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written by
Christian Nellemann

Carillion collapse: A reminder of the precarious relationship between public and private sector

Gloomy looking Carillion sign

With 43,000 global staff, and 23,000 here in the UK, news of construction giant Carillion’s impending liquidation is deeply worrying.

Government ministers have stated that employees should keep coming to work. Broad assurances have been made about contracts being upheld. But the reality is that the company is in a downward spiral and no guarantees can be made about its workers’ futures.

It’s grim news too for pension holders. Despite promises made by the Pension Protection Fund (PPF), the liability of the scheme will rise and the size of each pension will likely decrease. And spare a thought for the many small businesses that were used as subcontractors by Carillion. While they’re no doubt used to payment delays from corporate giants, this time they might not get paid at all – and that could destroy them.

Today, there is rightly a lot of anger and confusion. And in particular, the collapse demonstrates the problem with a business that works too closely with the public sector.

Why was Carillion given public sector contracts while in terminal decline?

For anyone paying close attention to Carillion’s wellbeing over the past 6 months, today’s news won’t come as a surprise. Severe profit warnings were issued in July, September and November. By the end of the year, crisis meetings with banks had begun.

However, Carillion kept being awarded major public sector contracts. It won a joint venture contract to work on HS2 just a week after its first major profit warning. And later in the year, network rail, schools and Ministry of Defence contracts were secured in spite of consistent warnings about its financial health.

Government policy dictates that private sector suppliers should not be awarded extra work if they are showing signs of financial distress, in order to protect the taxpayer.

I think it’s fair to say that UK taxpayers have not been well protected – and not for the first time.

Hedge funds profit from collapse while the government faces bailout pressure

While a total government bailout looks unlikely, the public sector will have to pick up the pieces from several existing contracts.

Other outsourced providers will be hungry for the leftovers, but the government may have to resort to temporary nationalisation of certain parts of the business.

Meanwhile, the hedge fund crows have been circling for a while. Short sellers have been betting against Carillion for months, and will pocket millions from this crisis. Even the advisers will profit richly while overseeing the financial damage that will be inflicted on thousands of workers, small businesses and pension holders.

This juxtaposition of winners and losers leaves a horrible taste in the mouth. And it reminds us of why relationships between corporations and the government are dangerous.

Corporations like Carillion benefit from state-awarded contracts, and the government typically advocates these projects as a means of removing financial risk from the government. But because of their size, when these corporations wobble, the government has no choice but to continue to work with them. The risk now is firmly in the government’s hands, and builds as the debt gets bigger.

Evidently, there is no such thing in business as ‘too big to fail’. Trust in big business will diminish further today, but the real lesson from this fiasco is that when corporations and the government hold hands, we should all be very worried.

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  • Christian Nellemann is the Founder and CEO of XLN, a provider of low-cost phone, broadband, energy and card processing services exclusively to small businesses. A serial entrepreneur, he’s a two-time winner of Ernst & Young’s Entrepreneur of the Year award and one of only 17 inductees into their Global Hall of Fame. He is passionate about small businesses, and is a featured columnist for realbusiness.co.uk. Follow him on Twitter @christianxln
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