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Carillion, one of the UK's biggest support services contractors, with interests in everything from running army barracks, to prisons to schools to hospitals, has gone into compulsory liquidation. And that is bad news, of course, for the 20,000 people who work for the company in the UK. It's also bad news for those hospitals and schools and so on that use its services. Its shareholders will be wiped out. They'll lose all their money. The banks that have lent it money will also kiss goodbye to a lot of their cash.
In a sense, that's exactly how it's supposed to work. Risk is transferred to the private sector under these so-called PPP deals. That's not to say there won't be costs for the taxpayer. Contracts will have to be taken in-house. The government will have to pay Carillion's workers to do the things that it does. And the contracts will have to be re-let eventually.
It's worth pondering for a while how Carillion got into such a pickle. It expanded very rapidly a few years ago. It bought lots of other companies. It racked up a lot of debt. And there's also the peculiar way that the support services industry works. When you win a contract, there are lots of costs involved in setting up everything. That money has to be borrowed up front, and it's repaid over the life of the contract, which might be 20 or 30 years, through revenue from the customer.
The problem is the mismatch. All the money spent up front, but only recouped over a long period. If you have a lot of debt, and several things go wrong simultaneously, it's very easy to get in trouble very quickly. And perhaps the lesson of the Carillion collapse is how that process might be managed better in future. Currently, companies are encouraged to bid very low prices for contracts. And then they can get into trouble if the revenues don't meet their expectations. Maybe it's time the government and the industry looks at that structure again.
