welcoming but frightening,” he said. “Government should insist on high-quality architecture and design without being embarrassed about looking for value. Given the right brief architects can be very inventive and work to a price.”

His advice: do not just take the lowest bid, a situation that causes a race to the bottom in terms of cost-cutting throughout the supply chain. As thousands of jobs and billions of pounds going up in smoke at Carillion shows, that method can produce bad results for both the government and the private sector companies with which it works.