A right Carilli-on
When Carillion issued its shock profit warning last week, it was easy to miss in all the excitement that the firm’s finances had effectively been undone by three UK PPP projects.
As the support services giant’s chief executive fell on his sword, and the company’s share price went into freefall, it became apparent that the bulk of Carillion’s £375m hitherto unexpected losses had come from the Royal Liverpool hospital project, the Aberdeen bypass and the midland Metropolitan PF2 scheme.
The problems facing Carillion – one of the world’s biggest PPP players that has now said it will not take on any new construction PPP deals in the future – should perhaps be seen as a major rebuke to the critics who claim the PPP model is simply a cash cow for investors, with plenty of upsides and all the downsides taken by the public sector.
Clearly in Carillion’s case, this could not be further from the truth. Of the three deals that have caused trouble, the Aberdeen one stands out, given that it was this deal that failed the National Audit Office’s off-balance sheet test, triggering a major rethink in the way that non-profit distributing (NPD) schemes are structured in Scotland. A rethink that has yet to come up with a complete solution.
However, the sight of these contracts rearing their heads as problems will do nothing for the future of the PPP industry in the UK, just as the Treasury has been hoping to kickstart the PF2 model back into life.
The Midland Met, in particular, is an uncomfortable presence, given that it is the only PF2 hospital to be procured so far. Earlier this month, a report to the joint Calderdale and Kirklees health overview and scrutiny panel within Kirklees Council revealed that authority’s health plans were being pushed down the PF2 route by the Department of Health.
So PF2 is clearly on the radar for new health projects. But how many investors will be keen to take up the challenge there when they see it causing problems for Carillion?
Some may argue that the prestige of undertaking the first hospital PF2 may have pushed Carillion to make a bid that was, in the end, unsustainable (although whether that is the reason the deal has caused problems is not clear). It should also be remembered that Carillion ended up as the sole bidder on the deal, suggesting not everyone was happy with the way it had been structured.
The real shame is that PPP is once again appearing in the press in a negative story, just as the government had hoped to start quietly pushing out a new wave of PPPs, from transport deals to hospitals and primary care schemes through a revamped Lift model.
Now, as well as the pushback from the public that PPP can bring, ministers may have to deal with increasingly wary investors and contractors, wanting plenty of assurances that such deals are not going to end up causing as much trouble as these three contracts have for Carillion.