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Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco....

Companies / Corporate News Jan 16, 2018 - 04:13 AM GMT

By: Nadeem_Walayat

Companies

Carillion has gone bust after Theresa May's Government decided not to bailout this particular private sector PFI contractor with tax payers money. Which the government deemed to be too small to bail, unlike the £4 trillion of banking sector liability bailouts of 2008 that the people of Britain are still paying the price for some 9 years on in terms of loss of purchasing power of real terms earnings as a consequence of inflating the money supply of asset prices through quantitative easing of over £500 billion and through a myriad of additional asset price boosting schemes such as "Funding for Lending".


Nevertheless, the Government refused to bailout Carillion that holds some 400 PFI contracts totaling more than £16 billion. Though this does not mean that any of the other loss making, highly indebted teetering on the brink PFI contractors with costs spiraling out of control would not be bailed out to prevent a systemic collapse of the whole sector bringing many public works to shuddering stand still. After all the government fully aware of Carillion's precarious state only a few months ago award Carillion contracts totaling £1.7 billion in attempts at keeping the corporation alive.

So just like Northern Rock of 2007 and Lehman Brothers of 2008, the first to collapse rarely tends to get bailed out, instead it tends to be the next dozen that follow, as occurred with Britains' banking sector bailouts. Furthermore the banking sector was found to be rewarding billions in bonuses on the basis of fictitious profits, and so it remains to be seen if the same has transpired with the PFI sector, therefore expect investigations into the collapse of Carillion to likely reveal dubious practices in the PFI sector.

Therefore just because Carillion holder of £16 billion of PFI contracts across the UK was not bailed out does not mean the same would not be true if any of the other major PFI contract holders went bust, given the fact that the total of outstanding PFI liabilities exceeds £220 billion by the likes of Amey, Jarvis, Connaught, Rok, G4S, Balfour Beatty, Serco, Mitie etc.. given the size of contracts held, for instance AMEY is the holder of a £2.2 billion contract for the city of Sheffield alone, let alone the value of contracts for the rest of the UK which are estimated at more than £10 billion.

Whilst many may argue that Carillion was a special case, but the reality is that in terms of published accounts, Carillion's profits and turnover was deemed to be one of the better performing PFI contractors, banking profits of £155mln against a loss of £200mln for sector giant Balfour Beatty whilst the likes of Amey trail with a loss of £26.5 million on turnover of £2.5billion.

As is usually the case the crippling factor is DEBT, and where Carillion's demise is concerned that debt was as a consequence of spiraling costs and growing pensions liabilities which are a hallmark of PFI contractors and other corporations at risk of bankruptcy. DEBT and PENSIONS liabilities are literally the corporate ticking time bombs under the hood of many major corporations from giant retailers such as TESCO, to the PFI contractors such as Carillion and dozens more in the PFI sector.

And where Amey is concerned the unintended consequences of what is taking place on the streets of Sheffield that on a near daily basis sees vast resources deployed to fell street trees that are met by resistance in the form of protests to prevent the the felling of street trees, resulting in costs spiraling out of control that foretells the crisis that Sheffield's PFI contractor is potentially facing. For no corporation can turn a profit on a contract that requires upwards of 30 personnel to be deployed to fell a single Street tree, the costs of which could easily exceed £10k in resources committed per DAY for just to attempt to fell a single street tree.

The following video illustrates one of the inherent flaws at the heart of PFI contracts. One of the lack of accountability between PFI contractors who remain focused on the terms of their contracts rather than what the people of cities such as Sheffield actually want. Resulting in unelected entities dictating what should happen to their streets that ultimately escalates into direct action which sends costs spiraling out of control to far beyond any of the financial projections made at the time the contracts were first signed.

The following video further illustrates what is happening on Sheffield's streets that illustrates why PFI contracts are going bad as costs soar sending contractors into losses and debt due to penalties for failure to meet contractual liabilities that pushes the likes of Carillion into bankruptcy.

Police Arrest Tree Protester on Meersbrook Park Road, Sheffield

The bottom line Carillion may be the first major PFI contractor to go bankrupt but it won't be the last due to the inherent flaws of rigid PFI contracts that are not able to adapt to what the people of Britain's largest cities actually want, which is the reason why elected bodies such as Local city councils came into existence in the first place, so as to express the settled will of the people, against which PFI contracts effectively result in the outsourcing of local democracy to a deaf, dumb and blind PFI contractor that is wholly focused on the terms of the signed contract, rather than what the people actually want to take place in their cities.

Watch this space for the next big PFI contractor to go bust!

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2017 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 30 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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