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Carillion crash can foster growth – Nigel Hastilow

By Nigel Hastilow | In-depth | Published:

There’s much anger and confusion over the failure of construction giant Carillion and it is truly astonishing to see a company valued not long ago at £5 billion collapse almost overnight.

It wasn’t entirely a shock. There had been warnings and sackings for months but, even so, a business of such size and importance can’t just disappear. Can it?

The Government has been attacked for awarding contracts to Carillion even after everyone knew it was in trouble. And the crash is being used as a stick to beat the Government with over the private finance initiative, a scam which allows Ministers to splurge public money and pretend it’s all down to the private sector.

There’s also the question of what the company has been doing with its finances – dishing out hefty dividends to shareholders and ignoring its pension-fund deficit so the directors can tell themselves they’re doing a brilliant job and enjoy exorbitant salaries.

Ministers are now making noises about directors facing ‘the full force of the law’ if they have misbehaved.

Politicians always say that – yet not one top British banker has seen the inside of a prison cell as a result of the near-collapse of the entire capitalist system a decade ago.

And in the case of Carillion, it’s highly likely the collapse is due to over-ambition and plain incompetence rather than anything more sinister.

The company that was once just plain Tarmac has expanded fast since it was created in 1999, buying up several well-known names like Mowlem and Alfred McAlpine. But, as any small business will tell you, the key to survival is cash-flow.

Once a company stops paying its bills on time, you know it’s struggling. In Carillion’s case, this was made worse because it started to rack up huge losses on big engineering contracts.

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Last summer Carillion said it was struggling with losses of £845 million on three projects. One of them was the £550m Aberdeen by-pass which is being built in sections by different companies.

According to a friend who was an engineer working on the scheme, the way Carillion managed their share of the contract was disastrous and it was no surprise it was losing money.

If it was guilty of poor management on one multi-million pound contract, it may well have left a lot to be desired on some of the others too.

The whole Carillion edifice has been described as a giant Ponzi scheme, where investment from new contracts is desperately needed to meet the bills for previous ones. Eventually there has to come a point when there isn’t enough new money to meet all the old bills.

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And both the banks and the Government decided there was no point in throwing good money after bad.

So why did Ministers keep on awarding contracts – including part of the HS2 railway scheme – to Carillion even after it was widely known the company was struggling under the weight of its debts?

Incompetence could be the answer but another may be that Ministers hoped that, by contributing further to the Ponzi scheme, the company would be given time to straighten itself out rather than go bust.

The fall-out – and the cost to the taxpayer – will be large and unpleasant but perhaps not quite as bad as many people fear. After all, construction schemes are not funded with all the money up-front and the work still has to be carried out.

In the same way, all Carillion’s service contracts will have to go to some other company. And while, sadly, jobs may be lost, it’s likely most of the people working for Carillion will find employment with its rivals as they snap up the work that’s suddenly become available.

The collapse of Carillion is not, though, a crisis for capitalism. In fact, it’s proof that capitalism works efficiently because the biggest losses will be borne by the company’s investors.

A Government bail-out might have kept the company limping along for a while longer but that wouldn’t solve its fundamental flaws. The taxpayer should not be the lender of last resort to companies which are incapable of managing their own affairs adequately.

You could argue the same theory should apply to the banks and yet they were rescued. And there are those who say they should also have been allowed to go to the wall, though the threat to the entire system was much greater than it is here.

The truth is it’s a good thing that companies go bust from time to time. It means badly-run, loss-making concerns are killed off and it allows well-run, profitable businesses to expand into new markets.

In this era of unrealistic, ultra-low interest rates, there are dozens more ‘zombie’ companies which should be put down to make room for more successful competitors. A functioning free market requires the survival of the fittest. Sadly, extinction is the price companies like Carillion have to pay if the economy as a whole is to flourish.

Nigel Hastilow

By Nigel Hastilow

Express & Star columnist

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