The recent collapse of construction and outsourcing giant Carillion has not only disrupted the UK construction market, but it has also reignited the politically charged debate around the success of private finance initiative (PFI) schemes.
Labour has pledged to scrap PFI schemes believing them to be a drain on public resources and a National Audit Office (NAO) report published earlier this year has prompted the Public Accounts Committee to lead an inquiry into PFIs after it revealed that projects such as schools and hospitals were privately costing taxpayers billions of pounds.
The report released in January highlighted how the government over the next 25 years would be paying nearly £200bn of public money to contractors under private finance deals. The NAO claimed there was little evidence that handing public contracts to private organisations offered value for money.
Against this backdrop, S&P Global Ratings’ has published a research paper on the ramifications for the PFI market and it concludes that, despite its challenges, PFI is not accountable for Carillion’s liquidation and any further troubles the UK construction sector faces this year.
The paper argues that Carillion’s collapse was a long time in the making, stating that Carillion’s financial statements began showing negative cumulative operation cash generation from 2012. S&P say that it believes that Carillion masked both the extent of its use of reverse factoring in its annual reports and the impact that this had on its financial statements;
Other contributing factors to Carillion’s collapse according to the report include the company’s aggressive dividend distributions, project impairments, declining profit margins, and its weakening balance sheet.
Despite the company’s collapse, S&P’s ratings on six operational projects (for which Carillion acted as counterparty) remain resilient. The UK government is providing the necessary funding to maintain public services undertaken by Carillion until suitable alternatives are found;
S&P conclude that the PFI scheme, despite some weaknesses, is not to blame for the fall of Carillion. The House of Commons briefing into the collapse also upholds this position, says the paper and asserts that the company’s government contracts did not prompt the liquidation and that financial difficulties stemmed from other areas of the business.
Click here to view the S&P research.
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