Bankruptcy of Carillion Roils U.K.

Carillion (LON: CLLN), the U.K.’s second largest construction firm, has been forced into liquidation. The board of Carillion released a statement saying that the company “had no choice but to take steps to enter into compulsory liquidation with immediate effect.” The accountancy firm PWC was appointed administrator of the liquidation.

Carillion is one of the government’s biggest contractors, holding 450 government contracts. Carillion’s work crossed many sectors including building hospitals, railways and thousands of homes as well as managing schools and prisons. The company is also a major player in two of Britain’s biggest infrastructure projects and is the second biggest supplier of maintenance services to Network Rail.

The bankruptcy comes after the company lost money on a series of contracts and racked up around $1.35 billion in debt. Warnings of lower than expected profits began emerging last summer. Transportation Secretary Chris Grayling is now under scrutiny for continuing to award fresh contracts to the firm as its financial condition deteriorated.

The British government is scrambling to contain the damage. The bankruptcy threatens more than 19,000 jobs in Britain. Carillion also employs about 22,000 workers overseas. Hundreds of subcontractors and smaller businesses will also be affected. The company’s pension fund, which currently has an $800 million deficit, is being taken over by a government-backed pension protection plan.

The company’s failure is raising questions over the outsourcing of public services to private enterprises. In the early 2000s, the centrist Labour government pushed so-called public-private partnerships. Bernard Jenkin, Conservative chairman of Parliament’s Public Administration Committee, says his committee will hold an inquiry into the outsourcing of public services. The bankruptcy is also reigniting questions about firms that have become “too big to fail”.

Now, the government has to step back in to keep public services that had been managed by Carillion running. A spokesman for Prime Minister Theresa May said that the government priority was to “keep public services running.” In Oxfordshire, a county northwest of London, the fire department is now “on standby” to deliver school lunches.

What happens next depends on the actions of a court-appointed official receiver. Some of the contracts are likely to be re-tendered and underwritten by the government to keep the services running. David Lidington, Minister for the Cabinet Office, released a statement saying, “All employees should keep coming to work. You will continue to get paid. Staff that are engaged on public sector contracts still have important work to do.”

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