LONDON (Reuters Breakingviews) - The collapse of Carillion is a stress test for the UK authorities’ faith in outsourcing. The troubled construction firm has gone into liquidation after failing to secure fresh funding. The government was right not bail out one of its key suppliers. Nevertheless, a messy cleanup will raise multiple questions about the risks in handing state work to private contractors.
The company responsible for repairing British prisons and delivering large-scale projects like the planned HS2 high-speed rail link was unable to negotiate a financial lifeline over the weekend. The government has appointed PwC to oversee the liquidation and ensure minimal disruption. Creditors including Santander, HSBC and Barclays, which are owed more than 900 million pounds, face a fight with Britain’s pensions regulator over the proceeds from the sale of potentially valuable contracts and a mere 144 million pounds in physical assets.
Ministers rightly resisted pressure to prop up Carillion by guaranteeing its debt or freeing it from loss-making contracts. Nevertheless, the collapse potentially leaves the public on the hook. To begin with, the government is providing an undisclosed amount of emergency liquidity in order to ensure that Carillion keeps functioning. It’s unclear how that will be repaid, and on what terms.
Second, it remains to be seen whether Carillion’s responsibilities can be transferred to others without disruption. Some unprofitable contracts may have to be re-tendered, raising the cost for taxpayers.
Third, Carillion’s rapid collapse could knock confidence in other providers of outsourced construction and maintenance contracts. UK building firms Balfour Beatty and Galliford Try announced on Monday that they would face a shortfall of up to 80 million pounds on a 550 million pound joint venture with Carillion to build a motorway bypass outside Aberdeen. Balfour Beatty said it would face a cash hit of up to 45 million pounds. Banks may respond to their Carillion losses by restricting exposure to other outsourcers.
Finally, the UK government will face questions about its ability to spot financial risks when handing work to the private sector. Even after Carillion’s financial woes became clear, the company was last summer awarded a role on the prized HS2 project. Excluding it from bidding, however, would have surely hastened the firm’s demise.
Critics of outsourcing have long maintained that it would be cheaper and less risky to keep more public sector work in government hands. A messy collapse for Carillion will only strengthen their case.
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