Blain's Morning Porridge Jan 16th 2018. Carillion - Why and How did it happen? And who should we
Blain’s Morning Porridge – January 16th 2018
“Look back at the past and the changing empires that rose and fell, and you can foresee the future….”
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Welcome to the X-Factor Economy… Carillion, once the darling of infrastructure, is exposed as a debt-addled fraud. Shock! Horror! Tabloids full of “Carillion executive ate my Hamster” headlines. Brek-Drek morning TV is full of insights: the tragedy of small local suppliers likely to suffer enormous losses as invoices go unpaid, starving schoolkids as their lunches don’t turn up, prisoners running amok because their guards have been sent home. Hospitals half finished, train-tracks un-laid, and a government follolopping around like a fish out the water. (Again.) Even the banks elicit some sympathy for the losses they will suffer. Someone has to take the blame – and Theresa May’s hapless government is the obvious target.
Whoa. Steady. Step back. What you pay for, you get.
Don’t bleat for the financiers. Carillion has been a massive short across the smart money for ages. Don’t bleat for the banks who are fully provisioned. I do feel a tinge of sympathy for the German investors sold the firms Schulschein private placements.
Why did it happen? Over the past 5 years Carillion has taken revenues of some $20 bln from Government contracts. Despite paying its 13 layers of management and sales teams handsome salaries and bonuses, and awarding its owners inflated dividends, the company’s pension fund is left massively underfunded, and the firm was about financially stable as a chocolate teapot. (As bonds yield rise that pension deficit would lessen – but too late for the 20k Carillion employees in the UK who are now consigned to the Government scheme.)
There is a great quote from Julian Assange, that well known Ecuadorian, on corporate collapse: “When Enron collapsed, through court processes thousands and thousands of internal emails came our, and it provided a window into how the whole company was managed. It was all the little decisions that supported such flagrant violations.” I can’t wait to learn how Carillion won its business….
And, government knew all about what was happening. They were collectively complicit – but were happy because Carillion apparently delivered Rolls Royces at Mini prices. Government ministers could happily preside over the ribbon-opening of a new hospital pontificating platitudes about value-for-money, budget responsibility, and value for tax-payers. Utter b*ll*x.
Despite watching the company gorge and fatten from the contract trough, and stumble into increasing debt, the government continued to award them contracts. Outsourcing became a mantra of government efficiency. Carillion embraced the need. It ate itself on increasingly less lucrative contracts and increasing debt.
Of course, you could blame the civil servants who approved the contracts. Civil servants on massive pension guarantees (paid by our taxes) were quite happy to do their job – which was awarding contracts to the cheapest bid and going out for regular and expensive dinners with the Carillion bid teams to “review contracts”. Due diligence means cheapest. But, they appear to have paid absolutely no attention to ability of the contractor to actually deliver or opine on its financial prospects.
In this modern World we need know who is responsible.
More to the point, what happens next? In the short-term – and I mean the next 48 hours – civil servants will “courageously” and “tirelessly” scramble to cover Carillion contracts, and cover up their tracks. I hear they are sending firemen to ensure kids get fed this lunchtime. But guess what? All these busted contracts won’t be replaced at low-ball bid levels. The new providers will charge real money – and mark ‘em up a bit/ a lot. Government officials will attempt to justify the hit to the public purse. Civil servants “can’t possibly comment.” Inflation will rise as service costs go up. Unhappy electors will moan a little bit more.
There are some £28 bln of future government contracts up for grabs by the next Carillion. These need to be reviewed. Strip out the numpties that award them, and the nonsense of giving them to the lowball bid. Real contracts are great for the economy – providing real trickle down to contractors, staff up-skilling and honest returns. Award contracts on the basis of ability, quality and deliverables. Watch productivity go up, and the infrastructure base of the economy move from barely satisficing to genuinely good.
Meanwhile. Let’s find someone to shoot! And speaking of chocolate teapots, it might as well be the Prime Minister. A bit of creative political destruction might not be a bad thing. If it wasn’t for the fact an election would make Brexit even more messy and uncertain, and a few years of Corbyn might prove too many, why not? Time to press the reset button. It might be a darn good thing for May and the rest of the Tory dinosaurs to tumble into the political abyss, giving the opportunity for the smart young mammals of the party to float to the surface..
Meanwhile, I really ought to be talking about market stuff – like inflation, rising bond yield prospects, oil prices rising but looking toppy around $70!, rising global growth forecasts and all that stuff. Or, why Asia is so strong this morning, as Japan closes on yet another high. It can all wait for tomorrow..
Out of time…
Bill Blain