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Britain reveals its ugly side in Carillion witch-hunt

22 Jan 18 In the seven days since Carillion announced it was filing for liquidation Phil Bishop has posted approximately 8,000 words on the subject in the form of various news reports for The Construction Index. Here is his first comment on the story.

Former Carillion chief executive Richard Howson
Former Carillion chief executive Richard Howson

The bile that has been directed at Richard Howson, former chief executive of Carillion, has been abhorrent. There are important lessons to be learned but hurling spew is both nasty and pointless.

In the 30 years that I have been writing about the construction industry there has been no bigger business story in the UK than the collapse of its second biggest contractor. Carillion, with a turnover of £5.2 billion, ran out of cash and filed for liquidation on Monday 15th January 2018. Its finances were so bad there was no prospect of trading its way out of administration. In the short term, it will certainly have major ramifications for thousands of people and, most likely, thousands of businesses.

The story deserves all the media attention it is getting, and then some.

However, the first few days of the collapse have generated more heat than light, and the heat has been used to fire up torches as the villagers set out to march on the castle of the evil fat cats who have been found torturing small children.

Keyboard warriors want to see someone hang for the collapse of Carillion and there are plenty of people in the media and politics prepared to feed that bloodlust.

The Daily Mail and The Guardian newspapers sit on very different points of the political spectrum but both have been fomenting an ugliness that their online readers have been delighted to display. These newspapers are surely not alone, but because they are free to view and they both invite comments to be posted below their stories, the worst aspects of the British character are in full view on their websites.

Richard Howson may have been out of his depth – maybe anyone would have been, given his inheritance – but I really do not think he is the villain that he is being portrayed as. He seems a relatively ordinary, decent-enough bloke who worked hard and by force of personality achieved success. He climbed the corporate ladder from site manager to the boardroom by the age of 41. In the game of life he was a winner, showing how far a career in the construction industry could take you. He was not born with a silver spoon in his mouth and neither was he a shady ducker and diver. And he gave back: making school visits to promote construction careers, taking leadership roles in Business in the Community and leading colleagues on charity cycle rides.

“Richard Howson lives in a mansion” cries the Daily Mail.

He was until recently the chief executive of a £5bn company; of course he has a decent house. But a mansion? It’s a five bedroom farmhouse on the edge of Skipton. Financially, it’s equivalent to a two-bedroom semi in west London. Skipton, a small northern market town, has improved a lot in recent years, but it doesn’t do mansions. And it is not typically where captains of industry live, bar the local building society boss.

“Taking the Piste” says the Daily Mirror. “Fat cat Carillion boss Richard Howson owns six-bedroom ski chalet.”

Why must we begrudge a successful man achieving his dream? There are plenty of relatively ordinary civil engineers who live in the southeast of England and by hard work and a couple of judicious climbs up the property ladder have been able to afford to buy a second home somewhere. Besides, Howson’s ski lodge is in Chatel – hardly St Anton.

Until Carillion collapsed, Richard Howson was in every way quite a modest captain of industry. Neither his remuneration nor his lifestyle were in anyway disproportionate to the position he had achieved in the business world. Now suddenly he’s a Bond villain. I don’t think he deserves it.

All this is not to say Howson should be absolved of responsibility for the fall of Carillion. But here’s the thing. Business, and especially the construction contracting business, is all about measuring risk, pricing it, and managing it. Some get it right (occasionally very right) and make lots of money, and some don’t.

The government is right to say that just because Carillion is big does not mean that it should be bailed out by the taxpayer. Private businesses have to be allowed to fail.

The government also had no choice in awarding Carillion's JV that HS2 contract after the first profits warning in July. Withholding the HS2 contract would have brought Carillion to its knees even more quickly with no chance of rescue. What threshold of financial stability could we possibly put on eligibility for public works contracts?

Many commentators are saying that the demise of Carillion this week will turn out to be a watershed moment for the construction industry. Possibly. But headlines suggesting the death of capitalism and the need for nationalisation now are a little over-ripe.

Andrew Adonis, who seems to be pitching for the role of the centre-left’s polemicist-in-chief, says they will one day make movies of Carillion's collapse, like the Enron saga. Hmmm.

There are of course important lessons to be learned – not that most of us didn’t already know them all well enough already. Like: stop taking the lowest bid.

But as yet there is no evidence of scandal at Carillion; poor decision-making and missteps, undoubtedly, but crime, corruption and villainy? Rein it in, chaps, and move away from the bottle. It was just a case of flawed risk management. That’s capitalism, folks, and if you don’t like it, run for office.

Even if it transpires that some of the accounting at Carillion sailed creatively close to the wind, it is likely that Carillion’s book-keepers did little different from their peers.

There are surely accounting lessons for the industry to be learned, such as how to value live contracts. I’m not qualified to know the answer to that one. But what I do know is that the most effective companies decide what their business is, where their money comes from, and then stick to it. That is not to say that diversification is a bad thing, but it needs to be managed and controlled, rationally and strategically, not simply opportunistically, as Carillion did.

Carillion’s problems started when it decided it didn’t just want to construct buildings, it wanted to clean them too. Not just the difficult cleaning, using rope access to get onto atria, where construction skills might help, but routine stuff like emptying bins and mopping floors. And then serving school dinners and getting into hospital food. Carillion, it seems, just didn’t know how to say no.

I’ve read that diversification is the key to happiness in construction, that the French giant Vinci manages car parks. Maybe, but I can see a link between building an asset and managing it, between building a bridge and collecting the tolls, but where’s the link between building a school and then serving dinners? Or building a prison and then teaching the inmates basket weaving?

Obituaries show that four large construction contracts (three in the UK and one in Qatar) were the straws that broke Carillion’s back. Perhaps without the recent surge in the cost of imported materials Carillion could have survived that. Maybe it was just the timing that was out. Carillion’s root problem lies in its decision to position itself as a support services company rather than a construction company.

The roots of this move are embedded in the private finance initiative (PFI) and its twin brother PPP. Carillion is not to blame for the creation of PFI. PFI was created in recognition of the fact that construction engineers understand construction risk better than desk-bound civil servants. At the outset it made a lot of sense; transfer the risk to the party best placed to manage it.

For PFI to work, it required that the asset being built generated its own revenue stream that could accrue to the contracting team that put up the money to build it. The earliest examples were: the Channel Tunnel, which was fraught with difficulties due to the initial project structure and required substantial contractual and financial restructuring before it actually worked; and the Dartford Crossing, which proved a resounding success in pretty much every regard, thanks to the tolls charged to motorists who have little alternative but to use it.

Then the financial folk realised that PFI could be manipulated to get more public spending off the books and make state finances look better than they really are. PFI depends on a revenue stream. Bogus revenue streams had to be created for schools, hospitals, prisons and government offices by giving the builders 20- or 30-year contracts to hang around and do something useful like empty the bins and do the washing up. By buying now and paying later, we were effectively factoring the entire public sector. There were some pretty solid up-front savings to be made – but the long-term expense is enormous. And it’s not the builders making the money. It’s the money lenders. The National Audit Office, the government spending police, confirmed last week that they could find no financial benefit for the taxpayer in PFI.

This whole mentality of confusing price and cost brings us back to another key lesson of Carillion’s collapse: the previously mentioned business of accepting the lowest bid.

And here we move onto another lesson – this continued misplaced obsession with lowest bid over whole-life cost. Over the years we have come a long way with prequalification systems, two-envelope bidding and weighted scoring, but at the end of the day all too often the lowest bid manages to float to the top of the pile. Why? Because if they are ever challenged, it’s the easiest bid for government purchasers to justify accepting. It’s not their money they are spending so they cannot be seen to be looking extravagant.

There are now calls for yet another review of public sector procurement in the wake of Carillion’s collapse. Ministers have already indicated that this will come.

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The Construction Leadership Council (CLC) says that the failure of Carillion “highlights many of the weaknesses in the construction industry business model, and that collective change is needed to reduce the risk of future failures and improve industry performance, productivity and profitability”. That is true, although so woolly as to be useless.

The CLC reckons that the forthcoming construction industry sector deal, a strategy it has drawn up with government, will sort this all out. That would be nice.

It says: “CLC believes that the sector deal, which will be published imminently, is structured to make this transition – focusing on digital, manufacture and performance as catalysts for the changes necessary to put our industry on a more sustainable footing. We have also taken steps to make sure that the sector deal addresses many of the procurement, payment and risk transfer issues which contribute to many of the difficulties faced by construction firms and their workforce.”

The sector deal may indeed help, but I do not share the CLC’s faith in its absolute effectiveness. Change is needed but I am not sure we can rely on the CLC to deliver it.

Another lesson emerging from the death of Carillion is how much we lost when the Property Services Agency (PSA) was privatised (with, ironically, parts of its being bought by Tarmac, which became Carillion). All the expertise of how to procure construction work and building maintenance that resided in the public sector was lost at a stroke.

The privatisation of the PSA also spawned the whole business of Carillion, Interserve, Mitie, Capita and their ilk developing janitorial services for government offices. PSA privatisation is technically a separate issue to PFI but the two are entwined.

I am prepared to believe that PSA privatisation sparked some clever innovations in building maintenance that were ultra vires for the civil service, but government as an intelligent client was left immeasurably dumber. And dumb clients are easier to fool. Read the Cole Report into the Scottish schools scandal, where lack of effective client representation in the construction process was found to be a root cause of building defects. We need clients to be strong and empowered. The public sector does not have to do everything itself; but it should not simply rely on a signed contract to ensure private companies do what they are supposed to do. Clients need to be much more involved in services for which they are ultimately responsible. More checks and balances are required, in the form of client control and representation.

Thank goodness that Highways England, the government agency that looks after the major roads network in England, appears (currently) to be moving back in the right direction, bringing back in house those professional services aspects of its operations that it had been increasing farming out to private sector consulting engineers. It has shown that it is possible to back-pedal on these things, which is reassuring. Highways England might be the new model client. Or maybe it still has a little further to travel.

Back to Carillion. Running a big construction contractor is in some ways a simple business. Money comes in and money goes out; you just have to make sure income stays ahead of expenditure, if only by a penny. Achieving that may not be so simple. All kinds of extraneous factors cannot be controlled, including the weather and slow-paying/argumentative clients. So you build these risks, which you’ve learned about from experience, into your pricing strategy. But once you get behind, it turns into a casino, urgently chasing that elusive win. Carillion won some jobs by bidding surprisingly low – always a danger sign.

In July 2017 Carillion was among the winners of seven huge civil engineering contracts for the HS2 high speed rail project. The total value of the seven contracts was £6.6bn. Five of them were won by contracting teams with prices at the mid point of the previously published estimates. Carillion’s CEK joint venture with Eiffage and Kier won the other two contracts with bids at or below the lower end of estimates. Lot C2 was estimated at £800m to £1.3bn, compared to CEK’s accepted bid of £724m. Lot C3 was estimated at £600m to £900m; CEK’s accepted bid here was £616m.

Kier and Eiffage are now contractually obliged to continue on these contracts without Carillion. Kier is also partnering with Carillion on Highways England contracts. Within hours of Carillion filing for liquidation, Kier put out a statement saying: “We have put in place contingency plans for each of these projects and are working closely with clients so as to achieve continuity of service. Following today’s announcement and after a short period of transition for these contracts, we do not expect there to be an adverse financial impact on the group arising from these joint venture contracts.”

I don’t know what else it could have said without starting a stampede. I hope it's true.

Carillion, and its predecessor company Tarmac Construction, has always been a buccaneering beast of an organisation. Howson did not create this company culture; he was formed within it and inherited it when he became CEO in 2012.

Carillion came into being in 1999 when the Tarmac Group demerged into a building materials company that kept the Tarmac name (and is now part of CRH) and a company focused on support services and construction services, renamed Carillion. It included the former construction business of George Wimpey, which Tarmac had swapped for its house-building division.

Since then Carillion has acquired major UK construction competitors Mowlem (in 2006) and Alfred McAlpine, (in 2008). It also bought the Canadian contractor Vanbots in 2008 and paid £306m in 2011 for Eaga, a supplier of heating and renewable energy services. How was Carillion to know that the government’s Green Deal scheme, a policy to incentivise homeowners into fitting insulation and new boilers, would turn out to be such a turkey?

In 2014 Carillion offered Balfour Beatty a lifeline when the latter was itself close to edge. Balfour Beatty rebuffed Carillion’s overtures and, under Leo Quinn’s discipline, has just about pulled itself back to something approaching health.

Had Howson succeeded in pulling off that Balfour Beatty deal his reputation today might be very different. However, the problems that both Balfour Beatty and Carillion have battled in recent years have been closely entwined with their merger and acquisition activities. Borrowing money to buy a company for its cashflow – it’s the casino again. And when each acquired business is a series of regional operations each with their own corporate culture and relationships, and perhaps different business management systems too, it all makes for a very rocky ship. Construction mergers are often acts of desperation, less than the sum of their parts. A Carillion/Balfour Beatty tie-up would not have survived for long, not without major surgery that Howson seemed reluctant to perform.

It is rash to attribute the actions of a 40,000-employee corporation to a single individual, but Howson was chief executive for five years before the roof fell in. He may perhaps have been a tad sleepy at the wheel, or maybe he was fighting like mad for change but (still only in his 40s) was unable to persuade shareholders and fellow directors to follow his lead. Maybe. In either case, others must shoulder their share of the blame and are equally deserving or undeserving of public opprobrium.

Howson’s first mistake was failing to undertake the surgery that Carillion had so clearly needed for so long. He was a builder, not an accountant. His instincts appear to be to build things, not cut them back. This does not make him greedy. It just makes him, in this context, wrong.

Maybe Howson really will transpire to have been some kind of villain, but it seems unlikely at this stage and so he does not deserve the personal venom being directed at him, by certain politicians, union activists, newspapers and newspaper readers.

In the final analysis, the only difference between Richard Howson and others who have been forced to let go of construction companies – think Martin Laing or Peter Costain, for example – may turn out to be little more than unfortunate exchange rate movements and a couple of duff decisions.

I struggle to understand precisely why the British people are currently displaying such hatred for Howson. Is it because he worked his way to the top of the company? Is it because he accepted the remuneration that came with the job instead of saying “ooh no, that’s far too much, fifty grand’s plenty for me thanks”.

Or is it simply that, in the end, he failed? Is it his initial success that offends so much or his eventual failure?

It seems to me that the biggest error for which Howson can be held wholly responsible was having a social media presence. A quick trawl through Google and journalists have found old photos of him on holiday, smiling, holding a beer, playing with the kids – all those things that makes him a normal human being. And perfect illustrations for their agenda.

“Look at him,” the trolls all say in response, “how dare he have fun when the company has crashed? How dare he smile? How dare he have a nice house and beautiful kids? It’s not fair.”

In truth, I doubt Richard Howson is having much fun at all at the moment. He may still have a nice house but he will surely be feeling very battered and bruised, both by a sense of his own inadequacy and by the threat of legal action (for what, we don’t yet know) hanging over his head as policy makers seek to absolve themselves of blame at all costs. Will any boardroom touch him again? Surely not.

But most of all I expect Richard Howson is feeling savaged by his treatment at the hands of the media and the British public. So here’s one more lesson from the collapse of Carillion: if you run a major company that might conceivably fail one day (and that’s any of them, by the way), then delete your entire social media presence now. You are not so much a fat cat as a sitting duck.

About the author: Phil Bishop is online editor of The Construction Index.

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